In an emerging market context, South Africa is not the most rotten apple in the basket

On Tuesday, 2 February 2016, the World Bank followed on the heels of the International Monetary Fund (IMF) by slashing its economic growth forecasts for South Africa. It projected growth 0.8% for this year, in line with the IMF’s forecast of 0.7%. But 2017’s growth estimate of 1.1% was substantially lower than the IMF’s expectation of 1.8%. The World Bank noted that the South African economy is “flirting with stagnation if not recession”.

Economic growth of less than 1% is bound to feel like recession for the South African consumer that is facing high debt levels, rising interest rates and higher inflation. Low income households have seen an increase in their debt levels over the last few years, and in contrast to higher income households that have increased their mortgage debt levels, the rise in debt was due to unsecured lending. Rising interest rates and inflation will impact this part of the population, which constitutes the largest part, the most. The market is pricing in interest rate hikes of at least 1% over the next twelve months. Retrenchments in the mining sector will continue to weigh on lower income households as well. Although next year’s growth is expected to improve, it is coming off a very low base.

According to the government’s National Development Plan, economic growth needed to be in excess of 5% on a sustainable basis to reduce unemployment to acceptable levels. This type of GDP growth was forecasted to reduce current unemployment in excess of 25% to 14% in 2020 and 6% in 2030. But from the onset, we are way off the target. The current economic environment will see the unemployment rate remain unchanged or even increase further. According to the leading economic indicator, there is no catalyst to unlock stronger levels of growth in the near future and the government has fallen short of announcing any structural measures to turn economic growth around.

Newly re-appointed Finance Minister Pravin Gordhan was left with little fiscal flexibility and he will struggle to provide support for the economy in the upcoming budget later this month due to pressure on revenues and credit rating agencies that are closely monitoring debt levels and the direction of future policy, including fiscal consolidation. All the drivers of economic growth: the government, consumer, business and trade are under pressure. But in an emerging market context, South Africa is not the most rotten apple in the basket and instead, the local woes are overshadowed by those experienced by Brazil and Russia. Both have fallen prey to the commodity fallout as well internally orchestrated demise. The World Bank projected GDP contractions of 0.7% for Russia and 2.5% for Brazil this year. The IMF’s forecasts for these two countries were worse, indicating even deeper recessions.

Government will have to prove and implement more concerted efforts to direct the economy in the right direction and prevent it from falling into the same category as Brazil and Russia. The country’s investment grade rating remains an uncertainty and expectations are that Standard & Poor’s will cut it to junk status as soon as June this year. Comparing South Africa’s looming credit rating downgrade to that experienced by Portugal and its subsequent exclusion from the Citigroup World Investment Grade Bond Index, then the country can expect foreign fixed interest capital outflows already 6 to 12 months ahead of the event in anticipation of the downgrade and irrespective of the yield it offers.