A new dawn awaits SA – Goldman Sachs

The South African economy could grow 2.3% in 2018 amid political change, a slowdown in inflation and higher commodity prices, the managing director of Goldman Sachs Sub-Sahara Africa said on Tuesday morning.

Speaking at an event hosted by S&P Dow Jones Indices at the JSE, Colin Coleman said its economic forecast was the “most bullish on the street”. The International Monetary Fund recently lowered its GDP growth expectation for South Africa to 0.9% from an earlier 1.1%, while the South African Reserve Bank adjusted its projection upwards from 1.2% to 1.4%. National Treasury is expecting growth of 1.1%.

Coleman said the fact that South Africa has grown by roughly 1% in recent years while the population was expanding at twice the rate was “a disaster”. Without doing anything right or wrong in particular, the country should be growing at 3%.

“If we perform well we should be at a 5% growth rate and it is only by shooting ourselves in the foot – as we’ve done for the last arguably five years – that you’ve seen a three-year growth rate of [roughly] 1%,” he said.

This situation has effectively developed due to the “shadow state” that has emerged under President Jacob Zuma’s administration, Coleman argued.

“State capture hasn’t been an ideology. It has been a practice and that practice has effectively evolved into a kitchen cabinet and a shadow state that has been effectively running a parallel process to the ANC organisation.”

In some cases, the ruling ANC party agreed with the decisions of the shadow state, but it was also often at loggerheads, he added.

“In effect, President Zuma has in a way been his own captive of that shadow state organisation and its deals that it has made with various parties.”

Many people were wondering if Zuma didn’t resign because he didn’t want to or because he effectively couldn’t as he was captive to the directives and obligations of the state capture project, Coleman added.

“I would effectively think the latter.”

The ANC NEC on Tuesday afternoon announced that it was recalling Zuma as president. Although no deadline had been set, it expected Zuma to respond to the decision on Wednesday. It indicated that it wanted ANC president Cyril Ramaphosa to deliver the State of the Nation Address, which was previously postponed.

Coleman said whether Zuma resigned under pressure or not, he expected that a new cabinet would be appointed soon. It would be easier for Ramaphosa to start with a clean slate when appointing a cabinet.

Although the budget – scheduled for February 21 – would probably be delayed by around a week, South Africa would likely have a new president and cabinet in place by the end of February, he said.

Accelerating economic growth

Coleman said if the whole economic programme was designed to redirect state resources to a small elite and to party constituents in the municipalities and provinces, the economy would underperform “and that is what we saw”.

The legacy of these developments in state-owned enterprises was massive. To reverse it, new boards would have to be appointed (as was the case with Eskom). Balance sheets, management and governance also had to be restored at state-owned entities in order for them to function operationally with the objectives set out for them, he added.

Fiscal consolidation, the re-equitisation of Eskom, the funding of free tertiary education and the underperformance of the South African Revenue Service (Sars) would also have to be dealt with.

What transpires in the budget is extremely important because if Moody’s decides to downgrade the country’s local currency rating to junk, confidence would suffer and South Africa would be evicted from the Citi World Government Bond Index. The country could see outflows of up to $10 billion from bond tracker funds as a result. Goldman Sachs estimates that the rand could weaken by roughly 50 cents in such a scenario.

“I think if we do the basics right in terms of fiscal consolidation, structural reform, getting the economic team in place, by then we should be ok. I think we can stay the execution of Moody’s in respect of the rating.”

Yet, this would not be sufficient to get growth going. The impasse in the mining sector has to be resolved as a matter of urgency. The implementation of the national minimum wage and youth employment initiatives are also important.

“I am pretty sure that we are going to have a new dawn in South Africa from March onwards. We are going to have a new team running the country and we are going to have a much stronger environment for economic growth and for asset price recovery,” Coleman argued.

But Ian Cruickshanks, economist at the Institute of Race Relations, warned that it would be difficult to reach 2.3% growth this year without the push provided by the agricultural sector in 2017.

A departing CEO of an American company in the manufacturing sector recently said the firm would not invest in South Africa until it was assured of the safety of its assets, a reliable and cost-effective electricity supply and an understanding that the national minimum wage had to be linked to productivity gains, he said.

Cruickshanks said until South Africa addressed the poor quality of its education system, it would be difficult to get economic growth to these levels in such a short time-frame.

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