2020 ITRANSACT ECONOMIC OUTLOOK CAN SOUTH AFRICA WEATHER THE COVID-19 STORM?
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FIRST QUARTER
2020 ITRANSACT IS A LICENSED FINANCIAL SERVICE PROVIDER
ITRANSACT
ECONOMIC
OUTLOOK
CAN SOUTH AFRICA WEATHER THE COVID-19 STORM?CONTENTS SUMMARY AND ASSUMPTIONS____________________________________________________________ 2 ACTIVITY______________________________________________________________________________ 3 PRICES, INTEREST RATES AND EXCHANGE RATES___________________________________________ 12 FISCAL AND EXTERNAL ACCOUNTS_______________________________________________________ 13 FORECAST TABLE______________________________________________________________________ 16 DISCLAIMER __________________________________________________________________________ 17 CONTACT DETAILS ____________________________________________________________________ 17
SUMMARY AND ASSUMPTIONS
Emerging Markets: As the COVID19-induced global economic chaos
•
intensifies, there has been an even greater shift of capital from emerging
markets to countries considered safer as investors are becoming more
risk averse. This, together with the steep contraction in economic As the COVID19-
activity, has resulted in more volatility of emerging country exchange
rates including South Africa’s. induced global
South Africa’s growth: The latest IMF World Economic Outlook forecasts
•
economic chaos
the global economy to contract by 3% in 2020 because of the fallout intensifies
from the COVID-19 pandemic. This, together with South Africa’s pre-
existing deep structural issues (including inadequate infrastructure), as
well as the economic impact of the 35-day country lockdown that has
been relatively aggressive, South Africa’s economy is going to be hit hard
in 2020 and a recession in inevitable. Minister of Finance predicts a GDP
contraction of closer to 6.5%.
Business confidence and business health during COVID-19: Business
•
confidence index reached a 21-year low during the first quarter of 2020.
Furthermore, a business survey on the impact of the pandemic shows
that businesses have already been profoundly affected. It indicates that
85.4% of responding businesses had turnover that was lower than their
normal range.
Unemployment: South Africa’s chronic unemployment shows no signs of
•
declining. Many South African businesses are already struggling and this
is going to result in thousands losing their jobs because of the COVID19
-induced economic crisis. Surveys already show that many businesses
expect to decrease their workforce. At the same time, many businesses
are expected to go under.
Inflation: South Africa’s consumer inflation has been moderating due to
•
mute domestic demand. A lower inflation rate recorded in March 2020
from February.
Interest rates: With the intensification of the COVID-19 pandemic, the
•
South African Reserve Bank cut the benchmark interest rate by 100 bps
during the Monetary Policy Committee’s (MPC) end-March meeting, and
by another 100 bps during an unscheduled meeting during mid-April.
We expect further cuts of at least 50 bps before the end of 2020.
Fiscus: The South African “actual budget” is deviating substantially from
•
the February Budget Speech. This is because government revenue is
expected to be negatively affected by the impending contraction in GDP
growth in 2020, while at the same time expenditure requirements have
risen substantially.
2PART ONE: ACTIVITY
By end-March 2020 the IMF indicated that the world investment credit rating from the major agencies. On
economy had entered into a recession, a recession that March 23rd Moody’s downgraded the country’s long-
was likely to be as bad or worse than the 2008/09 great term foreign and domestic debt rating from Baa3 (i.e.:
recession - even with a chance of mutating into a global the last investment grading the country had) to Ba1,
depression. As the COVID19-induced global economic while it maintained a negative outlook on the country’s
chaos intensifies, there has been an even greater shift of credit, citing both the country’s weak economy and
capital from emerging markets to countries considered fiscus as the main reasons for the downgrade. On Apr.
safer as investors are becoming more risk averse. 3rd Fitch further downgraded South Africa’s credit rating
This, together with the steep contraction in economic into non-investment grade by one notch to from BB+
activity, has resulted in more volatility of emerging to BB, stating the country’s lack of a clear path towards
country exchange rates. stabilizing government debt as well as the expected
impact of COVID-19 on both the economy and the
Graph 1 below depicts the exchange rates of selected fiscus as the main reasons for the downgrade. Fitch too
emerging market economies, including South Africa, for maintains a negative outlook on South Africa’s credit.
the period starting from Dec. 2019 to early April 2020.
