The State Of The South African Economy

World Economic Report by IMF indicates 0.8% Growth for SA Next Year

According to the IMF, the South African economy will likely grow by 0.8% in 2017. This news was made available by the World Economic Report (WTR) released on Tuesday, 4 October 2016. At the beginning of 2016, the IMF sharply curtailed its guidance on growth in the SA economy. The growth rate was reduced to 0.1% from 0.7%. Among the many reasons cited for the reduced growth rate was party politics and failed policies that hurt investor confidence. The IMF initially projected that the South African economy would grow at 1% in 2017.

Among the many reasons why the SA economy is under pressure are rising unemployment, plunging commodity prices, and tremendous uncertainty about policy issues. The IMF believes that the South African economy is in need of greater economic efficiency with parastatals such as Eskom. Meanwhile, the SARB (South African Reserve Bank) is anticipating a 2017 growth rate of 1.3%. The Monetary Policy Review of the SARB indicated that the absence of structural reforms in the SA economy would limit GDP growth to 1% – 2% over the short-term. This would not have a positive impact on jobs creation.

Performance of the Public Investment Corporation

The Public Investment Corporation is a massive money manager in the South African economy. The fund currently has management assets valued at R1.85 trillion, and the assets under management increased by 2.4%. Additionally, the Public Investment Corporation (PIC) saw its income rising to R424.2 million, up 28%. Unfortunately, the South African economy has endured a stagnating growth rate, and the PIC grew at its slowest pace since the 2008/2009 global recession. The assets under management increased by R0.04 trillion year-on-year from March 31, 2015.

The South African recession that began in 2009 precipitated a series of declines in annual performance of the PIC. The portfolio of assets under management with the Public Investment Corporation comprises a huge chunk (12.5%) of JSE-listed equities. Additionally, the portfolio also comprises 50% of state-owned enterprises to date, and some 42% of all government bonds issued. According to the PIC, the main issues facing the SA economy are structural. These include labour market imbalances, severe droughts, and an ageing electricity supply.

How Does the South African Finance Minister See the Economy?

SA Finance Minister, Pravin Gordhan is of the opinion that the South African economy must shift focus to long-term sustainable returns, as opposed to short-term portfolio benchmarks. He stressed that asset owners and asset managers must work towards ensuring that investment objectives are in line with long-term sustainable investment strategies.

The Finance Minister was speaking in London on 3 October, and he alluded to the worst being over for the South African economy. In contrast to the IMF report, he is anticipating a GDP growth rate of 1% + in 2016. South Africa is also facing problems on another front: credit ratings. The country’s credit rating is currently marginally better than junk status. A further downgrade by Fitch, Moody’s or Standard and Poor’s would force major foreign investment funds to withdraw capital from the SA economy.

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Source: Bloomberg

The Finance Minister did not provide specific reasons for his optimism, save that a 3% growth rate was possible if the economy performed spectacularly. One of the strongest possible reasons for upbeat sentiment in the SA economy is the performance of the ZAR. The South African rand gained 6.8% in Q3 2016, besting the performance of 150 currencies currently being tracked by Bloomberg. A total of R21.3 billion in SA Bonds was purchased during the quarter. According to the Finance Minister, the undervalued rand reduced sentiment among investors, but with FDI expected to soar in 2017 (SAB-Anheuser-Busch deal) some R100 billion could be passed on to SA shareholders.

This could then have a positive effect on the ZAR. Part of the reason why FDI (foreign direct investment) will increase in SA is the high yield on SA debt. During Q2 2016, the SA economy grew by 3.3%, fuelled by export growth and manufacturing. Concerns remain however with parastatals like South African Airways and Eskom dragging the economy into the mire. With low consumer confidence and high inflation, there is limited business investment opportunity. Nonetheless, Finance Minister Gordhan is of the opinion that the South African economy is growing above zero in 2016 and that the fiscal growth is substantially more than that.