Emerging

Engine failure

th  
25  
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
South Africa  
Engine failure  
Economic growth is forecast at only 0.4% in 2019, after averaging 1% a year in 2015-2018. The Ramaphosa government has little  
manoeuvring room to implement reforms, and strong structural headwinds continue to hamper economic activity. Illustrating the  
country’s enormous lack of infrastructure, major power outages disrupted activity in the first months of the year. To address the  
severe financial troubles at Eskom, the state-owned company behind the power outages, the government had to unblock additional  
funds to come to its rescue. The latest rescue package will accelerate fiscal deficit slippage and further weaken sovereign solvency  
in the medium term.  
South Africa’s real GDP growth averaged 1% a year between 2015  
and 2018, far short of what the country needs to boost per capita  
income; population increased by 1.7% a year over the same period.  
Economic growth has been weak since the beginning of the year  
and is unlikely to improve much in the very short term. The central  
bank eased monetary policy slightly last summer, but the  
government has no choice but to maintain a restrictive fiscal policy.  
Yet this will not prevent the public deficit and debt from increasing  
rapidly this year.  
1- Forecasts  
2
017  
2018 2019e 2020e  
Real GDP growth (%)  
1.4  
0.8  
0.4  
0.8  
Inflation (CPI, year average, %)  
5.3  
4.6  
4.2  
4.5  
1
Gov. balance / GDP (%)  
-4.4  
-4.2  
-6.1  
-5.8  
1
Gen. Gov. debt / GDP (%)  
52.7  
-2.4  
56.5  
-3.6  
60.0  
-3.3  
65.0  
-3.6  
Current account balance / GDP (%)  
External debt / GDP (%)  
45.8  
45.5  
51.1  
46.5  
52.0  
43.5  
54.0  
45.0  
Very slow economic growth  
Forex reserves (USD bn)  
After hitting another air pocket in Q1 2019, real GDP growth picked  
up slightly in Q2, reaching 3.1% q/q sa (vs. -3.1% in the previous  
quarter) and 0.9% y/y (vs. 0% in Q1). Leading indicators and recent  
activity data point to another slowdown in Q3. We are projecting full-  
year real GDP growth of only 0.4% in 2019.  
Forex reserves, in months of imports  
Exchange rate USDZAR (year end)  
4.7  
4.4  
4.0  
4.0  
12.4  
14.3  
14.5  
13.7  
(
1): Fiscal year from April 1st of year n to March 31st of year n+1  
e: BNP Paribas Group Economic Research estimates and forecasts  
The power outages arising from the troubles at the state-owned  
company Eskom hit the primary and secondary sectors particularly  
hard, especially in the first months of the year. A strike also blocked  
a major gold mine from November 2018 until a wage agreement  
was signed in April. Mining sector activity (7% of total GDP)  
contracted by 4.6% y/y in Q1 2019 and then by 2.1% in Q2. Growth  
in the manufacturing sector (which accounts for only 12% of GDP)  
slowed to 0.5% y/y in H1; it probably slipped into negative territory in  
July-August according to the industrial output index. The agricultural  
sector was hit by another sharp decline in production (down 12.7%  
in Q1 and 6.7% in Q2), while the troubles in the construction sector  
persisted (-2.4% in H1). The services sector reported growth of  
2
- Sluggish growth  
Real GDP (y/y, %), and contribution (in percentage points) *  
GDP  Household consumption  Public spending  
Investment Change in inventory Net exports  
5
4
3
2
1
0
1.5% in H1, roughly in line with the average for the past four years.  
-1  
-2  
-3  
The finance and real estate sector (18% of GDP) continued to report  
the most buoyant performance.  
From the demand standpoint (chart 2), real GDP growth was  
undermined by the negative contribution of net foreign trade in  
Q2 2019. This decline is likely to continue in the short term in a  
weak international environment. Private consumption (60% of GDP)  
rebounded in Q2 (+1.4% y/y) after slowing for several quarters, in  
part thanks to a slight acceleration in household lending. It could  
drop off again in the short term given the deterioration in the labour  
market and the feeble increase in real revenues. Employment  
declined slightly in Q1 and the unemployment rate rose to an all-  
time high of 29% in mid-2019.  
2
012  
2013  
2014  
2015 2019  
2016  
2017  
2018  
Source: Statistics South Africa  
* The residual component is not shown.  
One alarming signal is very weak investment, which has declined  
continuously since Q1 2018. The investment ratio fell below 18% of  
GDP, down from a 2011-2015 average of 20.5% of GDP. This trend  
could continue in the short term given the weak prospects for  
external and domestic demand, and due to the further erosion in  
investor sentiment.  
th  
26  
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
No manoeuvring room  
3- The fiscal deficit is deteriorating rapidly  
The confidence that was restored following the inauguration of  
President Ramaphosa in February 2018 proved to be short lived.  
