What does the Year of the Ox hold in store for South Africa?

Read the full podcast transcript here

• FT: Fundi Tshazibana - Deputy Governor of the South African Reserve Bank (SARB)
• AB: Annabel Bisop, Chief Economist, Investec SA
• CH: Chris Holdsworth, Chief Investment Strategist, Investec Wealth & Investment
• BT: Browen Trower, Fund Manager, Investec Specialist Investments
• NF: Neo Ralefeta, Treasury Sales & Structuring, Investec Corporate & Institutional Banking 

• Introduction

  The rollout of a Covid-19 vaccine, low interest rates and the hunt for yield, historic opportunities for emerging markets coupled with the threat of a full-blown debt crisis.

   

  These are just some of the factors likely to shape South Africa’s economic recovery in 2021, a year the Chinese have dubbed “the Year of the Ox” – which promises reward for those who are willing to work hard to turn around their fortunes… but will the economy play ball?

   

  I’m Lenyaro Sello, and in this Investec Focus Radio podcast we’re talking to the deputy governor of the South African Reserve Bank and three domain experts from Investec for their take on the country’s growth prospects following one of most economically destructive years on record.

   

  The Covid-19 crisis deepened what was already a crisis of low economic growth, high unemployment levels, increasing debt and continued downgrades. Then came the lockdown – one of the world’s harshest – sending unemployment to record highs and forcing the government to borrowing billions more from local and international institutions.

   

  The year also saw major upheavals on the political economic front, with the thorny issues of the public sector wage bill going all the way to the high court and continuing government corruption, even on tenders directly related to Covid disaster management. 

• Tshazibana: our growth is largely dependent on global recovery

  But South African Reserve Bank Deputy Governor Fundi Tshazibana, when it comes to the shape of the South African recovery, the global outlook is just as important as any of these local factors.

   

  “The one thing that I should highlight in terms of the growth outlook and the level of uncertainty is that the size of growth and the extent to which our economy recovers is still to a large extent dependent on what is happening elsewhere in the world. So elsewhere in the world we have seen a resurgence of Covid-19 infection rates in a number of economies that are going through a second wave of infections that has added to the level of uncertainty around the growth prospects and where growth would be in 2021.”

• Tshazibana’s growth predictions for 2021

  With that caveat, though, the deputy governor was prepared to share some ballpark predictions:
  

  “We see the economic growth recovering, so for 2020 we had projected economic growth or a contraction of 8% and in 2021 we see growth recovering and picking up to rise by 3.5% and we also see growth increasing by 2.4% in 2022.”

• Tshazibana on ow government needs to take action

  She went on to underline the critical role of government in addressing legacy problems and attracting investment:

   

  “It's quite important on the policy side for government to start to implement structural reforms that will support the long-term growth potential of the economy and for us to start to boost confidence and to reduce levels of uncertainty so that businesses can be more comfortable in making long-term decisions and to start to reinvest in the economy.”

• Bishop: we could only see full recovery by 2025

  Clearly the recovery will be slower in South Africa than in countries like China that were on a strong growth path before the onset of the pandemic. For South Africa, even regaining pre-Covid-19 levels of economic activity will take some time. And though some sectors, like manufacturing and mining, are already well on the path to recovery, many others will continue to lag for some time.

   

  Here’s Investec Chief Economist Annabel Bishop… 

   

  “We don't expect to achieve full recovery in the South African economy until 2023 and of course, that's in nominal terms if we were to look at inflation adjusted terms that could take even longer out to 2025. That's of course, if we don't see a sudden massive ramp up in improving the ease of doing business in South Africa; massive productivity coming through from the civil service and of course also the winding down of a number of other impediments to economic growth that still persist.”

• Holdsworth on a solution to South Africa’s debt conundrum

  Topping the list of these barriers is the country’s growing debt. While South Africa, unlike Zambia and Argentina, is not facing a full-blown sovereign debt crisis, rising debt levels are concerning, and a key focus for rating agencies.

   

  Investec Wealth & Investment Chief Investment Strategist Chris Holdsworth says the debt conundrum can be solved, but it may come at the expense of some inflationary pressures.

   

  “There's only a couple of ways you can solve the sort of Debt to GDP problem we face: either you have slightly higher inflation or you have higher growth or combination of the two or you raise the taxes. It's not really possible for us to raise taxes. Tax as a percentage of GDP at this point is very high relative to other countries of a similar sort of income. There's not a lot of scope on that side which means you do need faster growth then and you do need possibly slightly higher inflation. So, we wait to see if those things will come about.”