The graphs show that for the period depicted, the South Consequently, South Africa has seen more outflows of
African rand experienced the steepest depreciation of capital alongside other negative developments and this
the selected emerging market currencies. There are has had an adverse impact on the rand. Table 1 indicates
a number of reasons why the South African exchange that although the year-to-date net purchases of South
has been particularly impacted hard by the COVID-19 African bonds by foreigners during week ended early
pandemic. April in 2019 was over R22 billion, the year-to-date net
sale of South African bonds by foreigners during the
South Africa was already in a very vulnerable position corresponding period in 2020 was over R58 billion. This
when the COVID-19 shock hit, and this vulnerability trend is likely to continue as the country will no longer
has been exacerbated by the country having two rating form part of the FTSE World Investment Grade Bond
agencies cut its credit rating since the pandemic began. Index (WGBI) as of May 1st, 2020.
This also included South Africa losing its last remaining
Graph 1: Selected emerging market currencies against the US dollar and depreciations against
the US dollar, 1 Dec 2019 – 5 Apr 2020
20.00 South African Rand
-23.3
19.00
18.00
17.00
16.00
15.00
14.00
13.00
12.00
2019-12-01 2020-01-01 2020-02-01 2020-03-01 2020-04-01
Source: SARB and PAIRS
Note: Values within graphs represent depreciation between 1 Dec 2019 and 5 April 2020
3Brazilian Real Russian Ruble
5.50 -20.7 85.00
5.30 -16.6
80.00
5.10
4.90
75.00
4.70
4.50 70.00
4.30
65.00
4.10
3.90
60.00
3.70
3.50 55.00
Source: SARB and PAIRS
Note: Values within graphs represent depreciation between 1 Dec 2019 and 5 April 2020
Indian Rupee Chinese Renminbi
78.00 -6.13 7.15
77.00 -0.82
7.10
76.00
75.00 7.05
74.00
7.00
73.00
6.95
72.00
71.00 6.90
70.00
6.85
69.00
68.00 6.80
Source: SARB and PAIRS
Note: Values within graphs represent depreciation between 1 Dec 2019 and 5 April 2020
4Turkish New Lira Argentine Peso
6.90 -14.6 67.00
-7.85
6.70
65.00
6.50
63.00
6.30
61.00
6.10
59.00
5.90
57.00
5.70
5.50 55.00
Source: SARB and PAIRS
Note: Values within graphs represent depreciation between 1 Dec 2019 and 5 April 2020
Table 1: Foreign Trading on South African Bonds, Apr. 2019 – Apr. 2020
Year to date: Year to date:
Week ended 3 Apr. 2020 Week ended 5 Apr. 2019
Purchases (R 000’s) 441,401,837.33 349,892,980.66
Sales (R 000’s) (499,920,375.94) (327,877,564.89)
Net (Sales) / Purchases (R 000’s) - 58,518,538.61 22,015,415.77
Source: JSE
Note: Standard Nominal Turnover used
While the global economy was still relatively robust quarter of 2020 compared to the first quarter of 2019.
during H2 2019, the South African economy still entered The latest IMF World Economic Outlook forecasts the
a technical recession during the fourth quarter of 2019 global economy to contract by 3% in 2020 because of
as real quarterly GDP contracted by 1.4%, following the fallout from the COVID-19 pandemic. This, together
another negative growth of 0.8% in the third quarter of with South Africa’s pre-existing deep structural issues
2019. During this same period, the world economy was (including inadequate infrastructure), as well as the
still expanding (Q3: 3.1%, Q4: 2.5% (SARB)). Electricity economic impact of the 35-day country lockdown that
supply shortages due to Eskom’s inability to provide has been relatively aggressive, South Africa’s economy
the country with adequate electricity has been the is going to be hit hard in 2020. Growth recovery in 2021
main culprit in South Africa’s muted economy, and this will of course depend on the length of containment
had continued into 2020. In addition to this, the global measures as well as the speed at which economic
economic situation has taken a turn for the worse in activity resumes, and on policy. We forecast GDP growth
2020. to register a contraction of 5.9% in 2020, and a recovery
of 3.2% in 2021. Minister Mboweni recently announced
At the beginning of the year, negative spillovers from that he expects the GDP to contract around 6.5% this
trade partners, especially China, where the pandemic year.
