05 October 2022
South Africa has been plagued by a barrage of bad news, weakening confidence in the country’s future, but analysts who focus on this risk are missing the significant improvements the country has witnessed recently and which could boost growth expectations beyond the more conservative recent forecasts.
This was the view of the Old Mutual Investment Group’s Chief Economist, Johann Els, when he addressed two recent Al Baraka Bank client events, one in KwaZulu-Natal and the other in Cape Town.
Weak confidence in South Africa’s future continues to be fueled by a barrage of bad news, from political infighting within the ruling party that risks further social unrest, to a floundering education system, entrenched corruption and a lack of law and order.
In spite of this, Els stressed that South Africa already had a number of positives going for it, such as strong institutions, a strong constitution, an independent judiciary, a politically stable democracy with entrenched rights and a free media, a strong financial sector and generally healthy corporate sector, and easing fiscal crisis risks and a capable new minister of finance.
“Policy reform, such as we have seen recently around the energy sector, could prove to be the turning point to lift confidence in South Africa. In fact, the recent energy reforms announced by the President are the most consequential structural reform seen in South Africa to date, apart from the shift to a democratic society – particularly when it comes to the opening up of energy policy regarding the private sector,” said Els.
“South Africa’s growth path is changing from a down-trend to an up-trend and the country’s economic future is vastly improved from that of a few years ago. I expect 2.5%+ annual average GDP growth over the medium-term. This is a noteworthy shift from the pitiful 1% per annum growth over the five years to 2019.”
“Given the significantly increased emphasis from the governing party on the private sector’s role in the economy – in energy and in other logistical areas, such as railways and ports – I am even more confident in this improving trend. In fact, this move towards more private sector participation in the economy is very radical. Radical economic transformation is therefore back – but the good sort, rather than the feared populist shift of yesteryear.”
“Relative to last year’s populist-driven unrest and the ANC’s weak performance in the local government elections, the emphasis on the private sector’s role is indeed significant,” he added.
The uplift to 2.5%+ growth is more than double the previous 1% and will start impacting confidence, investments and further reducing fiscal risk.
“But this is clearly not enough yet. To lift growth further towards four to five percent on a sustained basis, we need to see massive privatisation. This is not at all about income for the state (failed SOEs are unlikely to attract buyers willing to fork out large sums), but rather getting private sector expertise to run these companies more efficiently and reduce the financial strain on Government,” said Els.
He maintained: “Outright privatisation, as such, might never happen, but the increased role of the private sector in traditional government/SOE functions – which we’re starting to move towards with this emergency energy plan – could be seen as ‘privatisation by stealth’. However, we still need to see more crucial reforms, such as significant labour market deregulation, education system reform and a stronger social compact between Government, labour and business.”
Commenting on whether the country could be dragged down with the global economic slowdown, Els indicated that South Africa was in a better position than at previous times of similar global circumstances.
He said: “Globally, we are seeing slowing growth indicators, with increasing risk of a global recession, and global inflation is likely to roll-over soon, with US PCE inflation likely to ease before CPI inflation. The Fed’s message is, therefore, likely to change and we also expect an uplift in Chinese growth momentum. But the risks are not insignificant in the global environment, particularly the recession risk, which has risen sharply.”
“Regarding the impact of this risk on South Africa, I am optimistic. The country’s inflation problem is less severe than that of global inflation, while the current account is in a strong surplus position, thanks to supportive commodity prices and the global outlook is also not as deeply negative, given the policy support and likely growth momentum lift expected in China.”
He believed that the South African growth outlook for this year and the medium-term should also be Rand supportive, and, while interest rates still needed to normalise more, he said there was no need for the South African Reserve Bank to be as aggressive as the Fed.
“Ultimately, we’re in a position to better withstand the pressure than in the past,” he said.
Els said he expected the South African economy to recover during the second half of this year.
“Manufacturing PMI has recovered after being hard-hit by loadshedding, the whole economy PMI has remained in expansionary territory and the leading indicator has remained relatively stable. Inflation has peaked and should be moving down to around 6% by December and 4.5% by the end of 2023. Services inflation is still low, while consumer goods inflation rates have also peaked and should be easing from here.”
He stressed: “Consumers are likely to experience less price pressures going forward as businesses won’t be able to pass on price increases that they did previously, when consumers were more willing to accept increases.”
“On the whole, confidence in South Africa is set to improve over the next few years, and the country’s economic growth needs sustained, stronger confidence if it is to get on a better footing.”
“Radical Economic Transformation is certainly happening in the country, but not the kind that has concerned us to date. Rather, policy is shifting to the right of centre in South Africa, with increasing emphasis on the private sector’s involvement in the economy, a hugely promising prospect for the future of this country,” he concluded.