• Trower on the threat to the South African bond market

  The big positive factor driving expectations of faster growth is the promise of a Covid-19 vaccine roll-out in coming months. This has not only seen green shoots emerging in the real economy; it’s also put global investors on a more risk tolerant footing and helped inflows into the South African bond market.

   

  But here again, the debt to GDP ratio is an important factor.

   

  Here’s Bronwen Trower, a fund manager at Investec Specialist Investments:

   

  “If we just look at our bonds in in general, you know, if our debt to GDP blows out or gets to an unsustainable level, we will start to underperform compared to our other emerging market counterparty bonds which means obviously our bonds would be dumped.

   

  “The other emerging market country funds will be favoured instead of ours and, you know, our finance minister Tito Mboweni echoes the same sentiments, and his point is very valid: if we get to a point where we have a sovereign debt crisis, it will spill out to other sectors and sectors that are very, very important and critical to South Africa.

   

  “So, I mean, by way of example, the largest holders of our bonds are banking Institutions and financial institutions and institutional clients. So, if there's some sort of sovereign debt crisis, you know, we are so scared that it will then lead to a banking debt crisis and that's something that our country really can't afford at this point in time.”

• Holdsworth: Vaccine will boost business confidence

  So realistically, can we at least expect 2021 to put us on a better long-term debt trajectory?

   

  Chris Holdsworth believes increasing debt levels are a given, but the impact could be tempered by higher level of business confidence.

   

  “We will definitely be borrowing more and that's a given. If you look at it on an annual basis, the Debt to GDP numbers are going to continue to deteriorate for the next few years so we definitely will be issuing no doubt there.

   

  “So, inflation starts to pick up in May and June next year in our estimate up towards about 5% or so. There will be no material change in interest rates over the coming 12 months in our view. 

   

  “In addition next year hopefully we land up with the vaccine being rolled out globally and potentially at some point in South Africa which causes an improvement in business confidence it also sees all the restrictions on mobility being gradually removed and that means over the year we land up with a natural boost to activity, all that sort of pent up demand gets exercised which means that we may well land up with surprising periods next year as that happens with increased demand for one.”

• Holdsworth: Employment levels will only pick up in 2022

  This improvement in business confidence is key not only for avoiding a debt trap, but also tackling levels of unemployment.

   

  “The difficulty is the key leading indicator for private sector job creation in South Africa is the year-on-year change in business confidence and business confidence at this point is still fairly depressed telling us that we shouldn't be again seeing much job growth over the coming 12 months.

   

  “Now it may well be the case that business confidence picks up quite rapidly early next year on the assumption that a vaccine is developed, and we land up with no more restrictions on mobility both in South Africa and globally, business confidence would ramp up but that would imply then employment creation really only starts to pick up the year after speaking again to what we started off with it's going to likely to be a gradual recovery for SA.”

• Bishop: South Africa is lagging behind other emerging markets

  So if the primary goal is boosting business confidence, how do we get there? According to Bishop, one important lever is policy reform.

   

  “What needs to happen is a massive increase in the ease of doing business because our economic growth throughout South Africa is very subdued compared to other emerging market economies, it’s close to 8% for the BRICS we're looking at, you know, well the BRICS I suppose the consensus is possibly 7.5, we’re looking at 2.5 for South Africa – a terrible outcome in comparison.

   

  “South Africa needs to inspire business confidence by severely improving the ease of doing business and that means cutting regulatory burdens, cutting the onerous part of regulations that impede and stop businesses from actually achieving what they need to do.

   

  “We saw in the latest business confidence readings for the fourth quarter, the building sector is one of the most depressed sectors in South Africa, not just because obviously lockdown prohibited a lot of activity but because it's really battling to get going as well because there's such low productivity from the civil services and a lot of the councils are not fully operational, the surveyor's office, etc. etc.

   

  “Yes, that's going to improve as you go forwards into the new year, but it is not yet expected to improve from where we were before Covid-19.” 

• Ralefeta: South Africa is “still quite attractive from a yield seeking perspective”

  Traditionally, low interest rates have been another lever for driving growth. And indeed, rate cuts were instrumental in saving the economy from total collapse in 2020, providing support to indebted individuals as well as sectors like housing and vehicle sales.

   

  But with interest rates projected to remain low for some time, are we not at risk of losing foreign capital inflows seeking yield in our bond market?

