Our Economy In 2016 –Trends To Look Out For
Last year was a difficult year with low economic growth, a declining currency, an increasing budget deficit and a substantial trade shortfall. The shock firing of Finance Minister Nene in December threatened to put the country into a downward economic spiral. The reappointment of Pravin Gordhan as Minister of Finance partially restored credibility to this crucial post. However, it has left South Africa entering 2016 with record currency lows, a need to re-establish fiscal discipline and restore confidence with our (mainly off-shore) creditors and investors.
Some thoughts on what the year may hold
Predicting future trends can never be an exact science, but a consensus of expert opinion points to a number of likely trends -
- US Interest Rates: For the first time in nearly a decade, the US Federal Reserve increased interest rates in December 2015. The Federal Reserve Governor has forecast that rates will increase quarterly in 2016. This will force South Africa to respond by raising interest rates to protect the currency, resulting in a knock on effect of lower consumer spending. In turn, this will put pressure on already fragile economic growth prospects.
Effectively the days of cheap money are ending. In reality this is positive as it indicates the world, led by America, is shrugging off the financial crisis of 2008 and the global economy is slowly returning to normal.
- Commodity Prices: Prices of commodities have been in a prolonged slump since the financial crisis. Some forecasters (Goldman Sachs) are predicting that commodity prices, led by oil, will start to climb in 2016.
If commodities start to recover, this will assist South Africa as commodity exports play a crucial role in our trading account. This will help stabilise the currency and improve the economy.
To see how this is developing follow the prices of platinum and iron ore.
- Fiscal Discipline: This will be extremely important as indicated above. Finance Minister Gordhan has vowed that he will follow a fiscally prudent course. Already he has forced the Board of SAA to adopt Treasury policy in its negotiations with the Airbus group. Whilst this is a good start, he will need to prove to a sceptical global audience that South Africa will indeed follow sound fiscal lines. Look for the Budget speech in February to reinforce financial discipline. Things to look for are a budget deficit of less than 4% and our overall debt levels at below 50% of GDP.
Once markets are convinced that Minister Gordhan will achieve fiscal conservatism, the currency and economy should begin to show improvement.
The downside of this for taxpayers is that more tax increases are almost a certainty to keep the budget deficit at acceptable levels.
- Junk Status: Over the past few years ratings agencies have been downgrading the nation’s debt. We are now just one level above junk status. Another downgrade would force foreign investors to sell South African bonds (most of them are not allowed to invest in Junk Status bonds). This could send the currency into another crash with the Rand falling potentially to 20 to the US dollar.
Fiscal prudence is the key to preventing this happening, so watch how Minister Gordhan manages the budget deficit.
- The BRICS (Brazil, Russia, India, China, South Africa): The major reason for the fall in commodity prices is tapering Chinese demand as the Chinese economy manages slower economic growth. Brazil and Russia are in outright recession and only India is showing increasing growth.
Watch how events unfold in China.
- Policy Certainty: At present we seem to have various Ministers pulling in different directions which exacerbates the current confusion in economic policy. The National Development Plan is a coherent policy document which the government pays lip service to. Putting the NDP at the forefront will dispel the uncertainty.
- The Drought: The region has experienced its worst drought in decades, with 2015 being the driest year on record. As a result, South Africa will need to import about 6 million tons of maize, leading to rising food inflation. This will add to the pressure on the Reserve Bank to hike interest rates (see above – U.S. Interest Rates).
2016 will be a challenging year with economic growth expected to be in the 1.5% area – much like 2015. At least the return of Pravin Gordhan as Minister of Finance gives some cause for optimism.