As SA limps out of 2018 with expected growth below 1% and its final investment grade still in tow, attention is moving to 2019 — an election year with a lot riding on it.
With national and provincial elections looming, President Cyril Ramaphosa will come under intense scrutiny to revitalise SA’s tepid economy and make a dent on the unemployment rate, which is nearing 30%.
Among the key issues investors will be watching are clarity around land reform, growth forecasts and whether the Reserve Bank will continue to hike interest rates.
The 2019 election
A poll by the Institute of Race Relations (IRR) on a possible voter turnout of 69% — which it considers likely — put ANC support at 59%, the DA at 22% and a negligible change in support for the EFF.
However, analysts believe political uncertainty is likely to increase ahead of the 2019 elections.
“Clarity on expropriation without compensation is still outstanding, while political parties are seeking increased leverage in a number of areas including populist policies, racial divide, property rights and socialism,” said Investec chief economist Annabel Bishop.
While it looks set to be a clear cut win for the ANC again, there is debate over whether the election will see Ramaphosa move more swiftly with reforms or whether the ANC will continue to fracture.
Some economists say the elections will give Ramaphosa the requisite space to make more meaningful structural reforms, including weeding out parts of the cabinet.
Depending on the outcome, SA could still see a downgrade from Moody’s Investors Service into subinvestment grade, which would trigger an exclusion from the Citi World Government Bond index and a forced selling of local government bonds.
Interest rates
While economists agree that the increase in interest rates for the first time in two years in November was a risky exercise, there are still expected to be further increases to the repo rate in 2019.
Reserve Bank governor Lesetja Kganyago warned at the last meeting of the monetary policy committee (MPC) that the longer term risks to the inflation outlook including tighter global financial conditions, a weaker exchange rate, high wage rate, oil prices and rising electricity and water tariffs remain elevated.
There is little consensus around when the Reserve Bank will make its next move, but at least one 25 basis points increase is expected over the course of 2019.
“The relatively subdued inflation outlook and the still weak economy will probably convince the MPC to keep interest rates unchanged at its January meeting and maintain this neutral stance for much of the year before resuming the upward cycle in November 2019,” Nedbank economist Johannes Khosa said.
On the other hand, Capital Economics economist John Ashbourne expects a rate hike in the first quarter on slightly higher growth and higher inflation.
Land reform
Investors will also continue to call for more policy certainty, especially around land expropriation without compensation pans out.
The National Assembly adopted a report recommending that the constitution be amended to allow land expropriation without compensation, but there is still little explanation on how this will be carried out.
There have been objections from various opposition parties, business organisations and some academics, who have argued that the change would deter investment without dealing with the real causes of the slow pace of land reform.
“Even with a constitutional change, though, we retain the view that land redistribution will have a limited effect on the overall economy,” said Ashbourne.
Ramaphosa and investment envoys have repeatedly reassured investors that there will be no “land grab” and that the process will be gradual.
“Given the extent of the negative economic impact in Zimbabwe, South African policymakers are unlikely to tread the same path,” Ashbourne said.
Growth forecasts
Growth will likely be stronger in 2019 than in 2018. Ramaphosa missed the mark in 2018 with dreams of 3% growth, which is still not expected in 2019.
SA plunged into recession for the first time since the global financial crisis in the first half of the year. While this will weigh on growth in 2018, credit rating agency S&P Global Ratings said the government’s commitment to reforms and the economic stimulus package announced by Ramaphosa at the end of September “will boost investor confidence, investment, and growth”.
“Higher real wages and last-ditch fiscal stimulus are likely to lift economic sentiment ahead of next year’s elections and should serve to stoke household spending and fixed investment, respectively,” reads an economic outlook by FocusEconomics.
The Treasury expects growth of 1.7% while the Reserve Bank is more optimistic at 1.9%. The World Bank sees slightly more anaemic growth of 1.3%.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.