A discussion on the outlook for SA’s economy by economists at Absa Corporate and Investment Bank has painted a largely positive picture with stronger economic growth, a stronger exchange rate, low inflation and no increase in interest rates. Unfortunately, the researchers added a huge ‘but’ to their rather optimistic views.
“Uncertainty is high. That outcomes can differ from our baseline (forecast) are not just possible, but reasonably plausible,” warn the researchers, leading them to add both more positive and more negative scenarios to their rather optimistic forecast.
The optimism is largely based on an improved global economic outlook. The economists note that as a small open commodity-exporting nation, SA’s economic performance is tightly linked to that of the rest of the world and maintain that prospects have improved during the last few months.
Global growth forecasts
The economics team – comprising Peter Worthington, Miyelani Maluleke and Mike Keenan – notes that the International Monetary Fund (IMF) has raised its forecasts for global growth in 2021 from 5.5% to 6% and that of 2022 from 4.2% to 4.4%, thanks to the enormous US stimulus bill and planned US infrastructure spending.
“Global trade volumes are also recovering strongly from the lockdowns of 2020. The IMF also forecasts that export volumes for emerging markets and developing economies will rise by 7.9% in 2021 while non-fuel commodity prices can increase by 16.1%.
“Meanwhile, prices for key export commodities are currently above estimates and should benefit SA, particularly if speculations about a commodities super-cycle (and a PGM-facilitated hydrogen economy) become a reality,” says Maluleke.
This better-than-expected scenario comes with a warning …
A stronger global economy is not all good news: if surging global demand and ultra-lax monetary policy generate a sharp increase in inflation, this could send bond markets tumbling, collapse risk appetite and ultimately tighten financing conditions in SA, according to Absa CIB.
Then there is the risk – some would say the certainty – of continued load shedding.
“Eskom’s maintenance efforts to date have not significantly stabilised the performance of the generating fleet. We believe that periodic outbursts of load shedding this year will likely remain a drag on economic recovery,” says Maluleke, although recognising that the availability of capacity has increased.
“The level of electricity demanded of Eskom has started to rise for seasonal reasons and is now back at levels that are normal for this time of the year. Thus, as activity rises further, the electricity supply constraint is likely to become binding again,” he says.
The quarterly report also notes that a third wave of Covid-19 infections is still a risk, but chose to assume that infections would not increase so much as to justify another round of strict lockdown regulations. However, it remains a risk to the economic prospects.
Thus, the economists raised their GDP growth forecast for 2021 from their earlier estimate of 3.1% to 3.8%, reflecting a generally faster-than-expected economic recovery during the second half of last year that would have spilled over to 2021.
Absa expects that GDP would have expanded by 1.7% quarter-on-quarter in the first three months of 2021, compared to its previous forecast of 0.3%. The official GDP figures will be available at the beginning of June.
The macroeconomic model predicts that the rand will be “markedly stronger” than estimated only a few months ago.
“We now expect the rand to be R14.25 per dollar by mid-year (previously R15.75) and R15.25 by year end (previously R16.25),” according to the report.
Inflationary pressures are expected to remain subdued, despite the sharp increase in petrol prices and electricity tariffs.
The economists also expect interest rates to stay low for long, noting that a large output gap, subdued credit growth and quiescent inflation will make it possible for the SA Reserve Bank to leave the repo rate unchanged at 3.5% until March 2022.
“The subsequent normalisation of rates will be gradual,” says Maluleke. “We believe the market is too hawkish in pricing in a 55 [basis points] tightening over the next 12 months.”
While admitting that government finances and fiscal policy will remain challenging, the Absa team says government debt can still stabilise, even taking into account the risk of government not achieving its plans to freeze public sector wages.
Its conclusion on fiscal stability is that tax revenue has already improved due to higher economic activity and better enforcement by the South African Revenue Service (Sars), contributing to a lower budget deficit than thought possible a year ago.
However, the report states that its optimistic forecasts are prone to be wrong, saying that positive or negative alternative scenarios could materialise on either side of the “baseline” scenario.
“Obviously, there are an infinite number of possible macroeconomic outcomes (especially along the many dimensions of pertinent macroeconomic variables).
“Roughly, the baseline scenario has a 40% probability outcome and the positive and negative cases on either side, each with a probability of 30%.
“We are not aiming to present extreme cases (which nonetheless remain possible).
“Instead, we aim to give investor-usable alternative scenarios with a reasonable degree of probability, even if they are not (in our view) the most likely outcome.
“In each of the two scenarios, our assumptions regarding the global environment are in line with the baseline forecast and the scenarios are largely based on different sets of domestic assumptions,” say the economists.
Negative, baseline and positive scenarios in numbers
|Government debt to GDP||80.8%||78.7%||77.3%|
|Prime interest rate||6.8%||7.0%||7.25%|
|R/$||R 15.47||R 14.66||R 14.07|
Source: Absa Research
The shape of things to come
The positive scenario assumes that any new waves of Covid-19 will not be too serious and stricter lockdown measures unlikely, less load shedding for the rest of the year, and good recovery in personal income and consumption.
Then everything turns out rosy. The economy grows faster, government finances improve, business confidence rises, the rand strengthens and rating agencies even remove their negative outlook on SA’s debt.
The negative scenario assumes that further Covid-19 waves are bigger than the second wave, with worse lockdown responses. Load shedding erupts regularly throughout 2021 and into 2022 as Eskom’s efforts to stabilise its power stations fail, while the building of new private sector renewable plants are hampered.
Under this scenario, economic growth falters as business and consumer sentiment remains pessimistic and damage from the coronavirus pandemic lasts longer. The economy will then only expand by 2.3%.
The pessimistic view also predicts that a strike by civil servants and upcoming elections force government to capitulate on its plan for a three-year pay freeze for public sector workers.
Government debt increases, the rand depreciates, inflation falls and interest rates are cut in a desperate attempt to bolster economic growth.
It is also likely that structural reforms to grow the economy would be slower under a low-growth scenario. Unfortunately, rating agencies would downgrade SA debt instruments to even worse junk.
Basically, things then start to resemble the shape of a pear.