Investment hopes & dreams in SA, rand in the line of fire - Capital Economics
Africa Economics

Investment hopes & dreams in SA, rand in the line of fire

Africa Economics Weekly
Written by Virag Forizs
South Africa’s push to increase public investment, outlined in the 2021 budget speech, is likely to prove to be a damp squib. Meanwhile, the rand took a beating in recent days amidst a rout in global financial markets, but we doubt that this would prompt the Reserve Bank to tighten monetary policy.

South Africa: reading behind budget lines

Finance Minister Tito Mboweni appears to have put rose-tinted glasses on when he delivered South Africa’s budget this week.

We noted that, despite repeatedly claiming that the 2021 blueprint was not an austerity budget, Mr. Mboweni largely stuck to the government’s previously-outlined fiscal consolidation path. The case against putting the “austerity-label” on the budget seemed to rest, at least partly, on the notion that capital investments will be the government’s fastest growing expenditure in the coming years.

A boost to investment is certainly needed. The government’s capital expenditure fell for four consecutive years both in absolute terms and as a share of GDP until a pick-up in the current fiscal year. (See Chart 1.) Persistent power cuts due in part to underinvestment at state-owned utility Eskom, are just one example of the economy already suffering from the repercussions of low investment. By 2040, the Global Infrastructure Hub estimates that South Africa’s investment gap – that is, the extra investment needed for infrastructure to be of comparable quality to that in similarly-developed economies – will exceed $150bn (42% of GDP).

Chart 1: Capital Expenditure

Source: South Africa National Treasury, Refinitv, Capital Economics

However, even with the increase in capital expenditure outlined in the 2021/22 budget, public investment will remain relatively low as a share of GDP, at around 1.6%. In comparison, debt servicing costs, projected to reach 5.6% of GDP in 2024, are much larger. What’s more, as Chart 2 highlights, the government has a poor track record in sticking to plans for capital expenditure. Indeed, since 2015/16, capital spending has undershot the government’s projections by an average of 25%.

Chart 2: Capital Expenditure (ZAR bn)

Source: South Africa National Treasury, Refinitv, Capital Economics

The upshot is that South Africa will probably have to rely on the private sector to plug its large investment gap. Pro-business reforms featured heavily in the budget, but will probably take a while to materialise (if at all). Until then, the economic pain due to underinvestment is likely to mount.

Bond market fallout drags down SA rand

The South African rand took a beating in recent days amidst a rout in global financial markets, but we doubt that this will push the Reserve Bank to tighten policy. As a highly liquid currency prone to swings in risk sentiment towards emerging markets, the rand has been among the hardest over the past week, plunging by 2.8%. But we don’t expect the fallout from here to be large. Global risk appetite will probably improve and South Africa’s current account that swung into a large surplus (of 5.9% of GDP) last year will support the rand. And low inflation will allow policymakers at the Reserve Bank to look through the weakness in the currency.

The week ahead

The highlights will be February’s PMI and January’s electricity production data from South Africa.

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Median*

CE Forecasts*

1st March

SA

Absa Manufacturing PMI (Feb.)

(09.00)

50.9

50.8

3rd March

Ken

Markit/Stanbic Bank PMI (Feb.)

(07.30)

53.2

52.0

4th March

SA

Electricity Production (Jan.)

(11.00)

(+1.1%)

5th March

Mau

CPI (Feb.)

(+1.0%)

(+1.3%)

Nga

Trade Balance (Q4, NGN)

-2,389bn

Selected future data releases and events

8th March

Tan

CPI (Feb.)

(+3.5%)

9th March

SA

GDP (Q4, q/q saar (y/y))

(09.30)

+66.1%(-6.0%)

10th March

Gha

CPI (Feb.)

(+9.9%)

11th March

SA

Current Account (Q4, ZAR)

(09.00)

+297bn

SA

Mining Production (Jan.)

(09.30)

+0.5%(+0.1%)

15th March

Nam

CPI (Feb.)

(+2.7%)

Bot

CPI (Feb.)

(+2.3%)

16th March

Nga

CPI (Feb.)

(+16.5%)

17th March

Moz

Interest Rate Announcement

16.25%

22nd March

Gha

Interest Rate Announcement

14.50%

23rd March

Nga

Interest Rate Announcement

11.50%

24th March

Gha

GDP (Q1, q/q(y/y))

(-1.1%)

SA

CPI (Feb.)

(08.00)

+0.3%(+3.2%)

25th March

Zam

CPI (Mar.)

SA

Interest Rate Announcement

3.50%

Also expected during this period: March

7th – 14th

SA

SACCI Business Confidence (Feb.)

