Nomura's 2017 outlook for SA: The risk narrative

PUBLISHED: Fri, 06 Jan 2017 11:05:11 GMT

2017 outlook: We expect the marked divergence to continue between what asset prices can do and what goes on in terms of macroeconomics, risk events and politics. Put simply, we expect some recovery in headline real GDP growth, albeit still shrinking per capita income growth, with the ANC elective conference dominating throughout the year to December. However, with South Africa looking somewhat better than peers such as Turkey, we believe asset prices and ZAR especially can do ‘ok’ until potential downgrades come – the timing of which remains uncertain, if still on the horizon.

Forecast overview

Are we bullish or bearish for 2017? This is a difficult question. We are only marginally below consensus forecasts for the coming two years on growth (though below official estimates marginally); we are roughly in line with them on CPI inflation (though above the SARB). That might be described as fairly neutral.

However, in 2016 the market appeared to define a narrative of “off the bottom” as being positive because we have passed the worst of the height of the Nene-gate impact on the economy. We think this is true – and the economy showed its resilience by not going into recession in 2016 despite all the political negativity – as we forecast a year ago. We think in 2017 the key investor question will be “what are the drivers of growth?” We think the answer is likely to be a very loud in 2017: “not much at all”. Indeed, in 2017 we believe the market will become more disappointed about the reforms already proposed and the lack of meaningful new ones forthcoming. Political constraints on government in this area may become more obvious as growth remains low in absolute terms and vs peers and as unemployment grinds higher as the level of employment grows far too slowly to absorb the bulging labour force. The negative effects of a national minimum wage should start to appear, although in our opinion, these will only become evident in the years after as data and studies emerge. Overall, we think negative per capita income growth and negative TFP growth will be the ‘low lights’ of the year in data terms. Looking at it in this way, we are not off the bottom and real incomes are still falling. The market should be more sceptical of official spin on such matters in 2017.

READ:South Africa’s 2016 risk report, forecast update – CNBC Africa

We expect politics to remain very noisy, but the market has largely become bored of attempting to follow the intricacies of the ANC’s internal machinations. We think the markets will still overplay the tail risk of Zumxit, even though this seems highly unlikely before the December elective conference. In our opinion, internal compromises keeping Jacob Zuma in office after the November ANC NEC meeting will prevent PGxit; however, we believe there is a meaningful (if difficult to pin down) likelihood of a wider reshuffle that could shock the market.

South Africa however is not as dramatic a risk case at all vs peers and especially Turkey for 2016. Hence, we see South Africa outperforming Turkey at least in H1 2017 or longer if the TCMB’s credibility does not recover. If Turkey overcomes its current obstacle to the executive Presidency by mid-year this should allow the market to focus more on South Africa politics in the region in H2 in the run-up to the ANC elective conference in December.

Broadly, we see more of a magnified focus on EM under a Trump Presidency with the prospect of higher US policy rates and a stronger USD, which should weigh on South Africa as a dual-deficit country, albeit maybe less so than some of its peers. We see little meaningful upside of US policy on US growth in 2017 and hence are unable to be over-enthusiastic about it and the positive effects on South Africa, especially with a weaker Asia and prospects of US protectionism. The real unknown for 2017 is if South Africa’s yield offering – which since the US elections has provided adequate compensation – will still be protective enough. We think the curve may have to steepen somewhat, but again can outperform peers.

Ratings again will be an important factor wrapping together medium run growth and fiscal risks as well as the noise from parastatals. Indeed the ebb and flow of events around Eskom, particularly with regard to the issues of contingent liabilities and its nuclear build programme will dominate again.

In summary, with inflation likely to move lower (but less dramatically than expected by the market previously), growth grinding slightly higher and the labour market stabilising at a (very) weak level, 2017 might be described as ‘ok’, but from a developmental and inequality perspective will not be positive and result in another challenging year.

Risk timeline

Putting all this together we see several broad sweeps of risk narrative:

Political from President Zuma consolidating at the8 JanuaryANC anniversary celebrations through to the elective conference at thestartofDecembervia the endJune/start JulyANC policy and consultative conference. The9 FebruaryState of the Nation Address from President Zuma, as in previous years, will be an important marker. We then see reshuffle risk throughend Januaryand start February. We also need to keep a continual watch on ANC splits within parliament.

A fiscal and ratings narrative arch encompassing the Budget expected in thelast week of February, ratings updates to come betweenApril and June(in a longer period than 2016 which saw the agencies more tightly bunched), the MTBPS in thelast week of Octoberand then further ratings updates atend November and start December.

We see growth broadly constant through the year in y-o-y terms after a step-up in Q1 data out inMarch. Inflation should fall from a December peak (and rebase and reweight published) inJanuarythrough to a bottom in June data out inJulyand then a rise back up to the top end of the SARB’s target.

We believe the SARB will be steady but hawkish throughout the year, ready to act on a weaker ZAR, higher inflation expectations or an unanchoring of the long end of the inflation forecast.

Much of the event risk is hard to put on the calendar. For example, the raft of court cases against state institutions and political leadership by opposition parties and the Zuma 783 corruption charge appeals procedure. These narratives will grind on in the background with some regularity.  

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