South Africa’s growth outlook has improved, but this is largely due to short-term cyclical factors. structural reforms are needed to push the growth rate sustainably higher.

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MACRO
upDate
The South African economy
grew by a mere 0.3% in
2016. This is the lowest
growth rate the country has
achieved since the global
financial market crisis in
2009, and also well below
the average achieved since
1994 of 2.9%. It also means
that income per capita
continued to decline since
the growth rate was below
the population growth of
just over 1%. under these
circumstances it is very
difficult to create jobs
and meaningfully reduce
the country’s income and
wealth inequality. It is
much easier to implement
economic transformation
strategies when growth
rates are stronger.
The key areas of weakness
in 2016 were mining and
agriculture. Together, these
two sectors subtracted 0.6
percentage points from the
annual growth rate. In other
words, had mining and
agricultural not experienced
a decline in output last year,
the South African economy
would have grown by
almost 1%. unfortunately,
the electricity, water,
construction and transport
sectors also experienced
declines in output.
More positively, the broad
business services sector,
which includes the banking
and insurance sectors, added
a welcome 0.4 percentage
points to the annual growth
rate. This was supported by
the retail sector which added
a further 0.2 percentage
points. Despite these positive
contributions, it is fair to
conclude that South Africa’s
economic performance in
2016 was extremely weak
and disappointing relative
to expectations at the start
of 2016. Furthermore,
the weakness was evident
across a very broad range of
industries.
Against this backdrop it
is unsurprising that South
Africa’s unemployment
rate averaged 26.7% in
2016, which is the highest
unemployment rate the
country has recorded in
almost 15 years. Furthermore,
the expanded definition
of unemployment, (which
includes discouraged
workers) rose to a very
worrying average of around
36% in 2016. In particular,
the unemployment rate for
the youth (younger than
More
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serViCes
SeCToR, wHICH
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Growth rate.
south africa’s growth outlook has improved, but this is largely due to
short-term cyclical factors. structural reforms are needed to push the
growth rate sustainably higher.
SA consumer confidence
Source: STANLIB, Bloomberg
-15
-10
-5
0
5
10
15
20
25
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Consumer confidence
By Kevin Lings
staNlib Chief
economist

2. 25), using the expanded
definition, was a shocking
63%.
All of this means that South
Africa’s labour market
has, once again, failed
to gain any meaningful
traction. Fundamentally,
this disappointing
performance reflects the
lack of fixed investment
spending by the private
business sector, as well
as sustained low business
confidence aggravated by
significant policy uncertainty
and political turmoil.
Furthermore, the high
rate of unemployment
contributes to much of the
social tension and anguish
experienced in South Africa
on a daily basis, especially
among the youth.
and can only be resolved
meaningfully through a
concerted and sustained
effort to improve skills
development as well as
encouraging private sector
fixed investment spending.
The low growth
environment is also putting
increasing strain on the
national budget. This is
reflected in the fact that
in the 2016/2017 fiscal
year tax revenue massively
underperformed budget
by an estimated R30bn. A
breakdown of the revenue
shortfall shows that the
under-collection was very
broad-based and includes a
dramatic R15.23bn shortfall
in individual tax collection,
a R11.26bn under-collection
of VAT and a R6.5bn
lapse in the collection of
customs duties. In contrast,
company tax collection
has been stronger
than expected (with an
estimated revenue over-
run of R6.8bn), helped by
a relatively modest initial
budget increase.
The under-collection of
tax revenue pressurised
the Minister to increase
tax rates significantly.
Consequently, National
Treasury announced tax
increases of R28bn for
2017/2018, including a
substantial increase in
dividend and personal
income tax. More
specifically, the top
marginal tax rate for
individuals earning more
than R1.5 million was
increased from 41% to 45%.
There are an estimated
103 353 taxpayers that
fall into this tax bracket,
representing a mere 1.4% of
iNCreasiNG
eMployMeNt iN
SouTH AFRICA
HAS To Be THe
number one
economic
obJectiVe
Growth in fixed investment spending by private sector
Source: STANLIB, Bloomberg
%q/q, 4-quarter moving average annualised
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
2014
2015
2016
SA budget revenue over-runs/under-collection
Source: STANLIB, Bloomberg
Rbn, relative to the original budget and not the Medium-term budget policy statement
8.2 6.5 5.2
14.9 13.3
-5.1
20.9
41.2
29.5
13.4
-14.5
-66.4
16.6
24.8
-14.0-11.6
-30.4
-16.3
12.0
-75
-65
-55
-45
-35
-25
-15
-5
5
15
25
35
45
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
South Africa headline CPI forecast
Source: STANLIB, Bloomberg
%y/y
2
3
4
5
6
7
8
9
2009
2010
2011
2012
2013
2014
2015
2016
2017
STANLIB is an authorised financial service provider. stanlib.com

