OSAGYEFO MAZWAI: S&P Global gets that SA tends to choose ‘fight’ not ‘flight’

There is mounting evidence that SA’s economic trajectory is moving in the right direction, and this was amplified by S&P Global recently revising our credit rating outlook from stable to positive. While the country still has a long way to go before at least one of the three major credit-rating agencies returns our sovereign credit to investment grade, incremental improvements will be positive for yields on our sovereign bonds and, over time, will enable global investors to take more active positions in our sovereign debt.

Over the past few weeks there have been several key data points that give credence to the relative success of SA’s structural reform programme. While all data points provide some insight into the operation of the economy, the most significant were perhaps the Bureau for Economic Research’s latest business confidence release, and the medium-term budget policy statement (MTBPS).

What matters most for economic growth and employment creation in SA is business confidence. The most recent index print showed that business confidence has just breached the long-term average level (since 1994), coming in at 45 index points. This indicates that just under half of the respondents to the survey — businesses in the main — are more optimistic about the future. This environment of increasing optimism gives space for business to invest in physical infrastructure and increase labour, due to expectations of more robust economic activity. The recent quarterly employment survey, which saw a reduction in the unemployment rate, is supportive of increasing business confidence.

The second important data source was the MTBPS, which was met with some disappointment. However, the move by S&P Global is supportive of the notion that the Treasury chose to err on the side of caution in its various assumptions and projections. For example, the Treasury forecasts a tax intake of about R6bn because of the two-pot system withdrawals. At the time of the budget the SA Revenue Service (Sars) had already breached this forecast, while Investec Wealth & Investment International’s (W&II’s) internal forecasts see Sars collecting up to R20bn in taxes because of the two-pot withdrawals. In summary, while the Treasury expects a R22bn shortfall in tax collection this year, the underestimation of tax collection from the two-pot system alone indicates that the shortfall could be far less than that.

The MTBPS was also conservative in its economic growth projections, but most interesting was the scenario analysis embedded in the document. In the best-case scenario SA could add structural economic growth of more than two percentage points to the base forecast for the period. In the worst-case scenario, we could see a reduction in structural growth of only 0.5 of a percentage point over the same period. This highlights the significant upside potential embedded in the SA economy, primarily as a function of improving structural fundamentals, down-trending interest rates and lower inflation (as a function of a strong rand and contained petrol prices).

The MTBPS forecasts were conservative, and any surprises to the upside would have a meaningful effect on our credit rating outlook. Third quarter GDP growth data is due to be released in the next week or two, but the employment data already shows broad evidence of recovery. 

As the government of national unity (GNU) kicks further into gear, lower bond yields will have a significant effect on its relative ability to deliver services (due to more funding being made available for government spending, as less is spent on servicing debt), as well as maintain political stability over the period of the seventh administration.

There are multiple tailwinds for third-quarter GDP, but the real evidence should come through in the fourth-quarter data, due in about April. The third quarter of this year was where we saw political certainty becoming more established, alongside broader stabilisation of energy security. However, it takes time to rebuild trust and confidence. It was only in the fourth quarter that the two-pot system came into play, there was an interest-rate cut by the SA Reserve Bank, and material rand strength and lower petrol prices led to lower inflation (greater spending power).

By Investec W&II estimates, reduced mortgage and debt-related payments, lower petrol prices and the two-pot withdrawals could add 2.5%-4% to household final consumption expenditure. This makes up about 60% of GDP, which implies a 1.5%-2.4% potential uplift to overall GDP. This estimate may be conservative given that exports could also have improved thanks to better energy security and some improvements in logistics.

The latest retail sales print for SA was, on the surface, disappointing. Some may argue that consumption has not fully recovered. The September data was affected by a robust print in September last year, in addition to promotional activity among retailers. The two-pot withdrawals, having only opened a couple of months ago, might not have found their way into consumer pockets due to administrative processes. The sharp rebound in vehicle sales for October 2024 may be a better barometer of consumer spending. 

How the Reserve Bank continues to react to low inflation will be the next key catalyst for consumer spending in SA. The recent 25 basis point cut should have a positive effect on spending (we estimate a 0.25% uplift), but the Bank will continue to keep a close eye on local demand, currency dynamics and external risks.

Inflation is forecast to remain at about the midpoint of the central bank’s target range, although the October inflation print breached the bottom threshold of 3%, coming in at 2.8%. At this point SA has more of a growth problem than an inflation problem, particularly when considering demand dynamics such as weak consumer spending over the last 15 years.

Inflation spikes have largely been a function of external factors, and one hopes the Reserve Bank does not place too much emphasis on the global environment, to the detriment of the local one. Even under the Bank’s own risk scenarios, inflation should remain within its target range over the next two years.

S&P Global gets it. The February 2025 budget will be another pivotal moment to better understand the success of structural reform and the effects of a stronger currency, lower petrol prices, lower inflation and interest rate cuts, on overall economic activity and spending.

Lower idiosyncratic risks in SA should provide further impetus for businesses to invest in the economy and employ people. The other ratings agencies should follow suit in due course, provided the data remains supportive of positive revisions — whether the rating or the outlook.

• Mazwai is investment strategist at Investec Wealth & Investment International.