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South Africa Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views

Growth will rebound only slightly in 2017, after a sharp slowdown in 2016. Elevated unemployment and sluggish credit growth will weigh on private consumption, while continued fiscal consolidation limits government spending. Elevated policy uncertainty and a poor operating environment will act as a continued headwind to investment. We believe that the South African Reserve Bank (SARB) will keep the policy rate on hold at 7.00% through end-2017. With inflation poised to come within the upper bound of the target band sustainably by mid-2017, and growth sluggish, we believe the hiking cycle is largely passed. We expect South Africa's fiscal deficit to narrow, though at a slower pace than anticipated by the government. Weak economic growth will act as a headwind to fiscal revenues. In the aftermath of a poor showing by the ruling African National Congress (ANC), the risk of a turn toward more populist policy measures or severe party infighting remains elevated. Major Forecast Changes We have revised our forecast for the rand, after a stronger than anticipated performance through mid-2016. We now forecast the currency will average ZAR14.75/USD in 2016 (from ZAR15.40/USD) and ZAR15.00/USD in 2017.

Table Of Contents

South Africa Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Challenging Operating Environment Will Weigh On Growth......................................................................................................8
South Africa's growth will remain tepid in the coming quarters owing to elevated unemployment, weak mining sector activity and a
challenging regulatory environment. Investor concerns over sharp shifts in policy due to infighting within the ruling African National
Congress will present a further significant headwind.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................10
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Monetary Policy........................................................................................................................................................ 11
Cooler Inflation Will Keep Policy Rate On Hold..........................................................................................................................11
Monetary Policy Framework.................................................................................................................................... 11
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................12
Fiscal Policy And Public Debt Outlook.................................................................................................................. 13
Political Environment Poses Rising Risks To Fiscal Outlook..................................................................................................13
Tepid economic growth will weigh on South Africa's fiscal revenues in the coming year, underpinning our view that while there will be
modest fiscal consolidation, the country is likely to miss its Fiscal Year 2016/17 deficit reduction target. Moreover, in the environment of
increasingly sclerotic policymaking, potential for a shift to more expansionary policies and an associated downgrade to South Africa's
credit rating to subinvestment grade has risen significantly.
TABLE: LOCAL AND FOREIGN CURRENCY DEBT RATINGS.............................................................................................................................13
Structural Fiscal Position........................................................................................................................................ 15
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................15
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................15
Currency Forecast.................................................................................................................................................... 16
ZAR: Depreciation Ahead On Inflation And Challenging Operating Environment..................................................................16
The rand is nearing the end of its multi-month rally, with an increasingly challenging political environment in South Africa and rising
inflation to cap substantial future gains. In 2017, sluggish investment, contracting mined commodity exports and elevated inflation
suggest the unit will resume its depreciatory trajectory.
TABLE: BMI CURRENCY FORECAST.................................................................................................................................................................... 16
Outlook On External Position.................................................................................................................................. 18
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................18
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................19
TABLE: TOP-FIVE GOODS IMPORTS IN 2015......................................................................................................................................................19
TABLE: TOP-FIVE GOODS EXPORTS IN 2015.....................................................................................................................................................19
Chapter 2: 10-Year Forecast................................................................................................................... 21
The South African Economy To 2025..................................................................................................................... 21
Underperformance Among EM Peers Ahead..............................................................................................................................21
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.....................................................................................................................................21
Chapter 3: Political Outlook................................................................................................................... 25
SWOT Analysis......................................................................................................................................................... 25
BMI Political Risk Index........................................................................................................................................... 25
Domestic Politics..................................................................................................................................................... 26
ANC Election Losses Point To Sclerotic Policymaking Ahead................................................................................................26
A poor showing by the ruling African National Congress in South Africa's August 3 local elections poses substantially increased risks to
policymaking on both the local and national levels, undermining scope for crucial economic reforms. This supports our view that growth
will be sluggish in the coming quarters and could threaten the government's fiscal consolidation efforts .
TABLE: POLITICAL OVERVIEW ............................................................................................................................................................................ 26
Long-Term Political Outlook................................................................................................................................... 28
Changes To Stability Will Persist................................................................................................................................................28
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................................................................................................................... 31
SWOT Analysis......................................................................................................................................................... 31
Operational Risk Index............................................................................................................................................ 31
Operational Risk....................................................................................................................................................... 32
TABLE: OPERATIONAL RISK.................................................................................................................................................................................32
Business Crime ....................................................................................................................................................... 33
TABLE: BUSINESS RESPONSE TO RISK IN SOUTH AFRICA.............................................................................................................................34
Government Intervention ........................................................................................................................................ 35
TABLE: BUSINESS TAXES..................................................................................................................................................................................... 36
TABLE: PERSONAL INCOME TAX......................................................................................................................................................................... 37
Chapter 5: BMI Global Macro Outlook................................................................................................... 41
Global Macro Outlook.............................................................................................................................................. 41
Broad Recovery But Three Notes Of Caution.............................................................................................................................41
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %....................................................................................................................................42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...................................................................................................................................43
TABLE: SOUTH AFRICA MACROECONOMIC DATA and FORECASTS..................................................................................................................45

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