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registered taxpayers.
However, these 103 353
taxpayers are projected to
contribute 26.3% of total
individual income tax in
2017/2018.
Further changes to personal
income tax included a
below-inflation adjustment
to the tax brackets. This
meant that the Minister
did not compensate
the taxpayer with the
negative effects of inflation
(technically referred to as
fiscal drag). The net result
of the hike in the top
marginal tax rate as well as
the lack of adjustment to
the tax brackets means that
personal income taxes are
expected to contribute an
additional R16.5bn to total
tax revenue.
The international credit
rating agencies welcomed
the tone of the national
budget, especially the
Minister of Finance’s
intention to reduce the
fiscal deficit as well as
contain government debt,
but they continue to flag
the disappointing growth
trajectory.
Fortunately, three key
factors are likely to combine
to lift South Africa’s growth
rate to between 1.0%
and 1.5% in 2017. Firstly,
improved rainfall across the
central and northern parts
of the country during the
past six months is expected
to boost agricultural
production, especially maize
production after a severe
drought in 2015/2016. This
turnaround in the fortunes
of the agricultural sector
has the potential to boost
South Africa’s economic
growth rate by as much as
0.5 percentage points.
Secondly, industrial
commodity prices have
moved noticeably higher
over the past year. The
basket of industrial
commodity prices
monitored monthly by the
International Monetary
Fund has risen by a very
impressive 31.5% in
dollars in the year ending
February 2017. This uplift
in commodity prices has
boosted South Africa’s
export performance,
which rose by almost 37%
year-on-year in January
2017. This is the best
export performance South
Africa has achieved since
2011. Consequently, South
Africa has been able to
move from perpetual
monthly trade deficits
into more regular trade
surpluses. This should help
to lift economic growth,
while at the same time
providing some support
for the rand exchange
rate.
Thirdly, South Africa’s
consumer inflation rate
appears to have peaked
at 6.7% year-on-year in
December 2016, and is
expected to moderate to
an average of around 5.6%
in 2017. This slowdown
in inflation is largely
based on a moderation in
food inflation, supported
by the much improved
agricultural season.
Agricultural food inflation
has already slowed
dramatically in recent
months. Importantly, the
slowdown in the rate of
inflation should provide
some relief for the
South Africa real GDP growth year-on-year
Source: STANLIB, Bloomberg
%y/y
-2,0
0,0
2,0
4,0
6,0
8,0
05 06 07 08 09 10 11 12 13 14 15 16
Importantly,
National
Treasury
warned that
taxes are
likely to
rise further
in 2018/2019;
possibly by a
further R15
billion.
SA business confidence (BER)
Source: STANLIB, Bloomberg
Index
15
25
35
45
55
65
75
85
95
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016

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household sector, boosting
income and spending in
real terms.
Although the improved
outlook for inflation
suggests that the South
African Reserve Bank could
cut rates in late 2017, the
scope for the Bank to
cut interest rates will be
significantly impacted by
further upward adjustment
of interest rates in the
United States and South
Africa’s credit rating
remaining at risk of being
revised lower. The Federal
Reserve is expected to hike
rates three times in 2017,
having increased rates by
25bps in December 2016.
Consequently, we currently
expect local interest rates
to remain unchanged
throughout 2017.
Risks to SA growth
The more favourable
growth outlook for 2017
is not without risk. These
risks include still low
consumer and business
confidence which will take
time to revive, ongoing
cost-cutting by many
corporates which could
start to include more
retrenchments, and a steep
decline in private sector
fixed investment activity.
Nevertheless, South
Africa’s economic growth
is expected to improve
somewhat in 2017, albeit
due to short-term cyclical
factors.
Longer-term, given
the current state of
government finances,
including higher levels
of debt and a weakening
tax base, as well as the
increasing demands for
financial support from the
state-owned enterprises, it
seems clear that the public
sector is unable to provide
additional economic
stimulus in the form of
government spending.
Instead, they will need
to focus on maintaining
fiscal discipline while
pursuing targeted fiscal
programmes.
This implies that South
Africa’s economic policy
officials need to find a way
to lift business confidence
and encourage the private
sector to play a bigger role
in growing the economy.
Realistically, this is most
likely to be achieved
through an implementation
of economic infrastructure
development through the
increasing use of private/
public partnerships.
This will require the full
backing of cabinet and
will have to be supported
by sound and consistent
economic policies.
Ultimately, the current political turmoil
in South Africa is likely to proVE decisive in
how the balance of risks to the economy
unfold in 2017, especially as the ANC starts
to focus on their elective conference in
December 2017.