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Mid-November 2020 economic report

South African economy is projected to contract by 7.8% in 2020.

Available data suggest that South Africa’s economic activity still remains bleak after a massive GDP contraction in the second quarter. Notwithstanding the above, South Africa’s Purchasing Managers’ Index (PMI) rose to 51.0 from September’s 49.4 reflecting a gradual movement to normalcy from economic restrictions induced in the first and second quarter of 2020.

South Africa’s debt to GDP ratio continues to soar the highest levels since 1994, largely due to the ongoing devastation by the coronavirus pandemic coupled with the decimation of public finances emanating from overspending, mismanagement, and alleged graft during the Zuma era.

Finance Minister Tito Mboweni presented his Medium-Term Budget Policy Statement where the South African economy is projected to contract by 7.8% in 2020. Additionally, tax revenues collections are expected to fall short by R300 billion, while the problem child South African Airways was allocated R10.5 billion to implement its business rescue plan operations.

President Cyril Ramaphosa announced the economic reconstruction and recovery plan. This blueprint anchors on infrastructure and mass employment programmes, energy security, digital transformation and combatting corruption. However, more is yet to be seen in terms of its implementation and objective attainment.

The Covid-19 Temporary Employer/Employee Relief will come to an end as a result of scarce government resources to continuously finance the programme. This scheme was aimed at protecting vulnerable employees at a time of financial distress.

South Africa’s inflation rate inched down to 3.0% in September 2020, from 3.1% August reading. Prices for housing and utilities somewhat increased in September, price pressures for food and non-alcoholic picked up marginally for the same period. Lastly, moderating transportation price growth offset the slight increases.

The unemployment rate increased sharply to a record 30.8% which translates to 6.5 million jobless. This drastic increase is attributed to the hard lockdown implemented earlier this year to curb the effects of coronavirus. According to most economists, unemployment is expected to worsen further in the coming quarters.

The most-watched and followed US elections saw the Democrats presidential candidate Joe Biden win the race. However, President Donald Trump is challenging the legality of the ballots in some states which might be a long protracted legal battle. The US elections provided a turbo-boost to global stock markets and a promising stimulus to risk assets such as emerging markets’ equities, bonds and currencies. The JSE rallied strongly with the rand breaching past the R16 level to the dollar, to R15.51. The local bond market enjoyed a cool R10 billion inflows as a result of the near uncertainties of this race.

As the end of the transition period fast approaches in December, Brexit’s ongoing negotiations seem to have hit a deadlock with both the UK and the European Union maintaining status quos. If these negotiations hit a dead end with a “No deal”, this might be ruinous for the United Kingdom and its economy.

Key takeaways

  • SA PMI rose suggesting a gradual movement to normalcy;
  • SA economy projected to contract in 2020;
  • SA’s unemployment rate reaches record levels;
  • US elections propelled most global markets;
  • Rand breached the R16 to the dollar, the highest since February 2020; and
  • “No Deal” might be detrimental.

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Mauro Forlin

Global & Local Asset Management

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