We maintain our 2016 real GDP growth forecast at 1.6%. The absence of load shedding at least until May 2016 justifies a minor increase from 2015's 1.4%, but strikes are likely to pick up in 2016. The deterioration in the business environment at the end of 2015 will extend into 2016, depressing investment growth, while private consumption remains limited by high unemployment and rate hikes.
Given that the rand has continued to weaken despite the return of Finance Minister Gordhan and food price pressures show no sign of abating, inflation expectations are at risk of becoming disanchored. To prevent this, the South African Reserve Bank will have to hike rates significantly to maintain its credibility hence we are ramping up our expectations to 75 basis points in hikes this year.
South Africa's current account deficit has improved from 5.5% of GDP in Q1-Q314 to 3.9% in Q1-Q315. Recent rand depreciation will boost the current account data from Q415. But for a sustainable improvement in the current account without experiencing a collapse in investment, savings must increase with the support of structural reform, which we do not expect.
South Africa's ruling African National Congress party will gradually adopt more populist, leftwing policies over the next four years in an attempt to retain dwindling popular support. Policy proposals will be mainly rhetoric until the 2016 municipal elections, after which point we expect an increasing focus on genuinely distributive policies.
Major Forecast Changes:
We have revised our 2015 growth forecast to 1.4% from 1.9%. The revision is driven by Q215's 1.3% y-o-y contraction and a further deterioration in the domestic demand outlook, as the July tax rate hike kicks in. Medium-term growth will be undermined by the lack of structural reforms and a low savings rate.
At present it is unclear how bad the electricity situation will be over the next few years. In a worst case scenario where the domestic grid collapses, we would significantly revise down our growth forecast.
|Nominal GDP, USDbn||350.0||319.7||292.1||288.9|
|Real GDP growth, % y-o-y||1.5||1.4||1.5||2.1|
|Consumer price inflation, % y-o-y, eop||5.3||5.1||6.5||5.2|
|Exchange rate ZAR/USD, eop||11.57||14.50||15.59||17.19|
|Budget balance, % of GDP||-3.6||-4.0||-3.2||-3.2|
|Current account balance, % of GDP||-5.4||-3.9||-3.1||-3.1|
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