started, were already having a negative impact on the
South African economy. It has already been reported Policy has been swift in dealing with both the health and
that China’s economy shrank by 6.8% in the first economic fallout of the COVID-19 pandemic, but to the
5country’s response is being constrained by the availability On April 23rd President Ramaphosa announced that
of public resources. Numerous fiscal measures have government would be introducing a five-stage risk-
been introduced to assist both businesses, workers and adjusted strategy for resuming economic activity that
vulnerable households (see our March 26th and April would be followed in order to contain the spread of
22nd Reports). The South African government has, the virus. This comprises stages from a hard lockdown
however, been having challenges mobilizing sufficient – stage 5 and the stage that the country is currently
funds for the necessary fiscal stimulus due to years of under (from March 27th to April 30th) to stage 1, which
limited revenue on account of the muted economic will be the least restrictive stage. It has been stated that
growth, and large scale looting of public funds within South Africa will be moving from one stage to another
the SOEs. As such, the government has been looking at depending on the containment outcomes, which means
international financial institutions for assistance (see stage(s) could be skipped, while at the same time it is
our April 14th and 22nd Reports). South Africa is going possible to revert to harder lockdowns. The President
to emerge from this crisis with even higher levels of indicated that the country would move from stage 5 to
debt. At the same time, the South African Reserve Bank stage 4 from May 1st. Stage 4 lockdown as indicated in
has been using numerous tools in its arsenal in tackling Table 2 below will see a somewhat increase in economic
the pandemic’s economic consequences, and this has activity than during stage 5. Finally, the bottom section of
included amongst other measures, 200 bps cuts in the Table 2 provides all the activities that will be prohibited
repo rate and the utilization of open market operations under all the five stages of lockdown.
to increase liquidity in the market (see our March 19th
and April 14th Reports).
Table 2: Risk-adjusted strategy for economic activity
Level 4: Moderate to high virus spread, with moderate readiness
Sectors permitted All essential services, plus:
i. Food retail stores already permitted to be open may sell full line of products within
existing stock
ii. All agriculture (horticulture, export agriculture including wool and wine, floriculture
and horticulture, and related processing)
iii. Forestry, pulp and paper
iv. Mining (open cast mines at 100% capacity, all other mines at 50%)
v. All financial and professional services
vi. Global business services for export markets
vii. Postal and telecommunications services
viii. Fiber optic and IT services
ix. Formal waste recycling (glass, plastic, paper and metal)
Transport Bus services, taxi services, e-hailing and private motor vehicles may operate at all times of
restrictions the day, with limitations on vehicle capacity and stringent hygiene requirements
Movement No inter-provincial movement of people, except for transportation of goods and exceptional
restrictions circumstances (e.g. funerals)
Restrictions that i. Sit-in restaurants and hotels
will remain in place ii. Bars and shebeens
regardless of the iii. Conference and convention centers
level of alert at any iv. Entertainment venues, including cinemas, theatres, and concerts
given time v. Sporting events
vi. Religious, cultural and social gatherings
Source: SA Government
6During the last quarter of 2019, there was a broad- contraction of 4.8% in 2018. Nonetheless, the latest
based contraction in activity across the South African estimates by the Department of Agriculture, Forestry
economy. All three main sectors, the primary sector, the and Fisheries’ (DAFF) crop estimates committee shows
secondary sector and the tertiary sector contracted by that maize production for 2020 is expected to be 31%
0.4%, 2.9% and 1% respectively. more than the 2019 crop. Maize is an important crop
and accounts for nearly two-thirds of the commercial
Agricultural output declined throughout 2019 as it area in field crops according to research by Greyling
recorded negative growth from the first through to and Pardey (2018). This, together with the fact that
the last quarter, recording -7.6% q/q during the fourth agriculture and the food sector value chain have been
quarter. This contraction was mainly the result of declared as essential during South Africa’s lockdown is
weather-related causes, while electricity shortages also likely to lead to the sector not being as hard hit relative
negatively affected those sub-sectors that are irrigation to other sectors of the economy, particularly during H1
reliant and energy intensive. Overall, agriculture 2020. All agriculture activity will be permitted during
contracted by 6.9% in 2019 following another stage 4 lockdown.