94.5

9th – 20th

Ken

GDP (Q4, q/q(y/y))

(-1.1%)

10th – 17th

Nam

GDP (Q4, q/q(y/y))

(-10.5%)

11th – 18th

SA

Manufacturing Production (Jan.)

-0.1%(+1.8%)

11th – 18th

SA

Retail Sales (Jan.)

-0.8%(-1.3%)

14th – 21st

Uga

GDP (Q4, q/q(y/y))

(-2.2%)

15th – 26th

Mau

Interest Rate Announcement

1.85%

15th – 29th

Nga

Current Account (Q4, USD)

-3.3bn

16th – 27th

Ang

CPI (Feb.)

(+25.3%)

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

Table 1: GDP & Consumer Prices (% y/y)

Share of

World 1

2009-18

Ave.

GDP

Inflation

2019

2020e

2021f

2022f

2019

2020e

2021f

2022f

Nigeria

0.80

4.4

2.2

-2.0

3.5

3.0

11.4

13.2

15.0

13.0

South Africa

0.57

1.5

0.2

-7.3

4.3

4.0

4.1

3.3

3.8

3.3

Ethiopia2

0.20

9.7

9.0

6.1

3.0

9.0

15.7

20.4

14.5

12.5

Kenya

0.18

5.6

5.4

-0.5

6.0

6.5

5.2

5.3

5.5

5.0

Angola

0.17

2.4

-0.9

-5.0

3.5

2.5

17.1

22.2

21.0

16.0

Ghana

0.13

7.0

6.5

0.5

5.5

6.5

8.7

10.0

9.0

8.5

Tanzania

0.12

6.5

5.8

1.5

6.5

6.5

3.4

3.3

3.0

4.5

Côte d’Ivoire

0.10

6.1

6.5

2.5

7.5

7.5

0.8

2.5

0.5

1.0

Uganda

0.08

5.3

6.7

-1.5

7.0

6.0

2.9

3.8

4.0

5.5

Zambia

0.05

5.6

1.4

-2.5

3.0

4.0

9.1

15.7

16.5

10.0

Botswana

0.03

3.7

3.0

-10.5

8.5

5.5

2.8

2.0

3.5

3.0

Mozambique

0.03

3.7

2.3

-0.5

4.0

4.5

2.8

3.0

3.0

3.5

Rwanda

0.02

7.2

9.4

-3.5

11.5

11.0

2.4

7.8

3.0

4.5

Mauritius

0.02

3.7

3.0

-15.0

12.5

6.5

0.4

2.5

3.0

3.0

Namibia

0.02

3.4

-1.0

-7.5

6.0

5.0

3.7

2.5

3.5

3.5

Sub-Saharan Africa

2.5

4.2

3.1

-2.4

4.6

4.8

8.3

9.7

9.8

8.5

Sources: Refinitiv, National Sources, Capital Economics. 1) % of GDP, 2019, PPP terms (IMF estimates); 2) Fiscal Years.

Table 2: Central Bank Policy Rates

Policy Rate

Latest

(26th Feb.)

Last Change

Next Change

Forecasts

End
2021

End

2022

Nigeria

MPR

11.50

Down 100bp (Sep. ’20)

Down 100bp (Q2 ’21)

10.00

10.00

South Africa

Repo Rate

3.50

Down 25bp (Jul. ’20)

None on horizon

3.50

3.50

Angola

BNA Rate

15.50

Down 25bp (May ’19)

Down 100bp (Q4 ’21)

14.50

13.00

Kenya

Central Bank Rate

7.00

Down 25bp (Apr. ’20)

None on horizon

7.00

7.00

Ghana

Policy Rate

14.50

Down 150bp (Mar. ‘20)

Down 100bp (Q2 ’21)

13.50

13.50

Uganda

Central Bank Rate

7.00

Down 100bp (Jun. ’20)

None on horizon

7.00

7.00

Sources: National Sources, Capital Economics

Table 3: Key Market Forecasts

Forecasts

Forecasts

Currency

Latest
(26th Feb.)

End

2021

End

2022

Stock Market

Latest

(26th Feb.)

End
2021

End

2022

Nigeria

NGN (Official)

381

400

400

NGSE

39,800

49,000

55,000

NGN (Nafex)

410

425

425

South Africa

ZAR

15.2

14.5

15.0

JALSH

66,138

75,650

91,550

Angola

AOA

631

700

750

Kenya

KES

110

115

120

NSE 20

1,916

2,250

2,650

Ghana

GHS

5.73

5.90

6.00

GSECI

2,198

2,400

2,800

Uganda

UGX

3,660

3,850

3,950

UGSE

1,352

1,500

1,700

Sources: Refinitiv, Capital Economics


Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com