Whoever wins the ANC leadership battle next week will face a binary choice in the New Year: shift the economy onto a markedly higher growth path, or continue to muddle along until the next crisis arrives.
Though financial markets will celebrate a victory for the anti-Jacob Zuma camp, and confidence should rebound strongly in an initial bout of euphoria, some economists fear that growth in 2018 is likely to be pedestrian even if Cyril Ramaphosa wins the ANC presidency.
There are several reasons for this. First, as Ramaphosa is beholden to the Left for electoral support, he will find it difficult to implement certain market-friendly economic reforms, including liberalising the labour market or curtailing public sector wages and employment.
Consider that Ramaphosa’s "new deal" proposes that SA’s primary focus should not be on achieving faster growth, but on creating "decent jobs". This is a policy term championed by organised labour that bit the dust when the National Development Plan was adopted. Its revival suggests that significant labour market reform could be a nonstarter under his leadership.
"If Ramaphosa wins there could be an initial confidence boost, but we think reform is unlikely," says Hugo Pienaar, a senior economist at the Bureau for Economic Research (BER). "We’re a bit sceptical about his potential for reform given that Cosatu and the SACP support him."
Second, there is deep division within the ANC as to what policy should look like. Turning the ship will take the consistent application of political will over time.
"There is a powerful populist streak in the ANC," says Old Mutual Investment Group economic strategist Rian le Roux. "If [Ramaphosa] wins, the chances are that it will be very hard for him to implement market-friendly reforms that can shift SA onto a dramatically higher growth path."
Third, much is already "baked in the pie" for 2018, says Le Roux. For starters, significant fiscal tightening will be unavoidable next year.
In addition to the R16bn in expenditure cuts announced by former finance minister Pravin Gordhan that are due to take effect in the 2018 fiscal year, Zuma has instructed treasury to institute a further R15bn in tax hikes and R25bn in expenditure cuts in 2018 to stabilise the debt ratio.
Higher taxes and government spending cuts, especially on wages and employment, will depress consumer spending and curb growth.
There is also little scope for the Reserve Bank to reduce interest rates next year, says Pienaar, given that the current policy rate is already more or less at the neutral real level of 1.5% based on expected and actual consumer inflation.
Fourth, under Ramaphosa’s "new deal", SA’s growth model will remain much as it is now: state-led and driven by public entities. There is no acknowledgment that this model has failed in SA, that state capacity is exhausted both institutionally and fiscally, and that the private sector needs to be unleashed as the engine of growth.
On the other hand, there is no doubt that a strong commitment by any new ANC leadership to fiscal consolidation, clean government and growth-friendly economic reforms could unleash pent-up confidence and growth.
Corporates are sitting with up to R1trillion in cash surpluses on their balance sheets that they have not been investing locally, mostly due to uncertainty over SA’s future policy direction.
"There is so much repressed demand from both corporates and households, that a market-and economy-friendly ANC electoral conference outcome would likely lead to a solid confidence boost in the new year," says Investec’s Nazmeera Moola.
She believes the future of the economy is binary, pointing out that while the consensus is for growth of about 1% in 2018, this is just a weighted average of two opposing potential scenarios.
Moola argues that growth will either be zero if the Zuma camp isn’t dislodged, or bounce up to 2.5% if it is and this unleashes a spurt of consumer spending and private fixed investment.
Le Roux agrees that the potential for a revival in business, investor and consumer confidence to improve SA’s growth prospects shouldn’t be underestimated. However, he doubts that growth will rebound significantly.
"Given political realities, it is hard to see such a strongly favourable outcome in 2018," he says. "So while things are expected to improve moderately next year, we should guard against both excessive pessimism and excessive optimism."
Pienaar’s view is similar: "Irrespective of who wins, at best politics will muddle through and in all likelihood remain a constraint on the economy, but confidence could be moved on the margin."
Old Mutual is forecasting real GDP growth of 1.5% next year, with the bulk of the improvement coming from net exports and a slight improvement in confidence and fixed investment based on post-election political certainty.
The BER expects growth of just 0.9% in 2018, with fixed investment still negative at -0.8%, employment growth worse at -0.4%, and consumer spending and exports only slightly firmer than they were in 2017.
A crucial assumption underlying these forecasts is that the global economic recovery will remain slow and steady, muting inflationary pressures in the US and Europe. This will allow global interest-rate normalisation to proceed gradually.
Economists like to describe this prevailing global climate as a "Goldilocks environment", in that it is neither too hot nor too cold. For emerging markets the environment has been just right, characterised by a soft dollar, firmer commodity prices and strong capital inflows.
The global search for yield has meant that the rand has remained relatively firm this year, despite the loss of the country’s investment-grade credit rating and slowing growth.
As long as the global environment remains supportive of emerging markets — and the consensus is that it will for at least a year — the fallout from further domestic credit-rating downgrades could be less severe than feared.
The first big ratings hurdle SA faces in 2018 will be the resolution of Moody’s 90-day ratings review period, which is due to end after the national budget in mid-February.
Moody’s has made it clear that unless SA is able to improve its fiscal and growth prospects, the country’s ratings will be junked. This gives the new administration very little time to present a credible turnaround plan backed by demonstrable political will.
If Moody’s junks SA’s local currency rating in mid-February, SA will be ejected from the Citi World Government Bond Index (WGBI) by the end of that month, as per the rules of the scheme. That means R80bn-R140bn in investment funds are likely to be withdrawn from SA over the course of a few days, which could cause a sharp fall in the rand.
However, it’s difficult to estimate what the scale of forced selling by index-tracker funds would be. It is also likely to be countered, to some extent, by the reallocation of SA government bond holdings from investment-grade to noninvestment-grade funds in active investors’ portfolios, given the global search for yield. To the extent that this happens, the net effect on the rand could be less extreme than feared.
"Regardless of the magnitude of potential WGBI-related outflows, the implications are clear: rand weakness occurs, leaving imported goods more costly, inflation higher and interest rates likely increasing," says Citi economist Gina Schoeman. "All these variables ultimately lower economic growth."
But as long as the pace of global monetary policy normalisation remains sedate and global demand continues to strengthen modestly next year — as most expect — SA could still make it through in reasonable shape.
"As long as the international situation remains stable, it’s difficult to see a calamitous situation developing for SA," says Moola.
There are a few other caveats, including the danger that a new ANC leadership could tack left towards more populist policies in the run-up to the 2019 election. (Nkosazana Dlamini-Zuma’s campaign hinges on "radical economic transformation", which may imply the nationalisation of industry and land grabs or nothing much at all.)
The other wild card is Eskom. Given government’s R350bn exposure to the utility, all bets are off if the power utility experiences solvency issues next year.
It could pull SA over the fiscal cliff all on its own.
In short, South Africans should hope for the best but prepare for a middle-of-the-road outcome. Another year of pedestrian growth is probably the most likely scenario for 2018.
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