Economy has turned an important Corner – Is the Glass now half-full?

South Africans have to guard against being overly pessimistic, Old Mutual Investment Group chief economist Rian le Roux said this week: “I think South Africa has turned the corner as far as the weak economy is concerned. The shocks are fading and maybe there could even be interest rate declines next year and a better year for mining. So, the economy can start to surprise us!” . “The last five years the growth path surprised on the downside, but I think into 2017 we might finally have a raise in activity.” He further stated that if one looks back over the last number of years at shocks like load shedding, food inflation, the rand and a host of strikes, one can see a lot of those issues have started to stabilise.

“Clear confidence in the economy is deeply depressed, driven to a large extent by the state of the economy, but over the last while there have also been positive aspects like the case against Finance Minister Pravin Gordhan being dropped and the report by the Public Protector being released,” said Le Roux. However, le Roux says that it’s too soon to tell what kind of political and economic impact the contents of the report will have. “The bottom line is that the release order shows that mounting pressure against state capture, corruption and the patronage network is starting to yield results,” he said.

“I think on the margin politics are taking a turn for the better. Yes, the economy is still quite weak and it looks like the third quarter will be quite weak too and consumers are under pressure. There is no question about it that in the shorter term there are lots of headwinds still.” When one looks “deeper” into 2017, he thinks a number of these headwinds could become tailwinds. The weaker rand is certainly good for tourism and competing exporters.

h3. The Big Question

“I think we should guard against becoming overly pessimistic. The question is, however, whether it is possible to acquire confidence boosting policy measures, especially in the arena of the labour market and if we could get politics on a more stable footing,” he said. “Those in the manufacturing sector say uncertainty is one of the biggest reasons for not investing.” He thinks peak inflation is also now clearly in sight and that there is a reasonable chance that SA could again escape a ratings downgrade to junk at the end of the year.

“The big issue is the longer term. The first goal must be to reduce the negative outlook. That will require economic growth and high levels of confidence, which will require a more stable political environment,” he said. “People forget the reverse is also true. When one thing is a boost, other things get a boost too. Of course, I don’t think we are out of the woods but don’t be overly pessimistic.

h3. Ratings

Le Roux explained that, following S&P’s decision to leave SA’s sovereign rating unchanged in June, it commended SA’s commitment to fiscal consolidation over the medium term, but also listed a string of concerns, including a lack of growth-enhancing reforms, especially with regards to the labour market and the mining code.

“S&P specifically warned against political interference that could weaken key institutions. The agency also expressed concerns over cohesion at the executive branch and went so far as to say that if these political tensions were to continue to fester, it could weigh more heavily on investor confidence. It added that the rating affirmation was based on the expectation that these political tensions would be held in check,” said Le Roux.

He believes that maintaining our investment grade rating at mid-year was good news for South Africa as it gave Government, business and labour a window, albeit a relatively short one, to make real progress on how to structurally lift South Africa’s growth performance: “Policy initiatives from Government and greater co-operation by all stakeholders in the interests of stronger inclusive economic growth are imperative,” he said, “nevertheless, even if a downgrade or downgrades can again be avoided in December, SA’s investment grade rating can only be cemented over time by improved economic performance that reduces social and fiscal pressures. History has shown that it takes many years to regain a lost investment grade rating.”

Therefore, he said all role players should not only focus on avoiding further downgrades as a matter of utmost urgency but also aim to ultimately remove the country’s negative outlook to get our rating on a stronger footing.

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