Surprising GDP data pressures Nene
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JOHANNESBURG – The pressure is on Finance Minister Nhlanhla Nene to deliver a medium-term Budget policy statement (MTBPS) that will ward off further credit downgrades in the face of the first recession since 2009 and a widening Budget deficit.
Nene will battle to achieve fiscal consolidation targets.
The second-quarter gross domestic (GDP) data released yesterday highlighted the challenges facing Nene and his Treasury team to deliver a sound MTBPS that would appease markets and rating agencies.
The data confirmed that the country fell into a technical recession after the economy shrank 0.7 percent quarter-on-quarter in the period.
The rand plummeted on the back of the poor GDP print and lost 20 cents in eight minutes following the release of the data. At 5pm, the local currency was bid at R15.31 against the dollar against R14.86 at the same time on Monday.
Treasury in its February budget said it expected the economy to advance by 1.5 percent this year and by 1.8 percent next year.
The forecast was attributed to “an expected increase in private investment as a result of improved business and consumer confidence”.
However, the improvement in business and consumer sentiment has not translated into significant investment.
President Cyril Ramaphosa. Ramaphoria has fast evaporated as policy uncertainties continue to hurt the ailing economy. Photo: GCIS
FNB senior economic analyst Jason Muscat said data at hand thus far, including the August PMI and August vehicle sales, suggested that growth for the rest of the year would be disappointing.
“We believe that growth forecasts will inevitably miss on the low side this year, jeopardising tax revenue and fiscal consolidation targets, and in turn drawing the unwanted attention of rating agencies,” Muscat said.
Statistics South Africa said year-on-year the economy expanded 0.4 percent in the second quarter, slowing from a 0.8 percent growth in the previous period – the weakest growth rate since the first quarter of 2016 when the economy contracted 0.3 percent.
The only bright spark in second-quarter growth data came in the form of the manufacturing sector, which eased its slump, and mining output rose for the first time in three quarters.
The government has battled to rein in public finances with its fiscal message rebuffed by the available data.
Last week, Treasury data showed that July’s budget deficit came in at R96bn – the worst in 14 years, which brought the year-to-date deficit to R123.6bn.
Professor Raymond Parsons, an economist at North West University, said the emergence this year of an economic recession and lower-than-expected growth prospects would impact tax revenues.
“There must be no renewed lapses in fiscal consolidation. These growth and fiscal developments will be critically monitored by the credit rating agencies when they again reassess South Africa's investment rating towards the end of 2018,” Parsons said.
The storied rise of Cyril Ramaphosa to head of state in February was expected to herald a new era of rapid economic growth as per his “new deal” blueprint.
However, Ramaphoria has fast evaporated as policy uncertainties continue to hurt the ailing economy.
Jason Tuvey, a senior emerging markets economist at Capital Economics, said a sharp rebound was unlikely and that the GDP data further dented hopes that Ramaphosa’s presidency would lead to a marked turnaround in South Africa's economic fortune.
“Yesterday's worse-than-expected data means that our forecast for growth of 1.3 percent over this year as a whole is now looking too optimistic. We will formally revise down our GDP growth forecasts shortly,” Tuvey said.
Ramaphosa last month indicated that the governing ANC had instructed the government to develop a stimulus package to add life to the ailing economy, but that this would be done within existing budgetary constraints.