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JOHANNESBURG — South Africans were in for a shock on Tuesday as Stats SA revealed that the country’s GDP for the first quarter of 2018 contracted by 2.2%. Economists and analysts were already forecasting a negative result, but the extent of the number has jolted many. However, the figure may not be surprising when considering that it occurred in a quarter in which Jacob Zuma finally departed from power. His resignation on February 14, 2018, marked the exact halfway point in the first quarter (the 45th day in a 90 day period). Here’s hoping that this will be final bad medicine South Africa would have tasted from his time in office. Ramaphosa, meanwhile, has a mammoth task ahead of him. – Gareth van Zyl
S. Africa economy shrank most in nine years as Zuma era crumbled
(Bloomberg) — South Africa’s economy shrank the most in nearly a decade as Jacob Zuma handed the reins of power to Cyril Ramaphosa, racking up the worst performance of the former president’s tenure.
Output slumped at mines, factories and farms in the first quarter, with overall gross domestic product dropped by an annualized 2.2 percent compared with the prior three months, Statistics South Africa said on Tuesday in the capital, Pretoria. That’s the biggest decline in nine years, much larger than economists forecast.
Africa’s most-industrialized economy hasn’t grown at more than 2 percent a year since 2013 and is struggling to gain momentum despite political changes that bolstered investor confidence. Ramaphosa’s rise to power since December initially boosted sentiment and the rand following Zuma’s scandal-ridden tenure of almost nine years, but confidence indexes have now returned to levels they were at late last year as businesses seek real reforms.
Ramaphosa replaced Zuma as leader of the ruling party in December and as president in the middle of February.
“Ramaphoria has to be followed by concrete policy and concrete change, and I think that many want to see faster change,” Thabi Leoka, an independent economist, said by phone. “Currently I think we are still grappling with the demise and destruction and disruption of the past nine years.”
When measured against the first quarter of 2017, the economy expanded 0.8 percent.
The economy has contracted in each first quarter for four of the past five years, and some economists say that this GDP report should be read with caution.
“The base that these numbers are coming off is really high,” Jeffrey Schultz, an economist at BNP Paribas in Johannesburg, said by phone. “This is going to be transitory in nature — I expect a big bounce in the second-quarter figure.”
Mining and manufacturing, which comprise about a fifth of the economy, both declined in the period as prices for commodities such as gold and platinum were stagnant and producers closed operations.
Highlights from the release include the following:
- Mining production contracted 9.9 percent from the previous quarter
- Manufacturing shrank 6.4 percent Agriculture declined the most, recording an annualized 24.2 percent contraction
- Expenditure on GDP fell an annualized 2.5 percent
The South African Reserve Bank forecasts the economy will expand 1.7 percent this year and 2019 and 2 percent in 2020.
“The tertiary, secondary and primary sectors all performed worse, which means there was a broad-based slowdown across the economy,” Gina Schoeman, an economist at Citibank Inc., said by phone from Johannesburg. “This means we have to be concerned because they are probably going to have to revise down GDP forecasts this year.”
South African activity stagnates while its African peers cheer
(Bloomberg) — South Africa’s economy contracted in the first quarter and now its business-activity levels are falling behind peers in the region.
Purchasing Managers Indexes published on Tuesday showed faster expansion in companies in Nigeria, Ghana, Uganda and Zambia in May. In South Africa, however, the index fell to the neutral mark of 50, making it the only country where the PMI didn’t improve.
Africa’s most-industrialized economy shrank by an annualized 2.2 percent in the first quarter, the most in nine years, compared with the median economist estimate of 0.5 percent. Together with Nigeria, South Africa’s gross domestic product make up about half of the region’s economy.
But Standard Bank Ltd. economist Thanda Sithole said South Africa’s economy is still on track to expand 1.8 percent this year and 2.2 percent in 2019.
“In our view the PMI will, during the remainder of 2018, largely show signs of improving domestic conditions,” she said in a note. “The ongoing debate on land expropriation, elevated international oil prices and a volatile rand, remain key risks to our PMI outlook.”
South African assets tumble as Ramaphosa’s growth pledge palls
(Bloomberg) — The rand weakened, yields on benchmark bonds rose and retail and banking stocks fell as a report showed that South Africa’s economy shrank the most in nine years in the first quarter, casting a pall over President Cyril Ramaphosa’s promise to boost growth.
Ramaphosa, who replaced Jacob Zuma in February, has pledged measures to fuel the economy, boost employment and attract investment after four years in which output never managed to expand more than 2 percent annually. But the latest data show he has a mountain to climb: gross domestic product contracted an annualized 2.2 percent in the first quarter of the year compared with the prior three months.
“We’ve seen the ‘Ramagloss’ rub off and now markets are focusing on the fundamentals of South Africa,” Michelle Wohlberg, a fixed-income trader at Rand Merchant Bank in Johannesburg, said by phone. “Bonds and the rand will continue to trade defensively in the short term.”
The rand fell as much as 1.1 percent and traded 1 percent weaker at 12.6925 per dollar by 2:41 p.m. in Johannesburg. Yields on benchmark 2026 government bonds climbed five basis points to 8.6 percent.
An index of banking stocks fell as much as 3.2 percent, the most in three weeks, while shares in general retailers dropped 2.4 percent. The benchmark stocks gauge pared losses to be 0.4 percent lower, supported by gains in so-called rand hedge stocks that benefit from weakness in the currency because of revenue earned abroad.
Banks and retailers “are quite dependent on an improving macro and improving fundamentals in South Africa,” said Brad Preston, chief investment officer at Mergence Investment Managers Ltd. in Cape Town. “But this is a backward-looking number, it was largely expected to be quite negative. I’d imagine the move to be quite short-term sentiment-driven.”
Ramaphosa’s rise to power since December initially boosted sentiment and the rand following Zuma’s scandal-ridden tenure, but confidence indexes have now returned to levels they were at late last year as businesses seek real reforms. Output expanded 0.8 percent year-on-year in the first quarter, below the economists’ estimate of 1.5 percent and short of the central bank’s full year forecast of 1.7 percent.
The weak GDP data may force the South African Reserve Bank to adopt a more dovish policy path in support of the economy, said Per Hammarlund, the Stockholm-based chief emerging-market strategist at SEB SE. The central bank last month left its main policy rate unchanged, and hinted that further loosening was off the table as inflation pressures build.
“It will take years to see the effects if Ramaphosa succeeds in implementing structural reforms to boost employment, investment and potential growth,” Hammarlund said. “The rand is depreciating because of the reality check provided by the GDP number, and because slow GDP growth may prompt the Reserve Bank to take a more dovish stance despite an expected uptick in inflation.”
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.