Graph 2: Total maize production, 2010 – 2020
Tons
18 000 000
16 000 000
14 000 000
12 000 000
10 000 000
8 000 000
6 000 000
4 000 000
2 000 000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Crop estimates committee, 25 March 2020
Mining production continued its trend of high volatility Manufacturing only grew positively during one quarter
in 2019, and on the whole contracted by 1.9%. in 2019 and recorded an overall growth rate of -0.8%
Production increased by 1.8% q/q during the fourth for the year. During the fourth quarter, the sector’s
quarter following a sharp contraction of 6.1% q/q in contraction slowed to 1.8% q/q from a decline of 4.4%
Q3. The sector was once again negatively affected by q/q during the third quarter. The sector too continued
Eskom’s rolling electricity cuts at the beginning of the to be negatively affected by electricity shortages, while
year. Meanwhile, due to the coronavirus impact globally,
poor domestic demand and low business confidence
demand for commodities started waning, which has
also led to the compromised activity in the sector.
also led to a decline in commodity prices. These would
Nonetheless, available data shows that, on a monthly
have had a negative impact on the sector during the
basis, manufacturing production increased by 2.5% in
first quarter, while the country’s pandemic containment
measures mean that there was a decrease in production January 2020 from a low base of -3% in December 2019.
from end-March and for the whole of April. However, Still, not only was manufacturing purchasing managers’
available high frequency data shows that mining output index (PMI) in the contraction territory throughout the
increased by 6% m/m in January 2020 following a first quarter, it was also the lowest on a quarterly basis
decline of 5.2% m/m in December 2019. Furthermore, since 2009, which suggests production was contained
more mining activity will be permitted from May 1st as during the quarter.
stage 4 lockdown commences.
1. Greyling J. C. and Pardey P.G., ‘Measuring Maize in South Africa: The Shifting Structure of Production During the Twentieth Century, 1904–2015’, Agrekon,
Volume 58, 2019 - Issue 1
7Graph 3: Purchasing managers’ index, Jan 2005 – Mar 2020
60.0
55.0
50.0
45.0
40.0
35.0
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-08
Oct-08
Mar-09
Aug-09
Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
Feb-12
Jul-12
Dec-12
May-13
Oct-13
Mar-14
Aug-14
Jan-15
Jun-15
Nov-15
Apr-16
Sep-16
Feb-17
Jul-17
Dec-17
May-18
Oct-18
Mar-19
Aug-19
Jan-20
Source: BER and PAIRS
It is worth noting that Statistics South Africa has made it its trend of positive quarterly growth since the great
known that due to the ongoing country lockdown owing recession. However, with many households and
to the coronavirus pandemic, the entity’s ability to businesses coming under immense financial strain, it is
publish some official statistics will be impaired. It is for going to have negative effect on their ability to honor
this reason that the February mining and manufacturing debts, and the nature of the current crisis bound to
monthly data, that are usually available by this time, negatively affect the property market amongst others.
have not been released. Therefore, it is highly likely that the great lockdown too
will have a substantially negative impact on the financial
South Africa’s biggest sector - finance, real estate and
sector. The tourism and hospitality sectors have also
business services, which made up 20% of the economy
been some of the hardest hit sectors. This is particularly
in Q4 2019, was once again one of the few sectors that
consequential for the country given that these sectors
registered positive growth rates over the fourth quarter
are also the most labour-intensive activities.
with 2.7% q/q. This means that the sector continued
8Graph 4: Real GDP growth by industry, annual (2019) and quarterly (Q4 2019)
Personal services
Government
Finance
Transport
Trade
Construction
Utilities
Manufacturing
Mining
Agriculture
-10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0
2019 Q4 2019
Source: Stats S A and PAIRS
Overall, domestic demand only increased by 0.8% in The decline in gross fixed capital formation followed
2019 as subdued economic conditions continued to take two consecutive quarters of positive growth, but the
their toll on both consumers and businesses. Demand subdued business confidence in the country, particularly
contracted by 1.2% q/q during the fourth quarter of on account of inadequate electricity supply continued
2019 following an increase of 1.2% in the third quarter. its detrimental effect in the last quarter of 2019. The
Final consumption expenditure by households increased electricity supply issues, together with low domestic
by 1.4% q/q in the fourth quarter from 0.3% during the demand, the bailouts of the country’s ailing state owned
third quarter. Available high frequency data shows that enterprises (SOEs), and the spreading of the coronavirus
retail sales increased by 0.9% m/m in January 2020 around globally led to a further deterioration of
following a contraction of 3.2% m/m in December 2019, business confidence into 2020. The Bureau of Economic
while vehicle sales went up by 1.3% m/m in January Research (BER) shows that its business confidence index
2020 after they contracted by 0.4% m/m in December reached a 21-year low during the first quarter of 2020
