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South Africa: Touching Base Summary

Core Content

This document provides an analysis of South Africa's economic and political outlook for the next 6-12 months, based on insights from a recent investor trip. It outlines key themes and developments across fiscal, monetary, and political landscapes, emphasizing the potential for improved growth, stability, and policy reforms.

Main Views

Economic Growth Outlook

• Positive momentum: The country is expected to have turned the corner, with GDP growth projected to average 2.0% in 2018, above the consensus.
• Confidence boost: Increased confidence across business, government, and civil society is attributed to Cyril Ramaphosa's leadership and his strong ties with labor unions.
• Investment outlook: A better mining charter and clarity on mining policy are seen as critical to improving investment prospects in the sector.

Fiscal Policy and SOEs

• Fiscal consolidation: The new government is likely to focus on fiscal consolidation, but challenges remain due to the burden of free tertiary education and other spending plans.
• SOEs challenges: State-owned enterprises (SOEs), particularly Eskom, face significant profitability and liquidity issues, which could impact state finances and the sovereign rating.
• Asset sales: Non-core asset sales, especially from the state's property portfolio, are expected to help address revenue shortfalls.
• Capital structure reforms: Long-term reforms of SOEs' capital structures, including potential privatisation, are likely but will face ideological resistance.

Monetary Policy

• Mixed signals: The Monetary Policy Committee (MPC) is divided, but the overall macroeconomic environment is positive.
• Rate cuts expected: The improved confidence and stronger rand suggest that rate cuts may occur in the next few months.
• VAT increase impact: A 1pp rise in VAT is expected to temporarily increase inflation, but the rand's strength should offset this.
• Moody's rating: Moody's is likely to maintain the Baa3 rating for South Africa, with a negative outlook, but avoid a downgrade in H1 2018.

Key Information

Political Stability

• ANC leadership: Cyril Ramaphosa's election as president and his new cabinet, including Gwede Mantashe as Minister of Mineral Resources, signals a more stable and predictable political environment.
• Land reform: The ANC's support for land expropriation without compensation remains a contentious issue, likely to intensify as the constitutional review committee approaches its August deadline.
• Cabinet reshuffle: Ramaphosa has made significant political changes, including reshuffling the cabinet and replacing Jacob Zuma, which is seen as a positive step towards reform.

Mining Charter and Investment

• Revised mining charter: The promotion of Gwede Mantashe to the mining portfolio is viewed as a positive development for resolving the controversial mining policy.
• Capex potential: A revised mining charter and related policies could boost capital expenditure (capex) in the mining sector by up to 84% over the next 3-4 years.
• Ramaphosa rally: The new government's focus on mining policy is expected to support the "Ramaphosa rally" in the short term, though land reform may dampen this momentum.

Structural Reforms

• SOE reforms: The new administration is expected to pursue structural reforms in SOEs, including changes to the way they operate and are funded.
• Labour relations: Reforms may involve changes to the Labour Relations Act and a shift in long-held ideological assumptions within the ANC and its allies.
• Energy policy: The outdated 2010 Integrated Resource Plan is expected to be finalised, potentially ending the debate on nuclear energy and promoting renewable energy projects.

Conclusion

The near-to-medium-term outlook for South Africa is cautiously optimistic, with improved confidence, potential rate cuts, and a focus on resolving key policy issues such as the mining charter and land reform. However, challenges remain in fiscal sustainability, SOE restructuring, and maintaining political stability. The success of the new administration will depend on its ability to implement structural reforms and manage the delicate balance between ideological commitments and economic pragmatism.

Important Disclosures

• The views expressed are those of the authors and do not constitute investment recommendations.
• The analysis is non-independent research and may be subject to conflicts of interest.
• The document is intended for Relevant Persons and may not be used by others without prior consent.
• All estimates and opinions are subject to change and should not be relied upon as definitive.