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South African outlook: April 2018

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Overall, the signals continue to improve and President Ramaphosa’s (CR) recent trip to the Heads of the Commonwealth meeting in London saw him selling South Africa as an investment destination. His message to a large extent was well received, but actions speak louder than words and in order to achieve his rather ambitious target of R1.2 trillion he will have to show that his government is serious about creating an investment friendly environment, both for local as well as international investors. Corporate South Africa still sits on a large investment pile that it has failed to mobilise. 

ZAR remains subject to USD moves and trade war fears. It is currently testing 12.27 off the back of a resurgent USD and a spike in oil prices. I see ZAR remaining range bound between 11:90 and 12:30 for the next month. The MPC may have scope for one further cut although they will probably wait to see the inflationary effect of rising oil prices and the recent VAT increase of 1%. I would expect another 25bps cut in Q3 2018 if inflation continues to moderate toward 4.5%. The South African Reserve Bank Governor, Kganyago prefers inflation expectations closer to 4.5% and believes price gains are expected to accelerate. He said the Bank’s inflation forecast for the next 18 to 24 months is 5% and not quite where they would like it. The Banks target is to maintain inflation between 3 - 6%. The current round of public sector wage negotiations is underway and will need to be backdated to March. An above-inflation wage settlement which is quite likely would set the tone for other sectors of the economy and could lead to further inflationary pressures. 

Union activity, especially regarding the proposed minimum wage will be closely watched by international investors. Saftu, South Africa’s second largest union after Cosatu, has called for a nationwide strike and is hoping other unions will respond to their call for action. 

GDP forecasts are improving and the IMF has raised its forecast from 0.9% to 1.5% for 2018 rising to 1.7% for 2019. CR is hopeful that SA could achieve 3% for 2018 and is hopeful of achieving 4 to 4.5% from 2020 onwards. For this to happen he needs to attract USD100 million in Foreign Direct Investment (FDI).

FDI was 24% of GDP in 2008 and had declined to 19% of GDP by 2017. The National Development Plan requires FDI to grow to at least 30% of GDP by 2030. For this to happen, SA needs a credible mining charter and will need to tread very carefully around the land expropriation without compensation issue. If we consider the recently restarted REIPPPP program, a number of foreign investors withdrew, selling their projects to local investors. The government wants to renegotiate the level of Black Investment for the expedited round before finalising the bids. They aim to facilitate greater equity participation by black South Africans in the REIPPPP projects. This will be challenging and could deter further FDI in the program. Returns are already under pressure with declining tariffs and fierce international competition for capital. There is a level at which FDI simply does not make sense. 

Government debt to GDP now sits at a new all-time high of 53.1% and will go higher. Restructuring the SOE’s and enforcing budgetary constraints are key to manage this inexorable climb higher. Time will tell.

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