Uncertain 2017 Financial Forecast For South Africa

The SA economy was subject to many factors in 2016 that shook investor confidence. The 2017 financial forecast does not look any better.
U
Melissa
Cohen
Published: Tuesday, January 17th 2017
General
In 2015, the Financial Times made a number of predictions about 2016. Majority of them were on the money while others fell flat on their face. One prediction was that the UK would not vote to leave the EU. The other? That Hilary Clinton would become president. In the Financial Times’ December 2016 world predictions for 2017, they stated that there’s “something to be said for the increasingly popular view that political and economic predictions are always and everywhere a waste of breath.” But, it doesn’t stop anyone making them. Let’s take a look at the general financial forecast for South Africa in 2017.

The Rand In Retrospect

10122016_RandInfographic-03-01 President Jacob Zuma’s 2015 decision to fire respected Finance Minister Nhlanhla Nene only to switch his replacement four days later with Pravin Gordhan, shook investor confidence. The effects of the South African political landscape on the rand is clear as day on the timeline of the Rand/Dollar exchange since ‘Nenegate’. Nene’s unexpected dismissal sent South African markets crashing. The economy was also subject to a number of other internal and external factors like a slowing global economy and the effect of the drought on agriculture. But, with our president’s loyalties having come under the microscope with numerous corruption allegations, the rand has been yoyo-ing between each of his court appearances. Rising on rulings against him, and vice-versa.
The International Monetary Fund’s (IMF) mission chief for South Africa, Laura Papi, said in July last year: “It’s an issue, because it affects investor confidence (and) it makes people want to wait when they are uncertain about what’s going to happen. Investors in particular, (who) have large start-up costs, tend to wait and not invest. In fact, we’ve seen very weak private investment for some time in South Africa”.

Economic Forecast: Cloudy. With a Chance Of Downgrade.

South Africa avoided a ratings downgrade this past December, but the country’s growth is still weighted by high political uncertainty. A number of sources confirm the risk of another rating review by mid-2017, and the ratings agencies' outlooks are negative. Economist Dawie Roodt told the Mail & Guardian that there are three factors determining South Africa’s fate in this regard:
  1. The fiscal matrix, which Roodt says does not look good as state debt levels are at record high levels.
  2. Political stability. Roodt says this is not necessarily negative but still risky, as it could go either way. He lists ANC succession fights as an example.
  3. Weak economic growth. Roodt says even if this proves better than expected, growth is still likely to be weak. Provided that there is no political infighting or rand weakening, economic growth could be 1%.
If South Africa receives a sub-investment grade status, treasury has indicated it could mean:
  • Higher interest payments,
  • A weaker rand,
  • A higher cost of living,
  • Reduced fiscal space,
  • And lower confidence.
This will result in low investment and poor job creation.

Implications Of The Weak Rand:

  • Increased inflation
  • Stifled growth in a slow economy
  • Contracted economy
  • Raised cost of imported goods
  • Higher cost of production for manufacturers

Benefits Of The Weak Rand:

  • Possible boost for local exporters
  • Boost in tourism
  • Gold could become profitable

A Silver Lining?

The IMF estimated SA’s growth at 0.8% in 2017 and 1.6% in 2018 (after 0.3% in 2016) in its updated World Economic Outlook. However, Econometrix chief economist, Azar Jammine, called the IMF’s forecast ‘unduly low’ claiming domestic expectations for growth were higher. The fact that drought was being alleviated after good rains in December was behind his optimistic forecast. He also said the strong rand would also correlate with lower inflation, which could mean an improvement of disposable income and lower interest rates. The Reserve Bank has also made mention of a likely easing of its interest rate tightening cycle from mid-2017. Now all that’s left is to hold thumbs for Finance Minister Pravin Gordhan's budget speech next month. Say it with us: “No expected tax hikes, no expected tax hikes…”