Emerging growth optimism?

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South Africa may be over the worst of its economic downturn with potential growth of over 1% next year, Finance Minister Pravin Gordhan said on Monday when he was speaking to reporters on the side-lines of the FT Africa Summit in London. Gordhan also said the country, which is teetering on the lowest investment grade ratings rung, hoped to avoid a downgrade to sub-investment status. He declined to comment on this year’s growth expectations, saying he would talk about this at the end of October. He earlier told the summit: “We are going through a difficult economic patch at the moment, but we may well have bottomed out.” Recent data seems to bear out that optimism, with growth in the April-June period at 3.3%, the highest in six quarters. The economy shrank 1.2% in the three months to March.

The economy and the currency are also under pressure from reported friction between President Jacob Zuma and Gordhan, who is popular with investors and business. Mr Gordhan is the subject of a probe by the Hawks special police unit investigating his role in a spy unit within the South African Revenue Service. Opposition parties have described the probe as a “witch-hunt”. Zuma denies a rift between him and Gordhan. “As long I am in this job, I have his confidence”, Gordhan told the conference in response to a question. He added: “There have been any number of statements from the president endorsing my position, but you equally know that the lifespan of a political office can end with one phone call, or it can start with one phone call”. Recent unconfirmed reports now suggest that the National Prosecuting Authority had declined to prosecute Mr Gordhan, in contrast with the Hawks recommendation that charges be instituted. Further uncertainty has stemmed from rumours that Mr Gordhan is to be replaced as Finance Minister. However, ANC secretary general Gwede Mantashe stated recently that Pravin Gordhan remains the Finance Minister and that there is no discussion in the ANC to replace him. “There is no such discussion … the president, deputy president and the ANC have offered support,” he said at the RMB Morgan Stanley Big Five Investor Conference in Cape Town late in September. This week, however, the National Prosecuting Authority announced that Minister Gordhan, and his co-accused need to appear in the court on 2 November.

Despite the on-going concerns about a debt downgrade, South Africa had no trouble raising money in international markets in the last week of September, selling a two-tranche bond (12-year and 30-year) totalling $3 billion, with the issue two-and-a-half times oversubscribed. National Treasury said the government “sees the success of the transaction as an expression of investor confidence in the country’s sound macroeconomic policy framework and prudent fiscal management”. A major potential headwind for South Africa is the possibility of a credit ratings downgrade to sub-investment grade. A downgrade would mean that more conservative funds will be forced to sell South African assets. Asked how worried he was about a downgrade, Gordhan said he would not want to see that happen. “We have put a lot of hard work in to ensure that we present a united national front and also that we communicate a lot better”, he said. Fitch and S&P Global Ratings both score South Africa at BBB-, the lowest rung on the investment ladder. Both agencies hold a negative outlook on the rating and the next round of reviews is due in December while Moody’s is due to provide an update on 25 November.

While our Finance minister has suggested that SA’s negative growth trajectory may have bottomed, the International Monetary Fund (IMF), in its latest World Economic Outlook report, has just provided a reminder that the future for GDP growth in South Africa is not particularly bright. Better-than-expected second-quarter growth had prompted the South African Reserve Bank to raise its forecast for this year from 0% to 0.4%, a move that was recently echoed by the World Bank. The IMF however is still not convinced enough is happening to lift the growth rate, and has opted to stay with its 0.1% forecast for this year, reports the Business Day newspaper. The IMF is still warning that the outlook for SA is “clouded by policy uncertainty and political risks”. More disturbing is that the IMF has cut its forecast for next year as well, from 1% three months ago to just 0.8%, with this very modest recovery reflecting a turnaround in the weather and in commodity prices and an improvement in electricity supply. Along with the gloomy numbers from the IMF has come the news that business confidence in SA is at multi-decade lows, suggesting that private sector investment, which has been falling for several quarters now, is unlikely to recover any time soon and that the economy’s potential growth rate is not expected to lift substantially in the near term. The IMF has again called for structural reforms to boost the economy’s growth potential and improve its ability to create jobs. The government has, of course, promised structural reforms and committed to these in its interactions with business, but little progress has been made.

