Growth will rebound only slightly in 2017, after a sharp slowdown in 2016. Elevated unemployment and sluggish credit growth will weigh on private consumption, while continued fiscal consolidation limits government spending. Elevated policy uncertainty and a poor operating environment will act as a continued headwind to investment.
We believe that the South African Reserve Bank (SARB) will keep the policy rate on hold at 7.00% through end-2017. With inflation poised to come within the upper bound of the target band sustainably by mid-2017, and growth sluggish, we believe the hiking cycle is largely passed.
We expect South Africa's fiscal deficit to narrow, though at a slower pace than anticipated by the government. Weak economic growth will act as a headwind to fiscal revenues.
In the aftermath of a poor showing by the ruling African National Congress (ANC), the risk of a turn toward more populist policy measures or severe party infighting remains elevated.
Major Forecast Changes:
We have revised our forecast for the rand, after a stronger than anticipated performance through mid-2016. We now forecast the currency will average ZAR14.75/USD in 2016 (from ZAR15.40/USD) and ZAR15.00/USD in 2017.
While the electricity situation has stabilised in the short term, in line with reduced demand driven by the economic slowdown, it is unclear how bad the electricity situation will be over the next few years as the current operational stability masks unresolved structural failures. In a worst case scenario where the domestic grid collapses, we would significantly revise down our growth forecast.
A downgrade to South Africa's long-term currency rating would have significant knock-on effects, including prompting a sharp currency sell-off, increasing imported inflation, undermining business confidence, increasing government and private firms borrowing costs. If we did see a downgrade, this could encourage us to revise our fiscal deficit and real GDP growth forecasts.
|Nominal GDP, USDbn||350.0||312.6||293.9||309.8|
|Real GDP growth, % y-o-y||1.6||1.3||0.5||1.1|
|Consumer price inflation, % y-o-y, eop||5.3||5.2||6.6||5.5|
|Exchange rate ZAR/USD, eop||11.57||15.47||14.50||15.00|
|Budget balance, % of GDP||-4.4||-4.3||-3.8||-3.6|
|Current account balance, % of GDP||-5.4||-4.4||-3.8||-4.0|
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