Optimism for SA’s coming economic year

By on January 27, 2014

In an interview conducted by Business Day TV (BDTV), Matthew Sharrat (a South African economist at the Bank of America Merrill Lynch) shared some of his positivity on South Africa’s “overall economic growth prospects,” following the World Bank’s latest Global Economic Prospects Report.

The global financial crisis of 2008 – peaking with the collapse of Lehman Brothers – is expected to show signs of improvement this year, according to the Global Economic Prospects Report released by the World Bank earlier this month. This is constructive news for the World Economy; even less developed countries (LDCs) can now start building long-overdue economic stability along with potentially gaining some room for economic growth.

Largely, this improved global environment takes some pressure off of South Africa’s shoulders, giving it room to speed-up its economic growth. Sharrat says he sees the country’s gross domestic product (GDP) growing from last year’s two percent to a much-needed 2.9 percent this year, which will be driven principally by growth in net export. In addition, with domestic demand expected to remain low, Sharrat states that “we actually see some improvement on the external side.”

When BDTV pointed-out some of the risks involved with being an emerging market (“…twin deficits, labour risk, political risk, infrastructural deficits, escalating costs…”), Sharrat acknowledged them and continued to call it a sort-of “race against time” in the South African context: “In terms of the global backdrop, the Federal Reserve is starting to withdraw its quantitative easing (QE). This is a headwind for the rand and presents a lot of upside risk to dollar/rand. However, at the same time we do think that what we’ve seen over the past two years is almost a 30 percent correction in the currency depreciation, which over time is likely to cause an improvement on exports and downward pressure on imports, particularly as global demand improves.” As long as the current account deficit continues improving at this rate (as Sharrat expects it will), the rand should be propped-up by the mid-2014.

However, the risks linked to a weaker rand are not something to be simply swept under the prospect of better economic circumstances, and the South African Reserve Bank (SARB) has some tough choices ahead of it: rate hikes could alleviate inflation-stresses, but both a vulnerable consumer sector and an economy vulnerable to blows from the labour front makes the SARB hesitant. Sharrat predicts them to “sit on the side-lines” and “probably only hike rates in the first quarter of next year.”

The labour situation in South Africa also calls for some attention, with only sour tastes left from last year’s strike-frenzy. Sharrat’s view, however, has a refreshingly optimistic tone: some of “the multiyear deals that have been struck” in those sectors could mean less unrest, cooled-down negotiations, more positive environments and – hopefully, in turn – higher economic productivity. Unfortunately, a sector that may hinder any-and-all economic growth is that of our country’s energy resources; if demand exceeds supply, Eskom and load-shedding could switch-off power-supply and economic activity – sadly, not even Sharrat can forecast anything here. The unpredictability lies with us consumers…

Provided that the GDP expands, the US does not throw a monetary curve-ball, SA’s account deficit keeps progressing, the SARB controls current inflation rates, and the labour-unrest dust stays settled, Sharrat expects improved economic growth and sees no reason for ratings downgrading in 2014 for South Africa:  “Unless we see a significant upsurge in labour unrest, the ratings can stabilise around current levels.”

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