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South Africa 2018 Outlook Summary

Core Content

This report outlines the economic and political outlook for South Africa in 2018, focusing on GDP growth, inflation, monetary policy, fiscal policy, and the challenges posed by state-owned enterprises (SOEs) and political uncertainty.

Main Views

Economic Outlook

• GDP Growth: South Africa's GDP growth is expected to improve slightly in 2018, reaching 1.6% compared to 1.1% in 2017, driven by a short-term confidence boost from Cyril Ramaphosa's election as ANC leader. However, long-term growth remains constrained due to slow structural reforms and ongoing socio-economic challenges.
• Fixed Investment and Inventories: Fixed investment is anticipated to turn positive in 2018, coming off a very low base, while inventories are expected to begin rebuilding.
• Consumer Confidence: Consumer confidence is more stable and resilient, which should support growth.
• Downside Risks: Political uncertainty and severe drought in the Western Cape remain key risks to growth, with the latter potentially impacting tourism and agriculture.

Inflation and Interest Rates

• Inflation: Headline CPI inflation is forecasted to average 4.9% in 2018, down from 5.3% in 2017. Core CPI inflation is expected to remain around 4.5-4.6%, with the SARB likely to keep rates cautious due to credit ratings risks.
• Rate Cuts: The SARB may cut rates by 25 basis points in March and May 2018, potentially lowering the policy rate to 6.25%. However, the pace of cuts is likely to be limited due to global monetary tightening and the risk of a credit ratings downgrade.

Fiscal Policy

• National Budget (21 February 2018): The budget is expected to show a modest return to fiscal consolidation, with additional tax measures and expenditure cuts. The Treasury is likely to implement revenue-generating measures such as increasing VAT, adjusting marginal tax rates, and removing zero-VAT ratings on goods like fuel.
• Public Sector Wages: The government aims to cap public-sector wage increases at 7% over the next three years, with the current agreement expiring at the end of March 2018. Public-service unions are demanding up to 10%, creating potential pressure on the Treasury.
• Debt and Deficit: The budget deficit is expected to remain above 3.5% of GDP in the medium term, with fiscal consolidation likely to be slow and challenging.

State-Owned Enterprises (SOEs)

• SOE Challenges: SOEs face significant liquidity, profitability, and governance issues, with contingent liabilities approaching 10% of GDP. Eskom, in particular, is expected to require further capital injections due to financial strain and low tariff increases.
• Funding Needs: Additional capital injections and drawdowns from the guarantee facility are anticipated, especially around the February national budget. SOEs are unlikely to become fiscally sustainable without privatisation or major structural changes.

Political Outlook

• Ramaphosa Leadership: The election of Cyril Ramaphosa as ANC leader is seen as a positive development, potentially boosting confidence and economic performance. However, political factionalism and the need for a unified front may slow progress.
• Zuma's Role: Jacob Zuma is expected to step down as president, but his constitutional mandate may complicate a smooth transition. The ANC's continued identity as a 'left' party and reliance on interventionist policies are likely to persist.
• Political Risks: The political environment remains uncertain, with concerns over corruption, policy inconsistency, and leadership quality. These factors could affect investor confidence and economic reforms.

Key Themes for 2018

1. GDP Growth: Short-term improvements, but long-term challenges remain.
2. Inflation and Rates: Inflation is expected to decline, with potential for rate cuts but limited scope due to global conditions.
3. Fiscal Policy: A modest return to fiscal consolidation, but structural reforms and debt management remain pressing.
4. State-Owned Enterprises: Continued fiscal burden, with Eskom as the largest risk.
5. Politics: Uncertainty persists, but Ramaphosa's leadership may bring some stability and confidence.

Critical Factors

• Political Stability: The transition from Zuma to Ramaphosa and the resolution of internal ANC factions.
• Economic Reforms: The pace and effectiveness of structural reforms will determine long-term growth.
• Credit Ratings: The risk of a downgrade from Moody's, particularly following the national budget and SOE bailouts.
• Drought Impact: Potential damage to tourism and agriculture in the Western Cape.
• Currency and Oil Prices: The ZAR is expected to remain relatively stable, but global oil price movements could affect inflation.

Forecast Highlights

Conclusion

While 2018 presents some optimism for South Africa's economy, particularly with Ramaphosa's leadership, the country faces significant challenges in terms of political uncertainty, fiscal sustainability, and the health of SOEs. Structural reforms and effective policy implementation will be crucial for long-term growth and stability. The SARB is expected to take a cautious approach to monetary policy, balancing inflation control with the need to maintain favorable real rates.