South Africa Year in Review 2015

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South Africa has a host of appealing competitive advantages. It remains the continent’s second-largest economy – benefitting from a large manufacturing base, more than $2.5trn worth of metal and mineral deposits, and one of the most robust financial sectors in the world – and also boasts strong investment and trade ties with a range of key emerging and advanced economies.

However, it has had to navigate a tricky 2015: falling commodity prices, high unemployment and a weaker rand made for a difficult year for South Africa, leaving a degree of uncertainty over the country’s 2016 outlook.

Change at the top

This was made visible in early December, during a bout of reshuffling at the top of the Ministry of Treasury. President Jacob Zuma removed former minister of finance Nhlanhla Nene, who was initially replaced by David van Rooyen, before Pravin Gordhan, who held the portfolio for five years previously, was handed the reins.

The move impacted the markets, temporarily driving up 10-year bond yields by a full percentage point and putting downward pressure on the rand, although it has since stabilised following Gordhan’s reinstalment.

Recent credit ratings action has seemed to echo market sentiment. In early December Fitch lowered the country’s sovereign credit rating to “BBB-”, citing looser fiscal policy and a failure to stabilise the debt-to-GDP ratio. Standard & Poor’s also revised its forecast for South Africa at the beginning of the month, lowering its outlook to negative.

Modest growth, weaker rand

However, the country is still poised to grow over the next 12 months, and at a faster rate than many advanced economies. South Africa’s economy is expected to expand by 1.4% in 2015, according to the IMF, higher than France and Italy, although behind that of other major emerging markets.

Growth has been more modest in recent years due to external pressures, including declines in commodity prices and global demand, and the continued fallout of the slowing Chinese economy.

In its effort to encourage growth and help buffer against inflation, the South African Reserve Bank (SARB) raised interest rates twice this year, lifting its benchmark rate by 25 basis points in both July and November. A similar move ­– which would bring interest rates to 6.5% – is expected in the first quarter of 2016, likely aimed at countering the effect of the recently announced rate hike by the US Federal Reserve.

Inflation remains within the SARB’s target band, at 4.8% in November, with consumer prices up 0.1% month-on-month to their highest level since July. The SARB has managed to effectively keep a lid on price rises, despite the steady depreciation of the rand, which hit record lows in mid-December – a reaction in part to the strengthening US dollar.

Sector performance

While there are a number of bright spots in the economy, some sectors face a more difficult outlook over the next 12 months.

Segments of the manufacturing sector, which accounts for around 13% of the country’s GDP, are expected to post stronger performance in 2016. The automotive industry, which stands as the largest contributor to manufacturing output, has proven particularly resilient to external headwinds, generating some R115.7bn ($7.6bn) in export earnings in 2014.

The industry, which accounts for two-thirds of total African production, is also set to benefit from the R6.9bn ($454.1m) worth of investments made by original equipment manufacturers in 2014. Exports in particular are set to increase, made more competitive by the weaker rand. According to estimates from the National Association of Automobile Manufacturers of South Africa, the country is on track to export a record 325,000 units by the end of 2015.

Agriculture, however, is poised for a more difficult year, as the country suffers its worst drought in 30 years. Low levels of rainfall caused by the El Niño weather pattern have seen harvests of key crops such as maize plummet by roughly one-third.

As a result, South Africa – typically a net exporter of maize – has been forced to import almost 1m tonnes to cover supply shortages. This season’s harvest is expected to fall from a record high of 14.25m tonnes in 2014/15 to 9.94m.

South Africa’s mining sector also faced an uphill battle in 2015, with prices for key commodities down and production stymied by labour strikes and power shortages. In mid-December one of the country’s largest miners, Anglo American, announced plans to eliminate more than 50% of its staff and sell off non-core assets in an effort to stem the double-digit decline in its share price.

Energy boost

However, some of those issues should be resolved in the coming years. The energy sector, for example, is expected to get a sizeable boost as a host of new renewable energy projects come online.

In April 2015 the minister of energy, Tina Joemat-Pettersson, announced 13 winning bids for the fourth round of the Renewable Energy Independent Power Producer Procurement programme. The programme was established in 2011 to combat load shedding, diversify the energy mix, curb emissions and encourage greater private participation in the sector.

Including the fourth round awards, 5423 MW of projects have been approved in the last four years, resulting in $12.5bn worth of private investment. According to Khulu Phasiwe, spokesperson for state-owned utility company Eskom, as of September 2015 the company had concluded power purchase agreements with 30 renewable independent power producers, accounting for 32 projects and up to 1.9 GW of new capacity.

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