2019. Although the country lockdown means that we as it declined by 8 points to 18 index points.
do not have access to February metrices for these
Already, a business survey report on the impact of
variables, the January 2020 figures at least suggest
the pandemic released by Statistics South Africa
household consumption started out well in 2020.
on April 21st shows that businesses have already
On the other hand, final consumption expenditure by been profoundly affected. It indicates that 85.4% of
government declined by 0.2% q/q while gross fixed responding businesses had turnover that was lower
capital formation contracted by a steep 10% q/q. than their normal range (see Graph 6).
1. Statistics South Africa, ‘Business impact survey of the COVID-19 pandemic in South Africa’, Report-00-80-01, April 2020, Pretoria, South Africa.
9Graph 5: Business confidence index, Q1 2000 – Q1 2020
90
80
70
60
50
40
30
20
10
0
2000 Q1
2000 Q3
2001 Q1
2001 Q3
2002 Q1
2002 Q3
2003 Q1
2003 Q3
2004 Q1
2004 Q3
2005 Q1
2005 Q3
2006 Q1
2006 Q3
2007 Q1
2007 Q3
2008 Q1
2008 Q3
2009 Q1
2009 Q3
2010 Q1
2010 Q3
2011 Q1
2011 Q3
2012 Q1
2012 Q3
2013 Q1
2013 Q3
2014 Q1
2014 Q3
2015 Q1
2015 Q3
2016 Q1
2016 Q3
2017 Q1
2017 Q3
2018 Q1
2018 Q3
2019 Q1
2019 Q3
2020 Q1
Source: BER and PAIRS
Graph 6: Impact of COVID-19 on business turnover
Turnover was below 85,4%
the normal range
Turnover was above
1,3%
the normal range
Turnover was within 13,3%
the normal range
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Source: Stats SA
South Africa’s chronic unemployment shows no signs struggling and this is going to result in thousands losing
of declining. It has been on an upward trend since the their jobs.
great recession and increased from 27.1% in 2018 to a
The Statistics South Africa business survey report
staggering 28.7% in 2019. With the COVID-19 induced
shows that 36.8% reported that their workforce size is
economic crisis having led the South African government
expected to decrease in the two weeks after the survey,
to put the country on an initial 35-day lockdown, and
see Graph 8.
with many restrictions bound to remain in place post-
lockdown, many South African businesses are already
10Graph 7: Unemployment rate, 2008 – 2020
30
29
28
27
26
25
24
23
22
21
20
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Stats and PAIRS
Graph 8: Expected changes to workforce size in the two weeks after the reference period
60%
50.4%
50%
36.8%
40%
30%
20%
12.4%
10%
0.4%
0%
Expect workforce Expect workforce Expect workforce Not sure
size to increase size to decrease size to stay the same
Source: Stats SA
11PRICES, INTEREST RATES AND EXCHANGE RATES
South Africa’s consumers inflation went down from With the intensification of the COVID-19 pandemic, the
4.6% y/y in February 2020 to 4.1% y/y in March. South African Reserve Bank cut the benchmark interest
Domestic demand was still quite muted, leading to the rate by 100 bps during the Monetary Policy Committee’s
moderation in inflation. At the same time, transport (MPC) end-March meeting, and by another 100 bps
inflation decelerated markedly from 6.2% y/y in February during a previously unscheduled meeting during mid-
to 3.4% y/y in March, and this was driven largely by the April. All together this brought interest rate cuts to
drastic fall in oil prices that led to the decrease in fuel tackle the COVID-19 economic fallout to 200 bps and
prices despite the weakening rand. Fuel price inflation 225 bps since the beginning of 2020.
went down from 12.7% y/y in February 2020 to 5.5%
y/y in March.