South Africa’s international public relations efforts are focused this week on the “SA Tomorrow” investor conference that is currently underway in New York. A recent editorial in the Business Day suggests the “new embrace” between the government and business and labour means that the delegation that has attended can demonstrate to US investors that there is a new spirit of collaboration between the partners to work to avert a ratings downgrade and boost the economic growth rate. The conference, now in its fourth year, was attended by more South African companies  than  ever  and  by  more  senior  US  fund  managers  than  in  previous  years, collectively representing $2 trillion under management. That there were these many delegates is testimony to continued interest in the South African story, despite the political theatrics investors would be watching from afar. US investors were clearly impressed at the willingness by SA’s government and business leaders to be frank about the challenges facing the country. These are mostly emerging markets investors, many of whom follow the South African story closely and are well-informed and sophisticated. They are investors who are looking at South Africa relative to other emerging markets, and relative to Russia or Turkey or Columbia or Brazil, the “noise” in SA may look less frightening than it does to SA’s own investors. The trouble is that SA returns to these conferences every year with the same promises of structural reform and every year without nearly enough delivery to show for it. The government-business-labour initiative can tell a good story only up to a point before it loses credibility. The government needs to start delivering on the reform it has promised if SA is to have any chance of getting growth to higher levels and of keeping international investors on side.
While there is reason for some optimism for positive GDP growth in SA, this growth may well be slow and uninspiring in the light of tepid growth prospects amongst our major trading partners. In the same IMF report, the Fund presents a rather gloomy picture and sounds loud warnings about the risks to growth, particularly some of the political risks in advanced and developing economies. In the US and the UK, growth has already weakened, even before we know whether “hard Brexit” or Trump victory scenarios might materialise.
The UK’s Daily Telegraph newspaper was boasting this week that Britain will enjoy the fastest growth in the Group of Seven (G7) most industrialised nations in 2016, despite the IMF’s dire predictions about the effect of Brexit. But at a forecast of only 1.8% this year and falling to 1.1% in 2017, Britain’s growth is expected to be well down on the rate of 2.2% reported in 2015. The US economy is also turning out to be weaker than expected with the IMF revising down its forecast for 2016, from 2.2% in July, to just 1.6%. The IMF now expects advanced countries collectively to grow by only 1.6%. Fortunately the prospects for emerging markets are slightly better, thanks to low interest rates in advanced economies, a better outlook for China and somewhat firmer commodity prices. But that masks differences among countries and regions, with sub-Saharan Africa “experiencing a sharp slowdown”. The bottom line is that the global economy has “moved sideways”, prompting the IMF to revise down its forecast for overall global growth yet again. And this is in the context of “sizeable uncertainty and downside risks”. The IMF is particularly concerned that persistent stagnation could fuel further populist calls for restrictions on trade and immigration, particularly in advanced countries, and that would dampen productivity, innovation and growth.

In SA’s case, the improved sentiment towards emerging markets in 2016, combined with the ebb and flow of local and global political risks, has seen the rand at one stage stronger by as much as 20% against the pound and about 10% against the US dollar. This has helped contain inflationary pressures and paused interest rate hikes. But, as the Reserve Bank and other economists constantly remind us, it may not last. A subsequent editorial comment in Business Day sums up the current status by pointing out that the political and other risks to economic growth are as real in the global environment as they are in SA. Equally, the warnings the IMF sounds about the need to encourage trade and immigration, rather than adopting protectionist or xenophobic policies should be heard too – as should the IMF call for all countries to implement reforms to boost growth and job creation.

We are indeed justified in being optimistic that the worst may be over as far as our GDP growth trajectory is concerned, but it seems clear that our future growth path may be very slow – dampened also by a global environment that is not supportive.