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Markets & economy

South Africa’s economic outlook deteriorates

Since the Northern Hemisphere summer of 2016, there has been a worldwide economic upturn. This is the first period of synchronous global growth since the initial recovery from the global financial crisis in 2009. Business conditions have been improving almost everywhere. The slowdown in emerging markets, which account for the larger part of global growth, has come to an end. Of particular importance is growing consumer spending in China, which is supported by a large pool of private savings. Rising demand has underpinned a recovery of commodity prices from the lows of a year ago. Despite the Trump administrations confusing first two months in office, the improvement in business and consumer confidence which followed the US election remains intact.

The US Federal Reserve has embarked on a process of normalising US interest rates. In February, short term rates were increased to 0.75% per annum and it is widely expected that there will be another two or three increases of 0.25% during the rest of this year. As the dollar is effectively the world’s reserve currency, any increase in US interest rates puts upward pressure on rates elsewhere.

Prior to President Zuma’s decision to fire Finance Minister Pravin Gordhan, South Africa’s economic prospects had been improving. In the last quarter of 2016, the current account deficit was 1.7% of GDP – a massive improvement on the 6% deficit of a year ago. The end of the drought should see a massive rebound in agricultural production. However, the economy remains vulnerable because consumer demand is persistently weak. Household incomes and balance sheets continue to be under pressure. The President’ cabinet changes have had a negative impact on the rand exchange rate, bond prices and investor confidence. As a direct consequence, S&P Global Ratings has downgraded SA’s foreign currency credit rating to sub-investment grade, and in line with this the major banks have been downgraded. Fitch Ratings has downgraded SA’s foreign currency and local currency credit rating to non-investment grade.

South Africa remains dependent on foreign capital without which it will be very difficult to achieve the growth rates it needs to address the challenge of widespread poverty. The outcome of the struggle by the Zuma faction of the ANC to gain control of the Treasury will have a profound impact on financial markets. Abandoning the fiscal prudence of the past year would result in further ratings downgrades and capital flight. In this environment, it would be difficult to fund government spending. Unfunded deficits push up inflation and therefore interest rates. Economic growth would suffer.

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