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South Africa Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 49 pages

Core Views

Growth will slow sharply in 2016, rebounding only slightly in 2017. Weexpect household expenditure growth to collapse, while governmentexpenditure growth decelerates on the back of fiscal consolidationand gross fixed capital formation growth also slows given continuedpolicy uncertainties.We believe the South African Reserve Bank (SARB) will tightenrates by another 50 basis points (bp) to 7.5% in Q316, given threesources of upside pressures on inflation: 1) the second-round effectsof food price inflation, 2) exchange rate depreciation and anincreased pass-through from the exchange rate to inflation and 3)a recovery in oil prices.We expect South Africa’s current account deficit to narrow marginallyto 4.0% of GDP in 2016 from 2015’s 4.4% as the trade deficitcontinues to narrow following the Q116 bottom in commodity prices.Given lower current account deficit financing needs and continuedpolicy instability, we expect limited inflows of portfolio and foreigndirect investment in 2016 after Q415 saw posted outflows.The ANC will ramp up its populist rhetoric in the run-up to the 2016municipal elections. Land reform in particular will resonate with thevoters, which the ANC is losing to the Economic Freedom Fighters.Yet the ANC is likely more preoccupied with Zuma’s succession,as Nkosazana Dlamini-Zuma is displacing Cyril Ramaphosa as thestrongest contender for the ANC leadership.Major Forecast ChangesWe have revised down our forecast for South Africa’s 2016 real GDPgrowth, from 0.7% to 0.5%. This would imply a more-than-halvingof real GDP growth from 2015’s 1.3%. Growth in Q116 was slowerthan we had anticipated. Meanwhile, slower growth in Europe dueto Brexit will also pose headwinds to the South African economy,weighing on financial market stability and further tempering investmentand trade.

Table Of Contents

South Africa Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Changes..5
Key Risks To Outlook5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Faltering Investor And Consumer Confidence Will Undermine Economy8
South Africa's economic growth will only gradually recover in the coming quarters after dropping into negative territory in the first quarter
of 2016.
GDP By Expenditure Outlook. 10
TABLE: GDP GROWTH FORECASTS..10
TABLE: PRIVATE CONSUMPTION FORECASTS..10
Balance Of Payments.. 11
Export Growth Still Faces Structural Obstacles11
South Africa's recent sharp upswing in export growth does not signal the start of a sustained structural improvement in the country's
trade dynamics. In May the country posted its largest trade surplus in over five years on the back of simultaneously surging export
growth (up 18.5% y-o-y) and a sharp slowdown in imports (up only 2.5% y-o-y).
TABLE: GOVERNMENT CONSUMPTION FORECASTS11
TABLE: FIXED INVESTMENT FORECASTS.11
TABLE: NET EXPORTS FORECASTS..11
Outlook On External Position. 13
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE (USD)13
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE (EUR)13
TABLE: CURRENT ACCOUNT BALANCE FORECASTS (USD).14
TABLE: CURRENT ACCOUNT BALANCE FORECASTS (EUR).14
TABLE: TOP 5 GOODS IMPORTS .14
TABLE: TOP 5 GOODS EXPORTS 14
Monetary Policy.. 15
Inflation Reacceleration In H216 Will Prompt Further Tightening..15
Rising inflation will prompt the South African Reserve Bank to briefly resume its monetary hiking cycle in the latter part of 2016, even
despite sluggish economic growth.
Monetary Policy Framework 17
TABLE: MONETARY POLICY FORECASTS.17
Fiscal Policy And Public Debt Outlook 18
Slowing Provincial Revenue Risks Increased Unrest.18
Slowing revenue growth will force South Africa's provincial governments to temper expenditures in the years ahead, with the lion's share
of the cutbacks likely to be aimed at social spending.
Structural Fiscal Position. 20
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES..20
Currency Forecast. 21
ZAR: Bounce Ahead, But Depreciation Thereafter..21
The rand is poised for modest appreciation in the months ahead, benefiting from looser monetary policy across the developed world.
Over the longer term though , a combination of weak growth, higher inflation compared to the US and poor balance of payments
dynamics will keep the currency on a downward trajectory.
TABLE: FISCAL AND PUBLIC DEBT FORECASTS..21
TABLE: BMI CURRENCY FORECAST..22
Chapter 2: 10-Year Forecast. 25
The South African Economy To 2025 25
Underperformance Among EM Peers Ahead25
The South African economy will grow at a slow pace of around 2.5% annually over the coming ten years. Power shortages, industrial
action and divestment in the mining sector will weigh on economic expansion, resulting in long-term economic underperformance versus
emerging market peers.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.25
Chapter 3: Political Outlook. 29
SWOT Analysis 29
BMI Political Risk Index. 29
Domestic Politics.. 30
Protests Suggest Uphill Battle For ANC In Tshwane Election..30
Recent violent protests against the ANC's proposed mayoral candidate in the metropolitan municipality of Tshwane highlight the deep
fissures within the ruling party. Popular disapproval of the candidate will only add to the already significant headwinds facing the ruling
party ahead of South Africa's August 3 municipal election.
TABLE: POLITICAL OVERVIEW .30
Long-Term Political Outlook.. 31
Social Challenges Will Be A Persistent Threat31
Many issues threaten South Africa's political stability over the long term, not least the social and economic inequalities still stemming
from the apartheid era. Although our core scenario envisages no major change to the political backdrop, we present a number of
alternative scenarios.
Chapter 4: Operational Risk. 35
SWOT Analysis 35
Operational Risk Index.. 35
Operational Risk. 36
TABLE: OPERATIONAL RISK36
Market Size and Utilities Analysis.. 37
TABLE: SUB-SAHARAN AFRICA-MARKET SIZE AND UTILITIES RISKS38
Labour Costs .. 41
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE.. 42
Chapter 5:BMI Global Macro Outlook. 45
Global Macro Outlook. 45
Brexit Risk Casts A Long Shadow..45
TABLE: GLOBAL ASSUMPTIONS..45
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %46
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %..47
TABLE: MACROECONOMIC DATA and FORECASTS.49

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