Policy uncertainty lower in fourth quarter, but remains highly elevated – NWU

Professor Raymond Parsons

Professor Raymond Parsons

Photo by Creamer Media

8th January 2024

By: Schalk Burger

Creamer Media Senior Deputy Editor


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The North-West University (NWU) Business School Policy Uncertainty Index (PUI) for the fourth quarter of 2023 showed a welcome easing to 65.5 from its 71.8 in third quarter. However, the presence of elevated policy uncertainty, therefore, remains, for now, a significant factor in the economic environment for business and consumer decision-making in South Africa.

While negative factors shaping the PUI remain strong enough to keep the PUI highly elevated (above the baseline of 50), there were enough positive factors to slightly reduce the PUI level in the fourth quarter. Only when affirmative forces strongly outweigh negative ones will the PUI eventually be in positive territory, says NWU Business School Professor Raymond Parsons.

“On the positive side, the Monetary Policy Committee, on November 23, unanimously decided to again keep borrowing costs unchanged. There is increasing evidence that interest rates in South Africa may now, barring shocks, have peaked and could begin to ease later in 2024.

“The much lower consumer price index and producer price index figures in November offered the real prospect that inflation in South Africa may now be beginning to unwind. There is also the prospect of much lower fuel prices in the early months of 2024. The period of stability in borrowing costs since May has also been a reassuring factor in business and consumer confidence in present difficult economic circumstances,” he says.

Further, on the foreign trade front, the good news at the successful African Growth and Opportunity Act (Agoa) Summit in Johannesburg in early November was the widespread championing by all participants of the extension of Agoa beyond 2025. The US Administration pledged its support for the renewal of these tariff concessions for Africa in due course.

In particular, US-South Africa economic diplomacy also now seemed to be put back on a more constructive basis. The Agoa Summit injected more certainty into the prospects for an eventual renewal of the Agoa arrangements, even though some US Congress resistance may still be anticipated, he adds.

However, on the negative side, the economic outlook for the rest of 2023 was described in a recent financial services firm Nedbank survey as bleak, citing a cumulative combination of well-known global and domestic headwinds towards year-end.

The most recent financial services firm FNB/BER consumer confidence index was the lowest festive season reading in more than two decades. Various contrary factors, such as escalating job losses and high borrowing costs, have converged to severely dent household spending and credit demand, Parsons says.

The South African Reserve Bank's (SARB's) quarterly Personal Finance Survey in December 2023 confirmed that household incomes contracted for the third consecutive quarter and real disposable income had declined considerably. Weak retail sales and disappointing new vehicle sales have therefore confirmed these trends in household finances.

“A better outlook for 2024 will depend largely on the pace at which inflation continues to decline and the extent to which interest rates indeed begin easing later in 2024,” he says.

“The decline in third-quarter gross domestic product (GDP) growth to negative 0.2% from positive 0.5% in the second quarter was worse than expected, negative factors having dominated positive ones to a greater extent than anticipated in that period. The decrease in private fixed capital formation in that quarter was also a red flag. Similar broad economic trends are also likely to have prevailed in the fourth quarter.

“It seems likely that previous consensus forecasts of about 0.8% in GDP growth for 2023 as a whole may now need to be revised downward, perhaps to about 0.6%. GDP growth in 2024 is currently forecast to be about 1%.

“The performances across various business sectors will vary and economic recovery in 2024 will be uneven,” notes Parsons.

Growth expectations in South Africa remain especially heavily dependent on loadshedding being steadily phased out and a higher level of energy security being achieved as promised. The appointment of a new Eskom CEO is a positive step in the right direction.

A promised memorandum of understanding between Electricity Minister Kgosientsho Ramokgopa and Public Enterprises Minister Pravin Gordhan is also necessary to clarify the roles of each department in resolving loadshedding.

The expected publication of the revised draft Integrated Resource Plan in the Government Gazette, nonetheless, needs to be critically interrogated, he says.

However, there remain serious bottlenecks in State-owned Transnet’s rail and port services that imposed widespread disruption and heavy additional costs on the economy during the fourth quarter of 2023, and for which urgent solutions are still needed, he emphasises.

Meanwhile, an additional source of recent policy uncertainty has been the serious deterioration in South Africa’s public finances during the course of 2023, and which was outlined in the Medium-Term Budget Policy Statement (MTBPS) on November 1.

“While some decisions were announced in the MTBPS, several of the key risks to the fiscal outlook still await to be addressed in the main Budget in February. The fiscal balance needs to be restored in the Budget without having to resort to unsustainable borrowing or damaging tax increases,” he notes.

Additionally, South Africa is facing the risks arising from the pending general elections in 2024. Global research has shown that, in many countries, policy uncertainty indices tend to spike when elections are due and South Africa will not be immune from this trend.

However, there are two key distinctive features that differentiate the possible impact of the 2024 elections on the uncertainty profile of the South African economy.

“Firstly, the prospect of political change or shifts after 30 years of dominance by the ANC governing party opens up several new areas of uncertainty not experienced in South Africa since the 1994 democratic elections. Secondly, the PUI has been highly elevated for some time and has been well in negative territory for an extended period, driven by other well-known domestic and global factors.

“It remains to be seen how the PUI will respond as South Africa moves into uncharted political waters in 2024,” Parsons says.

“Although slightly less elevated in the fourth quarter of 2023, the PUI remained well in negative territory as 2023 drew to a close. That a range of 2024 election outcomes seem plausible to political pundits is also strong testament to the elevated level of uncertainty that currently exists.

“These negative PUI levels can, however, be gradually reversed if the right policies and projects are implemented. Stronger GDP growth in 2024 requires multi-tiered good news to underpin and strengthen South Africa’s economic performance.”

There are a number of reform initiatives already emerging in major policy areas, such as in energy, logistics and transport, that could still become important tailwinds for this year’s growth prospects.

“The domestic challenge, therefore, largely remains to expedite the implementation of agreed half-forged policies and projects that could help to further reduce policy uncertainty by ensuring that the tailwinds outweigh the headwinds in 2024,” he says.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online




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