Real GDP growth in South Africa has been on a downward trend since 2010. During the last quarter of 2016, the economy contracted by 0.3%, which was followed by a further contraction of 0.7% during the first quarter of 2017. Due to the two consecutive quarters of contracting growth, the economy entered into a technical recession for the first time since 2009. The economy did expand by 2.5% during the second quarter of 2017, but compared with the second quarter of 2016, the growth rate was lower. The International Monetary Fund (IMF) reduced South Africa’s growth forecast for the year to 0.7% in October 2017 (this is lower than an earlier projection in May 2017 of 1%) and South Africa’s Treasury halved its 2017 growth forecast to 0.7% in October 2017, in line with the IMF. Weakness in the economy is broad based and South Africa’s growth forecast is well below the average growth forecast of emerging market and developing economies of 4.5%, and below the average growth forecast of developed economies of 2% (this is according to data released by the IMF in April 2017).
Uncertainty Results In Subdued Consumer Confidence
The lacklustre performance of the South African economy is, to a large extent, attributed to political and policy uncertainty, weak consumer demand, stagnant formal sector employment and persistent subdued business and consumer confidence levels which have supressed fixed investment. Other factors which have further worsened the situation include the global commodity price slump and the prolonged drought conditions experienced in many parts of the country. The unemployment rate in South Africa continues to rise and was 27.7% during the first quarter of 2017 (based on the strict definition). Based on the broad definition, the unemployment rate was even higher at 36.4% during the first quarter of 2017. Given the economic outlook for 2017, the unemployment rate is anticipated to remain stubbornly high for the foreseeable future.
Political and policy uncertainty, the misallocation of state resources and corruption within government has been at the root of subdued business and consumer confidence levels in South Africa, and this has had a significant bearing on the performance of the South African economy. According to the FNB/BER Consumer Index and the RMB/BER Business Index, both consumer confidence and business confidence has been on a downward trend since 2010. During the second quarter of 2017, the RMB/BER Business Confidence Index for South Africa slumped by 11 points to 29 (the lowest value since the last quarter of 2009 and well below the average of 45 points from 1975 to 2017). The FNB/BER consumer confidence index in South Africa dropped to -9 in the second quarter of 2017, from -5 in the previous quarter, highlighting households’ concerns about the weak outlook of the economy.
Cabinet Reshuffle Linked To Ratings Downgrade
The dismissal of Finance Minister, Nhlanhla Nene, on the 9th of December 2015, sent financial markets into turmoil and resulted in an immediate reported loss to the economy of approximately R500 billion, with the Rand falling to record lows against the Pound and the Dollar. The subsequent reappointment of former Finance Minister, Pravin Gordhan, was done in an attempt to stabilise financial markets and restore investor confidence and Gordhan endeavoured to achieve this during his appointment. However, the dismissal of Pravin Gordhan and his deputy minister, Mcebisi Jonas, in a Cabinet reshuffle on the 30th of March 2017, signalled a change in policy direction to local and international investors.
Shortly after the Cabinet reshuffle, on the 3rd of April 2017, S&P Global downgraded South Africa’s foreign currency debt to non-investment grade with a negative outlook, citing that the Cabinet reshuffle on the 30th of March has put policy continuity at risk and reflects the view that contingent liabilities to the state, particularly in the energy sector, are on the rise. On the 3rd of April, Moody’s placed South Africa on negative ratings watch, but then on the 9th of June, downgraded the country’s long-term foreign and local currency debt to one notch above sub-investment grade with a negative outlook. The key drivers behind Moody’s decision to downgrade South Africa on the 9th of June included – the weakening of South Africa’s institutional framework, reduced growth prospects reflecting policy uncertainty and slower progress with structural reforms and the continued erosion of fiscal strength due to rising public debt and contingent liabilities. On the 7th of April, Fitch downgraded South Africa’s foreign and local denominated debt to non-investment grade. Should either S&P Global or Moody’s downgrade South Africa’s local denominated debt further to sub-investment grade, institutional investors with narrow investment mandates (global pension funds etc.) would be forced to sell South African bonds, resulting in significant capital outflows, devaluing the Rand and changing the inflation trajectory. Should this occur, it is unlikely that the South African Reserve Bank (SARB) would over react, but rising inflation would put upward pressure on interest rates.
Will Interest Rates Continue To Fall?
In July 2017, the SARB reduced interest rates by 25 basis points and, should the political environment in the economy stabilise, we are hopeful that there will be further interest rate cuts in the medium term. Given political instability, uncertainty regarding the budget deficit and the Russian nuclear deal and the view that risks to the inflation outlook are on the upside, the Monetary Policy Committee (MPC) is taking a cautious approach to monetary policy. The trajectory of the interest rate cycle will be dependent on the overall policy environment in South Africa.
The recovery of the South African economy is also dependent on the performance of the global economy, with forecasts released by the IMF indicating that global output is projected to grow by 3.5% in 2017 and 3.6% in 2018, continuing on an upward trend. China’s growth is expected to remain at 6.7% in 2017 and to decline only modestly in 2018 to 6.4%. The growth forecast in the United States has been revised downwards from 2.3% to 2.1% in 2017 and from 2.5% to 2.1% in 2018, based on the assumption that fiscal policy will be less expansionary than previously assumed. The growth forecast has also been revised down for the United Kingdom for 2017. By contrast, growth projections for 2017 have been revised upwards for many European countries, where growth for the first quarter of 2017 was generally above expectations. If the global economy accelerates further, it will assist in driving a more convincing and sustainable recovery in global commodity prices, which will benefit the South African economy due to commodity exports.
Cape Town Proving Resilient In Poor Economy
Despite the poor economic performance in South Africa and political uncertainty, the Western Cape has outperformed the national GDP in the last 16 years, bar one year. Unemployment is 13.8% lower than the national average and the Auditor-General’s report released on the 21st of June 2017 revealed that the City of Cape Town was the only metropolitan municipality in South Africa which received a clean audit in the 2015/2016 financial year. The report also indicated that the Western Cape received the highest number of clean audits at 80%.
According to research conducted by John Loos, FNB Household and Property Sector strategist, overall price inflation in the metro is almost double the national House Price Index published monthly by the bank over the five year period. Furthermore, the average prices of property on the Atlantic Seaboard in Cape Town have more than doubled since 2012, with growth of 22.9% year-on-year in the fourth quarter of 2016. A number of significant developments are currently underway in the City Bowl, the Silo/Waterfront Precinct and Atlantic Seaboard (to name a few), which signals to the investor confidence in the Cape Town property market. According to the Q1 JLL Cape Town Office Market Report, the vacancy rate in Cape Town for the first quarter of 2017 remains the lowest in the country at 7.6% and the City continues to attract the interest of global corporates despite political uncertainty. Cape Town’s positive global ranking was also highlighted in the Financial Mail’s FDI Intelligence Report and the Wealth X ranking during the first quarter of 2017. Horizon Capital has been well positioned to take advantage of the strong property performance in Cape Town due to its investment in strategic geographic nodes in Cape Town.