Speaking at the OMIGSA quarterly press conference in Johannesburg on Tuesday, le Roux said that he expects the recent disruptions in the labour market and weakening of the rand to result in moderately lower GDP growth, moderately higher inflation, and a moderately wider current account deficit, but not to impact interest rate prospects, all assuming that the unrest is resolved relatively soon. Interest rates should remain at current levels through 2014, he forecasts, although could be lowered should growth turn out to be much weaker than expected.
"We now expect GDP growth at around 2.3% for 2012 and 2.7% for 2013, down from 2.5% and 3.0% previously. At the same time, if the rand stays at around R8.75 versus the US dollar over the next 15 months (and other factors remain equal), 2013 inflation should average a little over 5.5% y/y, compared to our previous forecast of 5.2% y/y. However, higher wages will likely be partially offset by job shedding, limiting the impact on inflation. Finally, export losses due to lower mining production should widen the 2012 current account deficit approximately 5.7% of GDP, versus 5.5% previously. For 2013, the deficit should still narrow to between 4.5%-5% of GDP as imports fall on weaker local demand and the weaker rand, while exports find support from improving global growth."
Le Roux says the wider deficit on the current account is contributing to the view of rising macroeconomic risks for investors. “Foreign investors have good reason to be concerned about the macroeconomic risks: Of 16 emerging markets, according to the latest forecasts from The Economist, South Africa measures dead last in terms of its combined current account and budget deficits at 10.8%, which is much worse than the second-worst market, India, at 10.0%."
The current account deficit and high-profile labour unrest has also highlighted to the world the more serious structural issue of South Africa’s lack of competitiveness. "While our overall ranking in the World Economic Forum at 52 out of 144 countries in its 2012/2013 Global Competitiveness Index is not too bad, we rank awfully lowly in some key areas such as the quality of primary and higher education, the flexibility of wage setting, hiring and firing practices, and pay and productivity were all ranked at 133/144 or worse. South Africa was ranked absolute last for labour-employer cooperation."
It is therefore not surprising, he says, that the rand has been one of the worst-performing emerging market currencies in the world since early 2011, with the primary cause a serious lack of export competitiveness.
Le Roux is not optimistic that conditions stimulating growth will improve significantly over the near-term. “Hopefully we will not be seeing additional stimulus coming from current government spending – the budget deficit is still in danger territory at close to 5.0% of GDP and infrastructure spending needs to rise. This can only occur if a tight lid is put on current government expenditure. Also we are not likely to get much stimulus above the 3% annual growth already coming from private consumer demand, due to little net employment growth.”
Domestic fixed asset investment could see some slow expansion, he notes, but a strong investment drive isn’t likely to materialise. “This is due to weak foreign demand (which deters exporters from expansion) and rising domestic cost structures (electricity, water, transport, labour, machinery and equipment imports, etc). Soggy domestic demand and deteriorating prospects are also key deterrents.
“Little help will be coming from offshore sources,” he adds, “with export volumes lacklustre due to weak global demand in the current climate and our lack of international competiveness. Although the weaker rand will help boost exports, rising cost structures may quickly erode the benefit. At the same time, any hope of major direct foreign investment has likely been seriously dented by recent events and concerns over future political, economic and policy stability.
“Hopefully, the recent labour unrest, downgrades by rating agencies and the rand’s slump will dramatically elevate SA’s economic challenges up the government’s policy agenda. We clearly have a labour absorption problem that needs urgent attention, which includes raising the country’s growth potential and re-thinking labour laws.
Government infrastructure expansion is of critical importance (also requiring tight control over current spending), as is a clear intent by the government to restore business and foreign investor confidence through strong commitments to macroeconomic stability; fiscal prudence (including ruthlessly stamping out corruption); growth-enhancing reforms over a broad front; and dramatically improving public sector service delivery and accountability. There must also be a strong commitment to implement all of these speedily,” le Roux concludes.
