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The winds of change are still blowing in SA, says Old Mutual Investment Group

13 September 2018Johann Els, Old Mutual Investment Group
Johann Els, Head of Economic Research at Old Mutual Investment Group.

Johann Els, Head of Economic Research at Old Mutual Investment Group.

While the latest surprise GDP data sent South Africans into a tailspin as it became clear that the country is officially in a recession, the worst appears to be behind us. This is according to Old Mutual Investment Group Head of Economic Research, Johann Els, who points out that, while we are unlikely to see any significant policy improvement until after the 2019 elections, the country is heading in the right direction and he believes the rate of change will gradually gain momentum.

“When the latest GDP data confirmed that the SA economy was in recession the collective SA psyche seemed to collapse in a state of total depression,” says Els. “But while the data was a surprise, the economy has been barely positive for some time so a slip below the zero line was probably more likely than we care to admit.”
 
He adds that South Africans probably had higher expectations from the economy, especially after political leadership change at the turn of the year lifted the nation’s spirit for a while. But the fact remains that a lack of confidence has been holding us back. “When consumers and businesses do not trust politicians or lack certainty about economic policy, spending and investment will be constrained. In our case, this has prevented the SA economy from fully participating in the global ‘tide that lifts all boats’.
 
The recession itself isn’t that damaging, as two slight negative quarters might be far less significant than one deeply negative quarter that wouldn’t have been classified as a recession, says Els. However, we’re still in a very low growth/no growth environment. “This has been even more damaging given the strong global economy and the fact that we haven’t been able to participate in the strong global growth environment. South Africa is a very open economy after all and our economy should have benefited more from that support,” he says.
 
“I would therefore argue, that we have been expecting too much too soon, especially as some factors are beyond the control of policymakers,” he explains. “The lower maize crop putting the agricultural sector under pressure is a case in point, as well as a potential global trade war and mounting pressure on Emerging Markets impacting heavily on currencies, while the higher oil price has also driven up local petrol prices. All this has contributed to current negative sentiment.”
 
Coming back to the recession, Els highlights that we have been here before, we just tend to forget very quickly. “SA experienced a recession as recently as last year; the fourth quarter 2016 GDP was reported as negative and was followed by a negative first quarter in 2017. But, by the time the fourth quarter 2017 GDP data was released earlier this year, the negative Q4 2016 GDP data was revised away.
 
But significant policy uncertainty continues to weigh on the rand, and this has been severely exacerbated by the Emerging Markets crisis, which had Turkey and Argentina at its epicentre. . 
 
However, Els believes that Emerging Markets are unlikely to go into a full blown crisis as we are already starting to see some policy adjustments in both Turkey and Argentina. Moreover, other Emerging Markets are a in better structural position regarding growth, interest rates, current account and fiscal balances, and inflation, than what they were during the 2013 ‘taper tantrum’ (when the US Fed announced their intention to scale back on quantitative easing). These variables are also significantly improved compared to the 1998 Emerging Markets crisis.
 
He therefore expect a sharp recovery in the rand once Emerging Markets stabilise somewhat and once some confidence returns to SA. Should the 2019 elections provide a clear victory for President Ramaphosa he will have a strong mandate to implement policy change quickly and effectively, further strengthening the SA economy. “The rand is very cheap at present and foreign investors might see the benefit of investing in SA once there is more stability and confidence.  However, a key investment reality remains that despite shorter term strengthening, the rand will be weaker five years from now given that SA’s inflation is higher than that of our trading partners,” he warns.
 
“The point is that uncertainty about policy is eating away at SA’s ability to grow stronger – on a sustainable basis. However, while we need to sort out the mining charter and uncertainty around the land expropriation issue is still severely detrimental to confidence and thus growth, even these arenas have seen some improvement and there has been some realisation that the land  issue will not collapse our economy under the weight of a free-for-all,” he says.
 
Els firmly believes that we are currently at a point of peak pessimism, which is normally when things gradually start improving. “Should we see significant improvement in Government policies after the 2019 elections, it will likely lead to a sharp recovery in confidence – including local consumer and business and foreign investor confidence. It will not be possible to fix years of low growth and bad policy overnight, but, we seem to have started down the right track and I don’t expect the situation to get sustainably worse than where we currently stand.
 
“Looking forward at the longer term investment themes, we believe that the winds of change have started blowing in South Africa. This will gather momentum as we start to see positive policy adjustments and as investor, business and consumer confidence returns. Renewed confidence will give the President’s five year investment plan improved probability of success. While growth in 2018 will likely be less than 1% and 2019 an unexciting 2%, it is not impossible that the SA Economy could attain growth rates closer to 3% to 3.5% around 2022/ 2023 onwards,” he adds.

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