The high hopes that were raised with the announcement of reforms  
% of GDP, 12-month moving average  
Central government deficit (rhs, inversed scale)  
 Fiscal revenues ▪▪▪ Total fiscal spending  
Primary spending (before interest payments)  
(
notably to improve public finances, fight corruption and raise the  
potential growth rate) and the implementation of the first measures  
have been dashed and replaced by fears of paralysis. As a matter of  
fact, the government’s manoeuvring room for implementing reforms  
is severely constrained by low economic growth, a very tense social  
climate and deep-running divisions within the ruling party. The  
significant structural headwinds that are hampering investment and  
GDP growth (lack of infrastructure, lack of skilled labour, labour  
market rigidity, corruption and uncertainty over future changes in the  
legal framework in certain sectors) are bound to persist. The  
authorities also have very little manoeuvring room to stimulate  
activity in the short term.  
3
3
-7  
31  
-6  
-5  
-4  
-3  
-2  
-1  
2
9
7
2
25  
23  
21  
2
012 2013 2014 2015 2016 2017 2018 2019  
The central bank lowered its key repo rate by 25 basis points (bp) to  
Source: Statistics South Africa  
6.5% in July 2019; its previous action was a rate increase by a  
similar amount in November 2018. Monetary policy could be eased  
slightly further in Q4 2019, since consumer price inflation is holding  
comfortably within the target range of 3-6%. Inflation averaged 4.3%  
y/y in the first eight months of the year, compared to 5% in H2 2018.  
The central bank will nonetheless remain cautious. The financial  
markets have enjoyed a relative calm since the beginning of the  
year and the rand has depreciated by less than 3% against the US  
dollar. However, new episodes of capital flight and pressures on the  
rand are possible in the short term in case of an external shock,  
bigger-than-expected fiscal deficit slippage and/or if Moody’s were  
to downgrade its sovereign rating (the next review is scheduled for  
early November). If South Africa’s sovereign rating were  
downgraded to speculative grade, it could trigger a large sell-off of  
public debt bonds by investors.  
Initially, Eskom was to receive support of ZAR 23 bn a year over ten  
years starting in 2019. This figure was raised to ZAR 49 bn for  
FY2019-20 and ZAR 56 bn for FY2020-21 (or about 1% of GDP a  
year), with part of the funding being early payments of the financial  
support plan previously scheduled for the longer term. This support  
package must be accompanied by a corporate restructuring plan  
and debt rescheduling for Eskom, and part of the debt guaranteed  
by the central government will probably be transferred to its balance  
sheet. There is a high risk that other state-owned companies may  
need direct government support going forward. Moreover, the  
government has almost no capacity to reduce other expenditures or  
to boost revenues given the sluggish pace of economic growth,  
fierce social tensions at a time of high unemployment and poverty,  
and very poor-quality public services.  
Accelerated deterioration in public finances  
Government debt is likely to reach at least 60% of GDP by the end  
of FY2019-20 and 65% at the end of FY2020-21. While South  
Africa’s medium-term solvency continues to deteriorate, the liquidity  
and refinancing risk of government debt in the short term has also  
increased. Nonetheless, it remains moderate thanks to a still  
favourable government debt profile and the existence of a large  
local-currency bond market. The average maturity on central  
government debt is long (at 15 years) and it is mainly denominated  
in rand (about 90% of total debt). Yet, with 40% of domestic debt  
held by non-residents, the government is vulnerable to changes in  
the sentiment of international investors. This sentiment could erode  
in the coming months in response to the rapid widening in fiscal  
deficits.  
Public finances have deteriorated gradually over the past decade  
due to insufficient fiscal revenues, rising debt and interest payments,  
and recurrent losses reported by state-owned companies. The  
situation has deteriorated even faster this year.  
From fiscal year 2014-15 to fiscal year 2018-19 (FY, starting April 1st  
st  
and ending March 31 ), the central government deficit held between  
4
% and 4.5% of GDP, and debt swelled from 47% of GDP to 57%.  
Although efforts to contain spending increases and to boost  
revenues helped reduce the primary deficit to less than 1% of GDP  
last year, compared to 2.7% in FY2012-13, the nominal deficit did  
not improve due to the increase in debt interest payments. These  
accounted for 3.7% of GDP in FY2018-19, and 14.3% of fiscal  
revenue.  
In FY2019-20, the nominal deficit should deteriorate significantly,  
rising above 6% of GDP (overshooting the government’s initial  
target of 4.5%). While interest charges continue to rise (to an  
estimated 4.5% for the full fiscal year), the primary deficit is also  
deteriorating rapidly (chart 3). It could reach 1.6% of GDP in  
FY2019-20. The much bigger increase in spending can be attributed  
to the government’s additional support to rescue the state-owned  
company Eskom.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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