2017 to be less ugly - economist

Cape Town – From an economic and political standpoint 2017 is going to a “less ugly year”, said Jeffrey Schultz, economist at BNP Paribas securities. 

Schultz’s explained to Fin24 that his prognosis is based on the fact that rising commodity prices continue to benefit South Africa from a trade position and significant rainfall that has helped to end a crippling drought in large parts of the country, which will most likely result in a surplus of grain stock. 

“All of this should probably lead to a relatively sharp drop in inflation in the second half of this year and that in turn could provide policymakers with some scope for policy easing later in this year,” said Schultz. 

Inflation forecast 

He expects headline inflation to drop below the South African Reserve Bank’s upper 6% target limit by the second half of 2017, reaching 5% by year-end.

In addition, there could be a significant drop in food prices with the end of the drought in important parts of the country and as such food price inflation will slow sharply in 2017, Schultz said.

READ: Market 'surprised' by December's 6.8% inflation rate

“A risk for higher inflation however is fuel prices, which are not going to be as favourable as last year. Oil prices have rallied significantly following the Organization of the Petroleum Exporting Countries (Opec) decision to slow down production collectively and we’ve seen Brent crude oil back up at $54 to $55 per barrel.”

Rand resilience

The trends in the currency this year are also going to be a risk to inflation, says Schultz, although the rand’s performance has been much more resilient in the past few months. 

The reasons for the rand’s better performance recently can be ascribed to the global search for yield, says Schultz. “But we have to remember the rand is still the most oversold currency on a trade weighted basis. The currency has weakened really fast and now we see more stability given the high carry trade.” 

GDP outlook 

BNP Paribas expects GDP to grow at 1.3% after expanding only at an estimated 0.4% in 2016. 

“The slight uptick in growth and a more positive trade environment on the back of better commodity prices could potentially improve South Africa’s external account balances,” Schultz says, “especially our current account. We’re likely to see the current account deficit narrow to about 2.8% of GDP, down from a deficit of 4% of GDP in the previous year.” 

These improvements, combined with meaningful progress with labour market and policy reform and a lower current account imbalance in the second half of 2017 could even see South Africa avoiding a sovereign credit ratings downgrade in the first half of the year, said Schultz. 

“But that being said, there’s a lot of global and domestic uncertainty and the risks need to be finely balanced.” 

READ: Rand falls as US Fed raises rates

The future reaction of the US Federal Reserve with regard to interest rate tightening, the sustainability of economic growth in China and commodity price gains will remain at the forefront of investor concerns in 2017, Schultz said. 

“I think we can expect another noisy year, nevertheless, our economy has the potential to join the likes of Brazil and Russia which have been beneficiaries of a more stable economic environment and the upswing in commodity prices.” 

Politics in 2017 

The firing of former finance minister Nhlanhla Nene in December 2015 revealed the gravity of risks associated with the behaviour of the ANC-faction associated with President Jacob Zuma, Schultz said. 

“The fear that Mr Zuma would mount a raid on the Treasury dominated 2016, as did relief over the president’s setbacks and the fact that South Africa avoided being downgraded by ratings agencies. 

“We expect 2017 to exhibit a similar dynamic, although the tail risk is that Mr Zuma will attempt a major cabinet reshuffle and/or a hijack of the ANC succession process. 

READ: Cabinet reshuffle: Zuma thinks of a comeback for Dlamini-Zuma 

“Financial markets will continue to respond to Mr Zuma’s potential setbacks on the legal front (he might be again charged with corruption and fraud) or in terms of his support within the party,” Schultz said, with reference to the rally in financial markets last year when Zuma was asked to step down by a few individuals in the ANC National Executive Committee (NEC). 

“We’ve seen markets acting similarly in Brazil when former President Dilma Rousseff was impeached, followed by a sell-off when the president was regaining support.”