When the South African Reserve Bank (Sarb) revised its growth expectation for the country’s economy for 2016 to 0% last month, nobody seemed surprised. The consensus is that South Africa is in a very tight economic spot.
Most analysts don’t expect this to change very soon either. Growth forecasts for next year are generally anaemic.
However, independent economist Dr Roelof Botha believes that the picture may not be as bad as most believe it to be. Speaking at the Momentum Mindshift conference on Thursday, Botha argued that there are a number of economic indicators that suggest that there is reason for optimism.
“This economy is not going into recession,” said Botha. “I can guarantee that.”
He argued that the negative growth experienced in the first quarter of 2016 was in fact a low point from which the economy has already started to improve.
“I firmly believe this economy has bottomed out,” he said. “Next year could be a bumper year, and we could grow at more than 2%, even 3%, coming off a low base.”
He said that the poor economic performance of the last few years was mainly caused by the slump in commodity prices, which remain a vital part of this country’s exports. However, he believes that market has turned.
“After six bad years it seems we are in the early stages of the next commodity boom,” Botha said. “And as long as this stabilises and follows a marginally upward trend we are guaranteed growth. Even though mining is less than 10% of the country’s GDP it has a pervasive supply chain.”
What is particularly noteworthy is that the first three months of 2016 saw the largest quarterly demand for gold in history. This has resulted in a noticeable recovery in the price of the yellow metal.
Gold touched a seven-year low of $1 060 per ounce in early January, but has since risen to current levels of around $1 350 per ounce. Botha believes that many analysts are missing the significance of what this means for the local economy.
“For 60 years there has been an amazing correlation between the gold price in dollar terms and the rand-dollar exchange rate,” he said. “This explains to a very large extent why the rand has strengthened.”
Botha believes that although the currency has reacted negatively to the news around the Hawks and Pravin Gordhan, it is currently in a strengthening phase and it will recover. This is clearly positive for inflation.
“Whenever the rand is weak, our imports are expensive,” he said. “Whether we like it or not, we have to buy oil, and we have to import many other things that we don’t make here, so inflation goes up. But then the rand recovers, imports become cheaper, and inflation goes down again. Think that in 2003 and 2004 inflation was negative!”
Botha acknowledged that there was an anomaly after the 2008 recession when the rand initially strengthened, but inflation didn’t come down. The reason for that, however, was a number of years in which the price of electricity was hiked by 25%.
“That’s behind us now,” he said. “The court has now sent out a clear message that electricity increases in this country will be linked to consumer price inflation (CPI) in future, and that is important for inflation. The rand is grossly undervalued and it will come back, CPI will fall from the end of this year and into next year, and by this year it could be between 2% and 3%.”
He pointed out that South Africa currently has the highest nominal money market rates in the world, which means that debt, and therefore the cost of capital is extremely expensive. However, he said that be believes this has peaked.
“Another clue is that bond yields declined by 120 basis points in nine months before the Hawks came into the picture this week,” Botha said. “The Sarb should be lowering interest rates at the moment, and I believe that next year they will.”
He said that while there is still concern about a potential downgrade from ratings agencies in December, there are fundamental reasons why this shouldn’t happen.
“In real terms our tax revenues are now growing after taking five years to recover from the recession,” Botha argued. “We also have the most diversified tax base on the continent.”
Government’s borrowing requirement as a percentage of gross public debt has dropped from 19% to 5%, and compared to its trading partners, South Africa’s debt-to-GDP ratio of under 50% is actually very favourable.
“We do not have fundamental fiscal instability,” said Botha. “In macro-economic terms we are magnificently better off than we ever were.”
In addition, government is still spending on infrastructure, tourist arrivals have increased significantly this year, manufacturing volumes are improving, mineral sales are up and retail sales continue to be positive. All of this gives him a lot of confidence.
“I cannot tell you what Mr Zuma or the Hawks are going to do next, and there will be some political instability,” said Botha. “But I’m convinced that the economy is strong and vibrant enough to lessen the pain of whatever happens in the political arena.”
This journalist is attending the conference as a guest of Momentum Consult.
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