South Africa's economy has just entered a technical recession. With the government's hands seemingly tied until after the elections, and global forces adding to local woes, the economy is finding itself in dire straits. What does this mean for investors?
South Africa’s economy has run aground and prospects of a quick recovery from the recession this year are poor as the country’s new leadership grapples with the costs of a decade of mismanagement, emerging markets are taking a beating and the global backdrop is deteriorating in the face of a deepening trade war.
News that economic output contracted in the second quarter of this year was not completely unexpected, but the depth of the downturn shocked financial markets, sending the rand into a new tailspin and making interest rate hikes this year inevitable as currency weakness fans inflation.
Economists scrambled to revise their growth forecasts for 2018 to below 1% as hopes that output would accelerate beyond last year’s pedestrian pace were quashed. News that investment contracted for the second consecutive quarter added urgency to the government’s drive to get business back on board after a breakdown of trust in former President Jacob Zuma’s administration.
But there is a good chance that the grim news will be a wake-up call for the ANC as it juggles the conflicting demands of getting business back on board with badly needed structural economic reforms and boosting popular support ahead of next year’s general election.
“We are still dealing with an overflow from the Zuma years – this is legacy,” says Standard Bank chief economist Goolam Ballim. “SA’s economy is deeply mired but it is not on the edge of a precipice of deep structural collapse. The irony is that this may be the low point.”
It’s hard to see how government will find the money this year to pay for a big overshoot in its public sector wage bill, a new bailout package for state-owned enterprises (SOEs) and measures to stimulate the economy, particularly as the unexpected slowdown in growth will lead to lower tax revenues.
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Esta historia es de la edición 13 September 2018 de Finweek English.
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