National Treasury, the South African Reserve Bank and the International Monetary Fund (IMF) revised down South Africa’s growth trajectory over the past year averaging 0.5% in 2019, 1.2% in 2020 and 1.6% in 2021. The low growth trajectory is due to minimal employment growth, policy uncertainty and increasing regulation. The uncertainty is expected to persist in 2020 resulting in low confidence and weak fixed investment. Net exports are unlikely to contribute materially to growth in 2020, so consumption growth will be the main driver. Fiscal strain restricts government consumption, so the private sector consumption will be the key driving component. The higher oil price in 2020 is likely to be offset by higher precious metals price, but load shedding will place a downside risk bias on the growth forecasts.
Of the three main international credit rating agencies only Moody’s rates South African government debt above sub-investment grade. Moody’s retained SA credit rating at Baa3 in December 2019 but revised down its outlook to negative. An already structurally constrained economic growth trajectory has been worsened by load shedding. This is expected to erode tax revenue growth even further, which will reflect in further fiscal deterioration in the National Treasury’s 2020 main budget. We take the view that South Africa’s sub-investment grade status has already been discounted by the market and that the credit rating agencies will serve as confirmation. Analysis of market reaction after the downgrade to sub-investment grade for seven countries over 22 years shows lower yields, lower policy rates and stable to slightly stronger currencies after the downgrade.
South Africa enters the new decade is a much worse financial and operational position at a public service level than when it entered the last decade. Both the municipalities and State-owned Companies are in crisis, both operationally and financially. There is a sustained electricity supply crisis in the country which looks unlikely to abate in 2020. There is a looming water crisis which has been exacerbated by major financial issues in the Department of Water and Sanitation which are impacting Trans Caledon Tunnel Authority’s (TCTA’s) ability to meet its financial commitments. The toll road system is under pressure due to the dysfunction of Gauteng e-tolls and several toll concession ownership changes. Two national airlines, SAA and SA Express, are under business rescue, and PRASA is under administration. The local government system is becoming progressively more operationally and financially dysfunctional and unable to maintain their respective infrastructures. Most of the large State-owned companies are in financial and operational crisis which is negatively affecting the integrity of the country’s existing infrastructure. The impact will be further structural constraints on SA’s economic growth.
The three major international financial institutions, the IMF, World Bank and OECD all revised down their global growth forecasts in H2:2019 to average 3.0% in 2019 and 3.2% in 2020. Macro signals such as the OECD leading indicator and JPMorgan Global manufacturing PMI show continued deterioration in late 2019. Some stabilisation in the growth trajectory is expected due to reduced uncertainty around the US-China trade tensions and Brexit. We expect increased fiscal stimulus in 2020 from major economies such as Japan, China, UK Germany and Italy.
The big four Central Banks– Federal Reserve, European Central Bank, People’s Bank of China and Bank of Japan – are all expected to provide even more monetary accommodation for their economies in 2020. All four Central Banks will provide further QE to add liquidity in their respective money markets. There is little incentive for the Central Banks to manipulate the shape and level of their respective yield curves further. Policy rates look likely to be lowered in China and Europe while Japan and the Fed keep their policy rates on hold at their current very low levels during 2020. The significant increase in liquidity provided by the big four Central Banks is expected to be supportive for the financial markets but is unlikely to give their respective economies a boost. In the low and falling policy rate environment, investment yields will be harder to find, and higher risk will have to be taken by investors.
The Fund continued to earn inflation plus returns from its core low risk, interest bearing investments, while the exposure to equities added to returns. It should be noted that the apparent strength of equities over the past year is partly due to the low base in the 4th quarter 2018.