Standard Bank Research Team
Standard Bank
Q4 GDP and Jan PSCE benefit from base effects; Budget to respond to lower GDP outlook
Domestic growth is limited by the fact that S.A. imports oil and foreign savings, a phenomenon commonly referred to as a balance of payments constraint to growth. Due to changing global dynamics, and an increasingly consumption- based economy, South Africa is currently experiencing the effects of its balance of payments constraint to growth more acutely than in the recent past.
Following the financial crisis, counter-cyclical fiscal policy has resulted in increased levels of government expenditure. Due to the nature of South Africa's government spending, i.e. over-spending on wages (fig 4) and under-spending on infrastructure, divergence between production and consumption resulting from infrastructure bottlenecks (fig 1), has been exacerbated and the country's trade deficit has been aggravated. Increased levels of government expenditure also raised South Africa's debt levels, and the overall effect has been a widening of the current account deficit to the point where South Africa's sovereign risk premium is now higher. This explains why the rand is expected to remain weaker on a sustained basis, as foreign investors demand a higher premium to invest in South Africa.
Countercyclical fiscal policy has been facilitated by abnormally low global interest rates, which also encouraged complacency with regard to the current account deficit. Complacency was also encouraged by our increasingly favorable terms of trade, which peaked in December 2010. While still favorable, the terms of trade have since declined, and while still low, interest rates are now rising.
The imbalances that have built up in South Africa’s and other emerging market economies are now being exposed, as emerging market growth rates follow that of China’s lower, and interest rates which are tied to those of the US, rise, as US monetary policy normalizes. Global growth and interest rate cycles are out of sync which is creating an exceptionally difficult environment for those countries exposed to global financial flows.
Unfortunately, the fact that the reversal of capital flows based on quantitative easing was expected, has not meant that South Africa is more prepared for the consequences. The country is facing a global withdrawal of capital from emerging markets at a time when it's higher debt levels and lower potential GDP growth make it more reliant on the continued inflow of capital. This reliance has made it necessary to reduce domestic demand and thereby imports such that the trade deficit contracts, reducing the current account deficit and the sovereign risk premium.
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