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South Africa Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views

We maintain our 2016 real GDP growth forecast at 1.5%. The absenceof load shedding at least until May 2016 justifies a minor increasefrom 1.4% in 2015, but strikes are likely to pick up in 2016. Thedeterioration in the business environment at end-2015 will extendinto 2016, depressing investment growth, while private consumptionremains limited by high unemployment and rate hikes.Given the rand has continued to weaken despite the return of FinanceMinister Gordhan and food price pressures show no sign ofabating, inflation expectations are at risk of becoming disanchored.To prevent this, the South African Reserve Bank will have to hikerates significantly to maintain its credibility hence we are rampingup our expectations to 75 basis points in hikes this year.

South Africa’s current account deficit has improved from 5.5% ofGDP in Q1-Q314 to 3.9% in Q1-Q315. Recent rand depreciationwill boost the current account data from Q415. But for a sustainableimprovement in the current account without experiencing a collapsein investment, savings must increase with the support of structuralreform, which we do not expect.South Africa’s ruling African National Congress party will graduallyadopt more populist, leftwing policies over the next four years in anattempt to retain dwindling popular support. Policy proposals will bemainly rhetoric until the 2016 municipal elections, after which pointwe expect an increasing focus on genuinely distributive policies.Major Forecast ChangesWe have revised our 2015 growth forecast to 1.5% from 1.9%. Therevision is driven by Q215’s 1.3% y-o-y contraction and a furtherdeterioration in the domestic demand outlook, as the July tax ratehike kicks in. Medium-term growth will be undermined by the lackof structural reforms and a low savings rate.

Table Of Contents

South Africa Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
No Cure For Structural Ills8
We maintain our 2016 real GDP growth forecast at 16% The absence of load shedding at least until May 2016 justifies a minor
increase from 2015's 14%, but strikes are likely to pick up in 2016
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS9
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
Monetary Policy 10
Tightening The Monetary Screws Of Credibility10
Given that the rand has continued to weaken despite the return of Finance Minister Gordhan and food price pressures show no sign of
abating, inflation expectations are at risk of becoming disanchored
Monetary Policy Framework 11
Fiscal And Debt Outlook 12
South Africa Is Not Junk12
Fitch's downgrading of South Africa to BBB- and SandP's move to negative outlook are in line with our negative reading of the Medium-
Term Budget However, we do not expect credit metrics to deteriorate significantly in the next 12 to 18 months, which would be required
for an SandP downgrade to junk South Africa's real crisis is a growth crisis, not a fiscal one
TABLE: MEDIUM-TERM BUDGET 2015, % OF GDP12
Structural Fiscal Position 13
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES14
External Trade and Investment 15
Current Account Still A Problem As Savings Too Low15
South Africa's current account deficit has improved from 55% of GDP in Q1-Q314 to 39% in Q1-Q315 Recent rand depreciation will
boost the current account data from Q415
Outlook On External Position 16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE16
TABLE: TOP 5 GOODS IMPORTS IN 201417
TABLE: TOP 5 GOODS EXPORTS IN 201417
Chapter 2: 10-Year Forecast 19
The South African Economy To 2025 19
Underperformance Among EM Peers Ahead19
The South African economy will grow at a slow pace of around 25% 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 FORECASTS19
Chapter 3: Political Outlook 23
SWOT Analysis 23
BMI Political Risk Index 23
Domestic Politics 24
ANC Rhetoric And The Post-Zuma Era24
The ANC will ramp up its populist rhetoric in the run-up to the 2016 municipal elections Land reform in particular will resonate with the
voters, 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 the strongest contender for the ANC leadership
TABLE: POLITICAL OVERVIEW 24
Long-Term Political Outlook 25
Socio-Economic Issues To The Fore Over The Coming Decade25
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
TABLE: PRESIDENT ZUMA'S APPROVAL RATINGS PER PROVINCE, %, NOVEMBER 24 2015 25
Chapter 4: Operational Risk 29
SWOT Analysis 29
Operational Risk Index 29
Operational Risk 30
TABLE: OPERATIONAL RISK 30
Trade Procedures And Governance 31
TABLE: IMPORT AND EXPORT DOCUMENTS 31
TABLE: TRADE PROCEDURES BREAKDOWN 31
TABLE: SSA TRADE PROCEDURES AND GOVERNANCE RISKS 32
Vulnerability To Crime 33
Chapter 5: BMI Global Macro Outlook 37
Global Macro Outlook 37
Unfinished Business In 201637
TABLE: GLOBAL ASSUMPTIONS 37
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 38
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 38
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 39
TABLE: SOUTH AFRICA - MACROECONOMIC DATA and FORECASTS 41

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