Economic and policy uncertainty in South Africa is expected to remain elevated until after the national elections on May 8.
According to the North West University Business School’s Policy Uncertainty Index (PUI), positive and negative trends appear to be putting the South African economy in a “holding pattern” until the elections.
The nature of the political mandates emerging from the elections are expected to largely influence whether policy uncertainty will substantially improve and whether the necessary reforms will materialise to put the country’s economy on a higher growth path.
For the first quarter of the year, negative factors influencing the level of policy uncertainty outweighed the favourable ones, resulting in an increase in the latest PUI.
Among the positive developments in the policy environment earlier in the quarter was President Cyril Ramaphosa’s State of the Nation Address (SoNA) in February.
“Although there was nothing unexpected in its contents and the SoNA inevitably trod warily on some key issues, it was nonetheless broadly well-received as a reassuring message,” the business school said, highlighting that, compared with where South Africa was a year ago, it ticked most of the boxes in terms of progress on certain major matters and had a positive impact on markets and businesses at the time.
Fiscal sustainability, meanwhile, remained a key factor in market and business perception. The Budget Speech of February 20 was a “frank and realistic” assessment of the extent to which the economic and fiscal challenges facing South Africa had escalated since the Medium-Term Budget Policy Statement (MTBPS) was presented in October 2018, the PUI showed.
“Finance Minister Tito Mboweni, nonetheless, sought in a consistent and coherent way to add financial and fiscal dimensions to the broader vision outlined earlier in the SoNA, striking what was broadly viewed as the right balance between prudence and populism,” the index authors said.
However, the business school warned that there was limited fiscal “space” within which to manoeuvre, owing mainly to muted economic growth on the one hand and the additional yearly Eskom commitments, in particular, on the other.
“Red flags were raised in the Budget Speech itself. While fiscal consolidation remained the overarching goal, the key deficit ratios still appeared set to deteriorate from what was originally outlined in the MTBPS. Borrowing repetitively to finance government consumption spending can only make South Africa poorer in the longer run.”
Subsequently, the renewed and widespread Eskom load-shedding in the latter part of the first quarter came as a shock to economic and policy certainty and is considered to be the single most negative factor in the first quarter of this year.
Intensive load-shedding and the prospect of yet higher electricity tariffs reinforced recent falls in business confidence, as disruption and economic costs steadily mounted for businesses and consumers alike.
Small businesses in particular felt the brunt of prolonged load-shedding.
It was also feared in the quarter that blackouts and lack of energy security might derail South Africa's investment drive.
The economic impact of load-shedding also means that already modest growth forecasts of about 1.3% to 1.4% for this year would now likely be reviewed downward, with several economists cutting it to within a range of 0.1% to 0.4%.
In addition, several high-frequency indices in the first quarter showed the economic recovery to be “weak and patchy”.
Meanwhile, Moody’s decision to leave South Africa’s investment rating and outlook unchanged came too late in the quarter to influence the first-quarter PUI.
Further, in a subsequent credit opinion released on April 2, Moody’s said it expects South Africa’s public finances and debt profile to further deteriorate and economic growth to recover slowly over the next two years.
The credit rating agency warned that a downgrade could follow if State debt rose, if risks from State-owned enterprises were not contained and if economic growth was not boosted.