south africa - stuck in the slow lane

Bank of Tokyo-Mitsubishi UFJ A member of MUFG, a global financial group

South Africa – Stuck in the Slow Lane*

Amir KhanEconomic Research | London Desk

October 2016*Data sourced from Macrobond & IMF/World Bank unless otherwise stated

Agenda

► Recent economic developments

► Political backdrop

► Market reaction

► Long-term positives & key challenges ahead

► Key take-aways/Q&A

2 South Africa – Stuck in the Slow Lane | October 2016

Recent Economic Developments


Economy losing its lustre…

► The economy has been losing its lustre recently & has seen a widening of the gap with its EM peers.

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Chart 1a: The economy appears to have lost its poise recently

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Chart 1b:...And is also borne out in terms of its performance relative to its global peers

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South Africa – Stuck in the Slow Lane | October 20164

…With the result that it has failed to keep pace with its peers

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Chart 2: South Africa's rate of catch-up has been poor realtive to its EMs peers

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(Level of GDP/capita relative to US)


High frequency indicators also make for rather poor reading…

► Underlying industrial production has been at best tepid, while retail sales remain rather sluggish amid the rather depressed nature of consumer confidence.

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Chart 3: Industrial production has been volatile & on the whole weak...

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Average industrial production growth since 2010

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Chart 4:...While retail sales have remained sluggish thanks to weak consumer confidence

Consumer Confidence Index(LHS)Retail sales (% Y/Y, RHS)


…A development which is corroborated by forward looking gauges of the economy

► Forward-looking proxies for the economy make for bleak reading.

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Chart 4: SARB's Lead Economic Indicator continues to languish in negative territory

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Political Backdrop


Political tensions rise to the surface…

Under the leadership of Jacob Zuma, political tensions in South Africa have gradually been on the rise. This is underlined by the following developments, not least:

► Growing political scandals/corruption, with some involving the president himself

► Failure to address key economic issues e.g. youth unemployment

► Deteriorating industrial relations, particularly in the mining sector


…Which is starting to adversely affect the popularity of the ANC party

► Although the ANC continues to dominate the political landscape in South Africa, its grip on power is starting to loosen somewhat recently.

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Chart 5: The ANC's vote share fell by 8pp in the 2016 local election...

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ANC, 53.9

Democratic Allinace, 26.9

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Chart 6: With both the DA & EFF eating into the ruling party's support base (%)


Market Reaction


The rand has underperformed its global peers…

► Domestic political considerations & uncertainty over how quickly the Fed would normalise its policy settings have been key factors behind the rand’s volatile performance on the currency markets.

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Chart 7: The South African rand has taken a pounding but has recouped some of the losses more recetly

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…But equity markets not so…

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Chart 8: After a difficult 2015 South Africa's benchmark equity index has been on an upward trajectory at least

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…All of which suggests ongoing uncertainty towards South African risk

► The sacking of the country’s respected FM at the end of 2015 caused South African benchmark government bond yields to spike. While they have come down more recently, they remain well above their lows seen in 2013.


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Chart 9: South African benchmark government bond yileds have been kept in check but are well above their

all-time lows

Global financial crisis & removal of former President, Mbeki,from power

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"Taper tantrum" related spike in yields

Removal of FM

Long-tem Positives & Challenges Ahead


Positive (i) – Within a regional context South Africa still stands out…

► Although Nigeria has overtaken South Africa as the largest economy in SSA, in per capita terms the latter is still by far the most important economy in the region.

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Chart 10: Although South Africa is now the second largest economy in SSA in per capita terms it's still the

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Positive (ii):…Thanks in part to the quality of its human capital…


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Chart 11: While South Africa's population trails some of its peers, this is tempered by the fact that it boasts a

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Positive (iii):…As well as its superior technological/infrastructure base

► There’s a vast gap between South Africa & its SSA peers in terms of key measures of technological/infrastructure development.

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Chart 13: Comparative road density

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Electrification (% of population)

Chart 12: Comparative electrification/mobile penetration rates

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Challenges (i) – Twin deficits & the need to preserve the country’s investment grade rating

► South Africa has sizeable deficits on both the fiscal & C/A side, which makes the country dependent on external financing. This also puts the country’s investment grade rating under the spotlight.

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Chart 14: South Africa is having to live with a twin defcit problem

C/A Balance Fiscal balance

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Challenges (ii) – Elevated unemployment & poor labour relations

► With around a quarter of the population unemployed, South Africa faces the urgent task of creating new jobs. But with growth stuck at the sub-2% level recently, this does not appear likely to happen.

► Elsewhere, with the highly unionised nature of country’s labour market, structural reforms also have to be stepped up with the aim of reducing structural rigidities evident in the country’s labour market.


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Chart 15: Unemployment is worryingly high in South Africa & more so because of the high proportion of long-

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Challenges (iii) – Social inequality & persistence of poverty

► Aside from high levels of social inequality, poverty remains an ongoing feature of life in South Africa.

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Chart 16: Income inequlaty is extremly high in South Africa

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Challenges (iv): Supply bottlenecks

► While the quality of South Africa’s infrastructure compares favourably with its regional peers, at the global level it fares less well.

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Chart 17: The overall quality of South Africa's infrastructure has deteriorated sine 2010

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Challenge (v) – Overreliance on mining/commodities

► The direct contribution of the mining sector to South Africa’s overall GDP remains modest (~7% of GDP) but this masks the fact that, from an export perspective, the sector has a much more significant bearing on the economy.


Q&A


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south africa - stuck in the slow lane

Economy & Finance