Graph 9: CPI and core inflation, Jan 2019 – Mar 2020
6
5
4
3
%
2
1
0
-1
2019 Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2020 Jan
Feb
Mar
CPI (m/m) CPI (y/y) Core Inflation (y/y) Inflation Targeting Band
Source: Stats SA and PAIRS
The depressed oil prices are expected to keep exerting COVID-19 pandemic as illustrated in Graphs 1 and 10.
downward pressure on South Africa’s inflation. The other From the beginning of March 2020 to April 24th the rand
significant downside risk to the inflation is domestic has depreciated by approximately 18.6% against the US
demand that was already weak before the country dollar, by 15.4% against the British Pound and by 16.1%
lockdown on account of COVID-19. All businesses with against the Euro. Although most developed economies’
the exception of ‘essential services’ (and those that central banks have already lowered their interest rates
could have employees work from home) have been to near zero, the fact that South Africa’s interest rates
closed during the initial ‘hard’ lockdown spanning 35 are still somewhat higher than the developed countries’
days. Furthermore, the somewhat eased lockdown to interest rates has not really boosted the rand through
commence on May 1st will still leave the majority of inflows of capital in search for yield as outlined earlier
businesses closed. As such, this will have a significantly because of increased risk aversion. This is particularly
negative impact on overall demand, while ongoing job the case since South Africa’s credit has been junk
losses mean consumers will have less money to spend, graded. We expect the rand to remain weak and volatile
and all these will have a dampening effect on consumer for the whole of 2020. Furthermore, we also expect
inflation. the Reserve Bank to cut interest rates again during the
MPC’s end-May meeting.
The South African exchange rate has weakened
substantially due to the economic effects of the
12Graph 10: The South African exchange rate, Jun 2019 – Apr 2020
22
21
20
19
18
17
16
15
14
13
2019-06-03
2019-06-10
2019-06-18
2019-06-25
2019-07-02
2019-07-09
2019-07-16
2019-07-23
2019-07-30
2019-08-06
2019-08-14
2019-08-21
2019-08-28
2019-09-04
2019-09-11
2019-09-18
2019-09-26
2019-10-03
2019-10-10
2019-10-17
2019-10-24
2019-10-31
2019-11-07
2019-11-14
2019-11-21
2019-11-28
2019-12-05
2019-12-12
2019-12-20
2019-12-31
2020-01-08
2020-01-15
2020-01-22
2020-01-29
2020-02-05
2020-02-12
2020-02-19
2020-02-26
2020-03-04
2020-03-11
2020-03-18
2020-03-25
2020-04-01
2020-04-08
2020-04-17
2020-04-24
R/$ R/£ R/€
Source: Stats SA and PAIRS
FISCAL AND EXTERNAL ACCOUNTS
The Fiscus 10% of GDP and debt to escalate even further than the
65.6% of GDP that was forecasted in Budget 2020.
The South African budget is deviating substantially
from the Budget Speech as presented at the beginning Graph 11 not only shows that growth in government
of the year in February. For one, President Ramaphosa revenue is highly correlated to GDP growth, but it also
and Finance Minister Tito Mboweni have indicated that shows that as during the previous global recession,
in order to finance some of the measures in the fight the decline in revenue can be even steeper than the
against the health, social and economic fallout from the fall in GDP. The Graph also shows that South Africa’s
COVID-19 pandemic, government would reprioritize government revenue is also more volatile. South
R130 billion from the current budget. What this means Africa’s economy contracted by 1.5% in 2009 as a result
is that some of the R500 billion stimulus package will of the great recession. During this period, government
be sourced from international finance institutions and revenue declined by 3.5%. The revenue forecasts during
other global partners (R200 billion will be in the form of February Budget 2020 was based on the economy
a loan facility to businesses that will be in partnership growing by 0.9% in 2020, but now the economy is
with major banks). expected to experience a contraction, which is going to
have a severely negative impact on the fiscus.
