The chances of South Africa’s economic and political prospects turning around were improving, but there was no guarantee that this would happen and it would not be a smooth path, Old Mutual Investment Group (OMIG) chief economist Rian le Roux noted on Thursday.
He added that Finance Minister Pravin Gordhan’s upcoming budget speech would attract critical attention from global sovereign ratings agencies, which meant that greater collaboration was required between government and business to help ensure the economic and political situation could be turned around.
Speaking at OMIG’s first quarterly investment briefing for the year, Le Roux said that, unless the country found the means to reform, it would be facing an even worse crisis than it currently found itself in.
“While the country is still adjusting to the macroeconomic implications of the changes in Finance Ministers during December, we are seeing some positive indicators coming through.
“President Jacob Zuma’s State of the Nation address focused more specifically on the economy this year, but practical follow-through is still needed to be impactful. Government and business are also finally starting to engage more constructively, which is encouraging,” he added.
Meanwhile, he noted that South Africa could avoid a downgrade to junk status provided that fiscal tightening targets, spending and tax hikes were not too “growth damaging”.
However, a possible ratings downgrade could not yet be set aside, and Le Roux believed the budget should be about more than just the fiscal situation.
“First and foremost, government needs to admit that the country is in a crisis, which we finally saw happening over the last few weeks. The next step is to see government’s commitment to more market-friendly and predictable policies, sound governance and democratic principles, as well a harder line on corruption and wasted expenditure.
“The functioning of State-owned enterprises and local authorities also needs attention as does a maintained transformation focus and the avoidance of any more policy blunders,” he asserted.
Most importantly, he believed there should be a solid compact between government, business and labour. “While we have seen more collaboration between business and Zuma’s government than ever before, there is still no representation from labour in these discussions.”
Meanwhile, Old Mutual Emerging Markets CEO Ralph Mupita welcomed the recent drafting and consideration by government of an eight-point plan that would, if implemented, help prevent a damaging sovereign ratings downgrade.
“Leadership has a window here to act decisively and quickly to get the economy back on a sustainable and inclusive growth path.
“What has been particularly encouraging is the strong consensus between government and business on the urgency and direction of the actions that need to be taken, and there is a growing sense of willingness, on all sides, to collectively do whatever it takes to rebuild our reputation as a safe investment destination,” he said.
Looking ahead, Le Roux expected this year to be difficult in many ways. “We are hoping for a much-needed tighter budget. We will most likely see two more 25 basis point rate hikes, as inflation is likely to exit its target soon, but fiscal tightening would reduce the pressure on monetary policy,” he explained.
“In addition we are expecting weaker growth with about 0.5% for 2016 and 1% for 2017. We don’t expect a recession, but with the economy stalling, the risk is still ever present. However, we do expect the current account deficit to narrow to around 3.5% of gross domestic product, provided commodity prices hold, which is more than consensus expectations.”