DOCUMENTS

Inside SA the tides are turning, and the world is watching

Hamlet Hlomendlini writes that positive outlook on economy is likely to continue until tabling of budget

Inside South Africa the tides are turning, and the world is watching

29 January 2018

Looking back to the past three years, and perhaps beyond, South Africa’s economy has been characterised by strong economic uncertainty, political instability, lack of leadership, deep-seated corruption especially at state-owned enterprises (SOEs), declining growth and rising government debt.

All these issues have contributed immensely to the country's credit-rating downgrades, which have been effected in response thereof. Due to the

credit-rating downgrades, business confidence in South Africa has been severely dented, leading to reduced investment in the economy.

As a consequence, South Africa's economy, was plagued by sluggish growth for the better part of 2017. It only managed returned to positive growth trajectory in April after a six-month recession—thanks to the agricultural sector for its robust and consistently performed throughout the year.

That being said, while we still battle with the impact of downgrades, there are visible signs that inside South Africa the tides are turning—inspiring a renewed hope among South Africans that the worst is over.

Since the election of Cyril Ramaphosa as African National Congress (ANC) leader at the party’s 54th elective conference in December last year, South Africa’s economic outlook and political environment have improved quite significantly.

A closer look at what has been happening since the ANC’s January 8th statement which was rendered by Ramaphosa at the party’s 106 celebrations in East London, reveals glimpses of profound changes occurring under the surface. There is now brighter prospects for the economy that markets seems to be optimistic about, but there are also challenges ahead.

Ramaphosa’s election has inspired much optimism and confidence about the country, invigorated by the brave and bold steps that he, and together with other ANC leaders, have taken to root out corruption and boost the ailing economy. Since then, the local currency, strengthened enormously against major currencies— gains which it still maintains on perceptions of reduced political uncertainty.

Also, the recent appointments of the new Eskom Board and acting chief executive officer (CEO) has inspired strong sentiments that South Africa could avert further credit-rating downgrades. However, there is still a risk of further downgrades specially if the budget speech in February fails to deliver the desired outcome.

In addition, as the country is headed to its 2019 general elections, which could see Ramaphosa becoming the fifth democratic president of the Republic, there is a strong message being sent out there, that once again South Africa is open for business.

Just last week the South African delegation led by Ramaphosa himself spent the past week in Davos Switzerland selling the country for potential investment. Remarkably, while uncertainty is still there, especially around issues of land, it appears as through the message is being heeded.

One of the things Ramaphosa has done quite well since taking over as the ANC’s leader, is to get the South African business community behind him. Their optimistic outlook about South Africa’s economy are also important to the foreign investors who wish to come and invest in South Africa.

But having said that, there are still profound challenges to overcome inside South Africa. The State Capture Inquiry to be headed by Deputy Chief Justice Zondo, the ongoing Eskom and SASSA inquiries and the freezing of assets at Gupta linked firms (Trillion and McKenzie) are a clear indication that South Africa is now ready to rid itself of corruption—but much more still needs to be done in this regard.

The positive outlook on the South African economy is likely to continue till the tabling of the budget in February, after which it could go either way. To avoid any negativity on the economy and to possibly avert further downgrades, the Finance Minister will have to deliver a budget that will convince the rating agencies that the government will, within a short-term, accelerate reforms to reduce both its spending and rising debt.

Rating agencies, potential investors, and indeed all South Africans will be waiting with great anticipation as to what efforts to provide fiscal support for ailing SOEs particularly Eskom will the Minister put on the table.

Another notable risk whose detrimental impact has been largely underestimated is the ongoing drought in three provinces of South Africa, the Western, Northern, and Eastern Cape. If nothing is done as a matter of urgency to minimise the impact, this persistent drought will remain a risk that will not only undermine the performance of agricultural labour market and the significance of the sector in the economy but will also pose as a threat to South Africa’s economic recovery. In his quest to attract investment to the country, this is certainly an immediate risk that Ramaphosa must mitigate.

By Hamlet Hlomendlini, Chief Economist, AgriSA, 29 January 2018