For now, plans of fiscal consolidation have clearly been
halted. The need for increased government expenditure Already, data released by South African Revenue
to fight the COVID-19 fallout, together with the Service at the beginning of April shows that the entity
inevitable steep decline in government revenue due collected R1 355.9 billion in the financial year ending 31
to the weakened economic activity that we expect to March 2020 (NB: these are preliminary results and will
culminate in a recession, are going to leave government be subject to reconciliation and auditing). This amount
finances worse off. Meanwhile, the funds to be represents a deficit of R66.3 billion (-4.7%) relative to
borrowed are going to add to the country’s mounting the 2019 Budget estimate of R1 422.2 billion, and a
debt burden. Budget 2020 released in February already deficit of R3.1 billion (-0.2%) against the 2020 Budget
showcased a weak fiscus, and as we have indicated estimate of R1 359.0 billion. See Table 3.
before, we now expect government deficit to exceed
13Graph 11: Growth in total national government revenue and GDP growth, 2000 – 2019
25
20
15
10
5
0
-5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
% change in government revenue GDP growth
Source: SARB and PAIRS
Table 3: Revenue collections 2019/20 against Revised Budget 2020 Estimate
Actual Budget MTBPS
R’m 2019/20 2020
Var Var%
2019
Var Var% Budget Var Var%
Personal Income Tax 528 910 529 309 -399 -0.1% 529 169 -259 0.0% 554 807 -25 897 -4.7%
Corporate Income Tax 214 655 219 229 -4 575 -2.1% 221 282 -6 628 -3.0% 232 940 -18 285 -7.8%
Dividends Tax/STC 28 286 29 144 -858 -2.9% 32 012 -3 726 -11.6% 31 893 -3 606 · 11.3%
Value-added Tax 346 565 344 202 2 363 0.7% 348 388 -1 822 -0.5% 360 471 -13 906 -3.9%
Domestic VAT 399 488 399 433 55 0.0% 399 191 297 0.1% 406 210 - 6 722 -1.7%
Import VAT 179 572 182 666 -3 094 -1.7% 190 449 -10 877 -5.7% 187 422 -7 849 -4.2%
VAT Refunds - 232 495 -237 897 5 402 -2.3% -241 253 8 758 -3.6% -233 161 666 -0.3%
Specific Excise Duties 46 818 46 765 53 0.1% 46 511 307 0.7% 42 354 4 464 10.5%
Fuel Levy 80 203 79 277 925 1.2% 78 354 1 848 2.4% 82 958 -2 755 -3.3%
Customs Duties 55 417 56 325 -908 -1.6% 58 365 -2 948 -5.1% 60 029 -4 612 -7.7%
Other taxes 55 018 54 683 335 0.6% 55 597 -579 -1.0% 56 757 -1 739 -3.1%
Total Tax Revenue (Cash) 1 355 871 1 358 935 -3 063 -0.2% 1 369 678 -13 807 -1.0% 1 422 208 -66 337 -4.7%
Source: SARS
14On the other hand, Moody’s taking away South Africa’s government debt denominated in foreign currencies
last remaining investment grade rating in March 2020 has become more expensive. The country’s total foreign
is going to make the country’s borrowing more costly. debt of national government denominated in foreign
What’s more, the substantial weakening of the South currencies increased by over 250% from 2010 to 2019
African exchange rate (see Graphs 1 and 10) means that as demonstrated in Graph 12.
Graph 12: Total foreign debt of national government denominated in foreign currencies
350000
300000
250000
200000
150000
100000
50000
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Source: SARB and PAIRS
Note: fiscal years
EXTERNAL ACCOUNTS
The South African current account deficit narrowed sig- higher production in some mines as well as higher pric-
nificantly from R188 billion in the third quarter of 2019 es, particularly of palladium and rhodium.
to R68.1 billion in the fourth quarter. This translated into
a narrowing of the current account as a percentage of Overall, the rand price of merchandise exports went up
GDP from 3.7% in the third quarter to 1.3% in the fourth by 0.4% in the fourth quarter, therefore South Africa’s
quarter. The current account deficit as a percentage of terms of trade improved as the rand price of merchan-
GDP also narrowed from 3.5% in 2018 to 3% in 2019. dise imports declined. Furthermore, in US dollar terms,
the price of a basket of South African produced non-gold
During the fourth quarter, the narrowing of the current export commodities recovered to record an increase of
account deficit came on the back of the South African 3.7% in the fourth quarter following declines in three
trade surplus more than doubling from R44 billion in consecutive quarters.
