Better Prospects for the SA Economy
It is time to put COVID-19 and talk about economic stagnation behind us.7th Nov 2021
Investors should try to ignore the remaining short-term noise and risks around infections, lockdowns, unrest and last year’s weak economic growth and look toward the medium to longer term. When investing – especially for future wealth or retirement – the short term becomes less important, as we all should invest for longer term returns.
The improved prospects for the South African economy – not only for this year, but also for the medium term — stem from a very supportive global economy, a local economic rebound from last year’s slump, an improved policy environment and a very positive February National Budget.
Growth in 2021 could reach 5.6%, and medium-term growth (i.e. from 2022 to 2026) could average 2.5% per annum. Although the concerns about the severity of the third wave, the slow rollout of vaccines and concerns about the global commodity prices rising are unlikely to last forever, they are all very valid risks for the local economy.
However, while the restrictions during the third wave clearly hurt the hospitality and alcohol industry, the overall impact on the economy was not as severe as during the hard lockdown of April and May 2020. The slow vaccine rollout has gained some momentum, and it seems reasonable to expect that a large percentage of the population will likely be vaccinated by the end of 2022.
Thus, Covid is unlikely to have any further deeply negative impact on the economic recovery. While a fourth infection cycle is indeed possible, regulations will likely be even less severe, as another infection cycle should be relatively mild, given ongoing vaccination. Global growth and commodity prices should remain robust amid ongoing policy support in the short term and the likely very slow removal of such support in the medium term.
The good news
It is probably worthwhile to run through the positives we have seen recently, to measure the reality against my base case of an expected economic recovery over the next few years.
On the political and policy fronts, there can be no doubt that there has been a truly remarkable turn of events late in the second quarter of 2021. It seems clear that the ANC overall, and the NEC (National Executive Committee of the ANC) in particular, is backing the President more strongly than ever.
President Ramaphosa has been able to resolutely drive his anticorruption crusade with the NEC’s decision that all members accused of corruption should step aside until investigations or court proceedings have been finalised. Thus, the ANC’s Secretary General was forced to temporarily vacate his position. As he was perceived to be one of the main obstacles to the anti-corruption and economic reform campaigns, this is a big step in the right direction.
Furthermore, the Constitutional Court’s ruling that the former president was in contempt of a previous judgement, and would thus be jailed, was monumental for South Africa’s judiciary. While South Africa has always been perceived as having an independent judiciary, the latter has come under increasing attack in recent years. This ruling clearly and soundly reaffirms the rule of law. No matter what transpired afterwards. The ruling has clearly defined the responsibilities of ruling politicians and the repercussions of defying the courts.
While the July unrest might have started as a backlash to the imprisonment of the former president, it quickly gained momentum because of the dire unemployment and poverty in the country. These are the consequences of weak economic growth over many years, resulting from slow and weak policy reform and implementation.
While the economy will likely recover in the short term from the unrest impact (more on that below), the larger question is whether these events could be an inflection point for faster, better economic policies that could potentially accelerate the uptrend towards stronger and more sustained economic growth in the medium term.
I believe that could be the case. But – given the political cycle – that might have to wait until after the local government elections in early November. I strongly believe that the spurt of policy action late in the second quarter was not the last seen in this space.
During the second quarter of 2021 we saw several new announcements on policy and corruption, and this is where President Ramaphosa shows ownership of his renewed emphasis on policy change.
- In June, the President announced that the limit for selfgeneration of electricity without licence will be lifted from 1MW to 100MW (substantially more than the 10MW the Energy Minister was reluctantly considering and double what business was hoping for).
- South Africa’s ports will be unbundled from Transnet, thus being able to reinvest revenues generated from port operations in upgrading and expanding port infrastructure – without the constraints of the holding company wanting to invest that money elsewhere within the broader group.
- South African Airways (SAA) was privatised with 51% sold to a private company (a majority stake sale this time, compared to the 20% stake sold to Swissair in 1999 – which was bought back in 2002).
- The Health Minister was placed on special leave due to corruption concerns.
- It was announced that the extradition treaty between the UAE (where the corruption-accused Gupta brothers allegedly live now) and South Africa would come into force on 10 July – which might assist the corruption fight.
- Eskom managed to reduce its debt from a peak of R484bn in March 2020 to below R400bn by early July 2021. Meanwhile, the economy has responded as follows to the strong global environment and reopening:
- Much stronger than expected GDP growth, at +4.2% and +4.7% annualised, was recorded in Q1 and Q2 2021 respectively.
- Nominal GDP has rebounded strongly and is already 7% above the pre-Covid level of the fourth quarter of 2019.
- While July data was heavily impacted by the unrests, most economic activity indicators have rebounded in August and September.
- Tax revenues are recovering strongly and reflect the better economy. Similarly, the prevailing sentiment about fiscal risk has turned sharply since the February Budget. Fiscal risk has indeed declined markedly since late last year. The 2021/22 budget deficit could turn out substantially better than the -9.3% budgeted. My estimate is -7%. The debt-to-GDP ratio could also stabilise around 75% – compared to the 95.3% assumed at the time of the October 2020 MTBPS (Medium-Term Budget Policy Statement).
- Consumer balance sheets are being repaired as the economy and asset prices recover. The household savings rate is in positive territory – and as consumer confidence recovers, some of these excess savings will likely be spent. The savings rate recovered, as spending collapsed by more than incomes last year.
- The external trade balance remains in record surplus territory, with the average of the last six months’ surpluses almost R50bn per month. The cumulative trade balance for the first eight months of 2021 totalled R326bn, versus +R140bn in 2020 and zero in 2019.
- Similarly, the current account balance recorded a huge surplus of 5.6% of GDP in the second quarter of the year.
- Business confidence has rebounded strongly across many sectors, e.g. retail and motor trade, manufacturing and construction.
- While consumer confidence is still constrained, consumers are feeling better about their own household finances. Sentiment in the housing market is also on the mend.
This is an environment where the investment cycle should also start to kick in – with more renewable electricity plants in line with recent policy moves. The mining sector will likely also expand capital spend in line with the better conditions in that sector. Better growth will likely lift fixed investment across a range of other sectors as well.
While it might be easy to dismiss this view, given all the negatives still around, it is the trend that is important in determining the future outlook. And the trend has certainly improved – from significant headwinds, to those headwinds dying down, to some tailwinds starting to blow, to those tailwinds picking up pace. This trend has the potential to rapidly improve over the next year or two – feeding into the better medium-term outlook.
Under these conditions, confidence among consumers, business and investors can continue to improve rapidly, driving growth up. Clearly, investors need to be cognisant of this improving environment, as markets will rapidly discount the better news. Ignore this at your peril – don’t miss out.
Join Johann Els and Estate Living on our #ExpertInsight Series as we continue to unpack the topic. The webinar includes a Q&A session
DATE: 17 November 2021