Stay abreast of COVID-19 information and developments here
Provided by the South African National Department of Health
SA must rethink
Investment Economist at Sanlam Investments
Sep 27, 2018
Given the deterioration in real economic activity in the first two quarters of 2018, average real gross domestic product (GDP) growth for the year is likely to print significantly lower than last year’s modest increase of 1.3% – even if the economy rebounds in the second half of the year. Growth of 0.75% at best is expected in 2018, while our current potential growth rate is only around 1.5%.
Considering the buoyant mood that prevailed at the start of the year, it’s fair to ask: what went wrong? One important development is the spike in oil prices, which has weighed on South Africa’s terms of trade. Further, in addition to the necessary but painful VAT rate hike of 1% in April 2018, individuals’ tax on income and wealth has increased to its highest level on record relative to personal disposable income. Together, these developments have eroded households’ real personal disposable income and purchasing power. As a result, the promising bounce in final household consumption expenditure in the second half of 2017 gave way to an outright decline of 1.3% (seasonally adjusted and annualised) in the second quarter of 2018.
At the same time, given slow profit growth and lacklustre returns on domestic investment spending, firms have curtailed domestic activity and employment creation. Total fixed investment spending decreased 0.5% (seasonally adjusted and annualised) in the second quarter of 2018, following a material fall of 3.4% in the first quarter.
At the least, it’s reasonable to expect the GDP data to improve in the second half of this year as the impact of the drought, transport sector strike and temporary shutdown of oil refineries fades. This optimism is supported by the historically reliable leading real economic activity of the South African Reserve Bank (SARB), which points to firmer economic growth.
However, tightening global financial conditions and the apparent escalation of the global trade conflict are weighing on emerging market economies, especially those with significant macroeconomic imbalances, including South Africa. The accompanying volatility of the rand limits the SARB’s ability to respond.
It’s helpful that core consumer price inflation is currently contained and real private sector credit extension is soft. However, South Africa is a small, open economy and short, sharp falls in the rand can ignite inflation expectations. Ultimately, the job of the SARB’s Monetary Policy Committee (MPC) is to anchor inflation expectations at a level consistent with its inflation target. Accordingly, should the MPC’s inflation forecast reflect a sustained breach of the upper end of the target range, the Bank can be expected to increase its repo rate.
The growth stimulus package announced by the government last week focuses on providing greater economic policy certainty, and emphasises the need to shift government spending towards infrastructure projects. On balance, the package is positive, but more is required to lift South Africa’s potential growth rate. There’s widespread agreement that South Africa’s poor growth rate reflects structural economic rigidities and the erosion of its industrial capacity – in essence, the supply side of the economy isn’t functioning efficiently.
Our policymakers are clearly mindful of the intensifying focus on the fundamentals of emerging market economies. There’s little, if any, room to loosen the government’s purse strings further. However, although the growth package addresses some economic policy concerns, South Africa should be far more proactive in pursuing a strategy that improves its sovereign debt ratings.
The country’s fiscal consolidation programme of recent years hasn’t been successful. Although the growth package is a material step in the right direction, the government’s gross loan debt ratio remains on an upward trajectory, its expenditure is still skewed towards consumption rather than investment, and general government net worth (fixed assets less liabilities) has deteriorated since the global financial crisis. In addition, non-financial state-owned companies recorded a cash deficit of R60 billion in 2017/18.
The increase in total public sector expenditure from 23.8% of GDP in 2007 to 27.9% of GDP in 2017 has been accompanied by a material decline in South Africa’s potential economic growth rate. In effect, the government has absorbed a large slice of available savings, while persistent sovereign debt rating downgrades have pushed real interest rates higher. This must have crowded out private sector investment spending – especially if we also consider the material deterioration in South Africa’s rating for its business environment. For example, in 2017, the country was rated a lowly 82nd in the World Bank’s Ease of Doing Business Index, where a rating of 1 represents the most business-friendly country.
Encouragingly, measures are being put in place to address governance, financial management and efficiency issues at state-owned companies. If successful, this would go some way towards improving South Africa’s economic outlook – especially if greater economic policy certainty emerges at the same time.
However, even though we may enjoy some improvement in activity as we head into 2019, a sustained, robust upswing that effectively addresses the excessively high unemployment rate of 27% is likely to remain elusive. Note that since 2000, the lowest unemployment rate recorded was 23% – in 2007 – but this was only achieved following four years of real GDP growth in excess of 4%.
South Africa cannot rely on global tailwinds alone. Risks to the outlook for the global economy are building. Apart from tightening financial conditions and trade war threats, as noted above, China has the difficult task of deleveraging its economy while maintaining growth momentum.
South Africa therefore needs to find a way to lift its own game. A sustained high level of government expenditure hasn’t been accompanied by strong economic growth rates. Rather than relying on more of the same, policymakers must find a way to unlock the economic potential of its citizens.
Overall, pursuit of strong economic growth is likely to be best achieved through policies aimed at sovereign debt rating upgrades to lower real interest rates, deregulation and deconcentration of the economy (promotion of small business development) and improvements in the ease of doing business.
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
South AfricaSouth Africa Home Sanlam Investments Sanlam Private Wealth Glacier by Sanlam Sanlam BlueStar
Rest of AfricaSanlam Namibia Sanlam Mozambique Sanlam Tanzania Sanlam Uganda Sanlam Swaziland Sanlam Kenya Sanlam Zambia Sanlam Private Wealth Mauritius
GlobalGlobal Investment Solutions
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.