the third quarter to R102 billion in the fourth quarter
of 2019. This was due to a decline in the value of mer- The deficit on the services, income and current trans-
chandise imports, while the value of merchandise ex- fer account also experienced a significant narrowing in
ports and net gold exports increased. Still, the value of the fourth quarter, going from R232 billion in the third
merchandise exports only increased marginally by 0.1% quarter to R171 billion in the fourth quarter. This was
in the fourth quarter following an increase of 2% in the largely driven by a significantly smaller deficit in the in-
third quarter. This was on account of both manufactur- come account that was the result of a large decline in
ing and agricultural exports that contracted, while non- gross dividend payments. Overall, gross dividend pay-
gold mining exports increased despite electricity short- ments decreased marginally by 0.5% in 2019 as a whole
ages during the period. The increase was largely driven because of the subdued domestic economy.
by platinum group metals (PGMs) that were boosted by
15Graph 13: Balance of Payments: trade balance (R millions) and current account deficit as % of GDP, Q1 2010 – Q4 2019
150000 0
-1
100000
-2
50000
-3
0 -4
-5
-50000
-6
-100000
-7
-150000 -8
i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Trade balance (LHS) Currrent account balance as a % of GDP
Source: SARB and PAIRS
Monthly trade statistics show that South Africa’s trade account recorded a deficit of R2.7 billion in January 2020,
which was expected due to the seasonal deficit that is normally recorded during the month. Still, the deficit was much
smaller than those recorded in the preceding two years (January 2018: R27 billion deficit, January 2019: R13 billion
deficit). The trade account rebounded with a strong surplus of R14.2 billion in February 2020. The trade balance is
likely to have registered another
surplus in March 2020. For one, the account has done so consecutively for the past four years. Moreover, domestic
demand remains muted, which is negatively affecting imports, while the weakened price of oil will lead to a lower
import bill for South Africa. As such, and should the deficit on the services, income and current transfer account not
widen (significantly), we expect South Africa’s current account to have narrowed even further in the first quarter of
2020, which should somewhat benefit the rand.
FORECAST TABLE
Variable Unit 2018 2019 2020f 2021f
Population Million 57.7 58.8 59.9 61.1
Real GDP Per cent, growth 0.8 0.2 -5.9 3.2
Unemployment Per cent of labour force 27.1 28.7 30.8 31.2
Headline Inflation Per cent (avg) 4.7 4.1 4.1 4.7
Repurchase (repo) rate Per cent (avg) 6.6 6.6 4.3 3.8
Current Account Deficit Per cent of GDP 3.5 3.0 2.4 2.7
National Government Deficit Per cent of GDP 3.9 6.3 10.9 8.1
Source: PAIRS, SARB, Stats SA
Note: “avg”: average
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but no guarantee is made that such information is accurate or complete. All estimates and opinions included in this
report constitute our judgements as of the date of this report. Analysis, statistics and opinions contained in the report
are published for the assistance of recipients, but by no means should be taken as a substitute for the exercise of
judgement by any recipient. Clearly, they are subject to change without notice. Pan-African Investment and research
Services (Pty) Ltd. does not accept any liability whatsoever for any direct or consequential loss arising from any use
of material contained in this report. This report is for the use of intended recipients and may not be reproduced [in
whole or in part] or delivered or transmitted to any other person without the prior written consent of Pan-African
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17CONTACT DETAILS
1st Floor, Summit Square 15 School Road Morningside, Sandton 2196, South Africa
Postnet Suite #42 Private Bag X51 Rivonia 2128
T: +27 11 883 1381
E: enquiries@pan-africanresearch.co.za
www.pan-africanresearch.co.za
DISCLAIMER
The information and opinions contained in this report have been obtained from public sources believed to be reliable,
but no guarantee is made that such information is accurate or complete. All estimates and opinions included in this
report constitute our judgements as of the date of this report. Analysis, statistics and opinions contained in the report
are published for the assistance of recipients, but by no means should be taken as a substitute for the exercise of
judgement by any recipient. Clearly, they are subject to change without notice. Pan-African Investment and research
Services (Pty) Ltd. does not accept any liability whatsoever for any direct or consequential loss arising from any use
of material contained in this report. This report is for the use of intended recipients and may not be reproduced [in
whole or in part] or delivered or transmitted to any other person without the prior written consent of Pan-African
Investment and Research Services (Pty) Ltd.
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