   

  Neo Ralefeta from Investec’s Corporate & Institutional Banking Treasury Sales & Structuring team doesn’t think so…

   

  “I don't necessarily think that there is a high risk of losing capital inflows because of current interest rate levels in South Africa, and I think there is still the possibility of seeing another 25 basis point interest rate cut by the Reserve Bank.

   

  “And with policy rates in some developed markets as low as 0.05% and the average policy rate in the Emerging Markets having declined from about 5.3% to an average of about 2.4% in August this year there's still more than two percentage points of yield for yield seekers to earn in Emerging Markets when compared to their developed peers.

   

  “So to answer that question again from a South African perspective, you know, I think when looking at the G20 countries we have the eighth highest interest rates of those countries so I don't think we necessarily run that risk of losing capital given the fact that we're still quite attractive from a yield seeking perspective.”

• Trower: South Africans are moving their money offshore

  Apart from government bonds, the onset of the pandemic saw investors moving into traditional safe havens like gold and US Dollars. But with the gradual global recovery, Trower says South African investors are looking further afield.

   

  “What we do notice recently though is, obviously with the strengthening of the Rand, those who can afford it are externalising their funds. They're taking their money offshore and together with the global recovery of equities, the global growth story, we are finding that some local investors are taking their money offshore and particularly deploying it into global equities.”

   

  Locally, Trower also notes, there has been a shift in investor behaviour, with more willingness to take up risk driving demand for equities. But how long that lasts is unclear.

   

  “I think the other dynamic that is important to note is that remember, you know with the downgrades, we are going to feel the pinch. So with the increased cost in government debt, with our suppressed growth, with the fact that jobs are at stake and we continue losing them and the fact that you know, household income will come under pressure. We're not sure if that kind of appetite will stay around for long, but we're seeing trends and shifts in terms of where the money is flowing to in the various funds.”

• Bishop on the global moves that could impact South Africa

  So we can expect another tough year for both the local and the global economy.

   

  But we may also see improvements in areas that dragged the economy down this year, such as the US-China trade war, global political volatility and fresh lockdowns, says Annabel Bishop:

   

  “So globally the economic factors that could affect South Africa would obviously be from a financial market perspective a negative sentiment prevailing such as a massive risk-averse climate and of course, as a consequence of that, some of the factors would be very negative for South Africa's currency. And of course, if we get, as expected, further credit rating downgrades next year, this will have a much more substantial impact.

   

  “So, you know, what would obviously drive a turn in sentiment could be higher interest rates, higher inflation globally, but inflation is not expected to lift massively in 2021 - from a global perspective inflation is expected to be fairly contained from a world average.

   

  “There certainly will be unexpected events that occur and obviously could cause weakness and yes, we obviously are anticipating a much better global economic environment under Biden than Trump. Instead of the stop-start nature that Trump’s been famous for and the huge volatility, there will be a move towards more stable and improved relations with other countries, you know with China etc. So we are not looking for any escalation of the trade war in 2021 in fact we are actually looking for a de-escalation.

   

  “And of course, that is one of the reasons why the markets have rallied so much, because of the Democrat near clean sweep, not of course because of Trump, but instead from the joy around the fact that the Trump presidency is seen to be moving on.

   

  “And we’re actually going to get this fiscal stimulus in the United States of perhaps close to two trillion dollars, which then of course will feed into the rest of the world as well and provide fiscal stimulus multiplier effects through other economies in the world and even into South Africa.

   

  “This will bolster commodity prices, manufacturing and of course allow South Africa to expand and bring in more employment and improved incomes for South Africans. But that will not occur if South Africa doesn't further improve its regulatory environment, reduce its structural weaknesses and work down the corruption, and of course move to policies that reduce the hugely onerous burden of the regulatory environment and the blockages in the regulatory system in South Africa by improving the capacity of the civil service to deliver.”

• Conclusion: Electricity supply is key

  And so if 2021 is to set South Africa on the long road to recovery, we need first and foremost to tackle the persistent structural problems that were holding us back long before the first case of Covid-19 arrived on our shores.

   

  Deputy Reserve Bank Governor Fundi Tshazibana has the last word…

   

  “2021 would largely be affected by what happened to productive capacity in South Africa, what happens to the level of investment that companies put into the economy and what will happen to electricity supply.

   

  “We did see during the course of 2020 that as the economy opened up, we started to have a few bottlenecks on the electricity side. We have been experiencing electricity supply challenges, so if those supply challenges were to resurface in 2021 that would have an impact on how quickly our economy recovers.

   

  “A second factor that is important for our growth in 2021 is the level of policy support that is there from entities like the bank and other government support programs.”

   

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