One theme stood out when Absa’s team of economists hosted a webinar about the prospects for the South African economy for the next year or so: every one of the presenters mentioned that there are so many uncertainties that forecasting the country’s prospects over the next few months will be extremely difficult.
The economists listed the usual challenges facing SA and the financial wellbeing of its citizens, and even added the possibility of a few unexpected events that might render their forecast moot.
“There [is] no respite from multiple challenges facing the SA economy,” said Absa economist Peter Worthington.
“An already-weak growth outlook has been further dampened by various headwinds and ongoing structural constraints.
“While GDP figures were higher than expected in the first quarter of 2022, intensified electricity shortages and a less supportive global economy led us to cut our growth estimate for 2023,” he added, noting that he expects electricity disruptions to continue for the rest of the year and in 2023.
In their South Africa Q3 22 Quarterly Perspectives report, the economists note that SA’s first quarter growth of 1.9% (quarter on quarter) was almost double what they expected.
“However, after a flood-ravaged April, activity data for May were quite subdued, with both manufacturing and mining output data so far suggesting that these sectors may subtract from growth in the second quarter,” states the report.
Of significance is that earnings for commodity exports decreased from previous high levels due to lower demand, lower prices and transport constraints, as well as constraints at ports.
In line with general consensus, Absa also flags unreliable electricity supply as the biggest threat facing the SA economy.
“The electricity plan that President [Cyril] Ramaphosa announced earlier this week will begin alleviating load shedding only from the middle of 2024,” said Worthington.
He added that Eskom’s serious debt problem is not going away; the utility is still in trouble.
To fix Eskom’s balance sheet, he expects that some of the utility’s debt might be moved “onto Treasury’s balance sheet”. This has a positive in that it will cost Treasury less overall, as direct transfers to Eskom might be lower in future.
Absa’s fixed income strategist Mike Keenan said load shedding has had a big impact on the exchange rate because of its impact on sentiment and investor confidence.
While he makes a compelling case that the rand is actually weaker than it should be (compared with the currencies of other developing economies reliant on commodity exports), he said negative sentiment regarding the effects of load shedding is pushing the rand even lower.
“The rand lost five cents against the dollar every day of Stage 6 load shedding. It does not sound like much, but it accumulates over time,” said Keenan, warning of the inflationary effects of a weak currency.
The economists spent a lot of time talking about inflation – probably the number one topic around the financial world.
“Inflation has recently surprised to the upside,” said Absa economist Miyelani Maluleke, adding that price pressures are broadening beyond fuel and food.
“We now see CPI [Consumer Price Index] inflation peaking at 7.9% in October this year and remaining above the upper 6% band of the target range until mid-2023 and the 4.5% midpoint until 2024.
“Our relatively bullish oil price assumption leaves some downside risk to our CPI forecast, but like the Sarb [South African Reserve Bank], we see the balance of inflation risks lying to the upside,” he said.
In addition to the usual discussion about how inflation has increased around the world and the subsequent increase in interest rates to break inflationary pressures, the team warned about the risk of SA moving too slowly to reduce inflation.
“If the US Federal Reserve is successful in reducing inflation in the US while SA struggles, the inflation differential will cause the rand to decline steadily.
“In this case we see the rand remaining above R16 to the dollar,” said Keenan, despite his belief that the rand is oversold in terms of purchasing power parity.
He also warned that the rand might come under pressure if demand for commodities declines, as it will have a detrimental effect on the balance of payments.
According to the report: “The rand appears fundamentally undervalued, but recovery is likely to be slow. We believe weaker terms of trade and ongoing structural constraints on exports will erode the current account surplus, returning it to a deficit in 2023, earlier than Absa’s prior forecast.”
As a result, Absa forecasts steeper interest rate hikes.
“We now see more aggressive monetary tightening. The Sarb’s recent decision to hike the repo rate by 75 basis points reveals a sharply more hawkish stance. In contrast to our previous forecast, we now see the repo rate rising beyond the neutral level for some time, as the Sarb tries to reverse rising inflation expectations,” said Maluleke.
“The Sarb could take the repo rate up to 7.5% fairly swiftly over the next few meetings, before easing gradually from mid-2023, when inflation should begin to fall again,” he added.
Worthington threw a few wild cards out too. “Nobody can predict the exact outcome of the upcoming ANC elective conference. A few months ago, it looked like Ramaphosa had strong backing, but nobody knows the dynamics playing out on the floor.
“Only last weekend, the key province of KwaZulu-Natal elected a leadership faction that is opposed to Ramaphosa.
“The upcoming general election creates more uncertainty. An uncertain political situation is not positive for effective and stable government,” he said.
He added the possibility of another bout of social unrest to the list of unknowns to contend with.
The Absa report concludes that things can easily become worse than currently expected.
“As we have argued before, making a weak economy function better typically requires a lot of difficult policy changes and a big dose of luck to all cohere together. For SA specifically, we see some upside risk to our baseline forecast in the possibility that the government swiftly implements its putative anti-corruption and structural reform agendas. However, the obstacles to this are significant – specifically a weak bureaucracy and an ideologically and factionally conflicted political leadership.
“We believe that downside risks to our baseline forecast dominate the upside. We see a big downside risk to our baseline forecast if another violent social unrest erupts, given the backdrop of surging inflation, rising unemployment and the increasingly desperate factional battle for control within the ANC,” warns the report.
All forecasts at a glance
Listen to this MoneywebNOW podcast with Simon Brown, with Izak Odendaal of Old Mutual, on finding value in a high inflation and high interest rate world