BMI View: Following a trip to South Africa in mid-October, we have revised downward our forecasts for real GDP growth, and are now projecting growth of 2.3% in 2012 and 2.8% in 2013, compared with previous estimates of 2.5% and 3.3% respectively. The wave of industrial unrest seen over recent months highlights various structural faultlines in South Africa's risk profile, which will weigh on investment over the coming years.
BMI travelled to South Africa in mid-October 2012 to assess local sentiment and gain on the ground insight into the outlook for South Africa following the wave of industrial unrest that has engulfed the mining sector. We met with a number of banks, corporates and government bodies including the South African Reserve Bank, Development Bank of Southern Africa, and local subsidiaries of Clover and Atlas Copco, each of whom shed light on the implications of the industrial action for the economy and political scene.
The conversations we held, coupled with our own observations and close monitoring of newsflow suggest that although the strikes are far from over in the mining sector, the worst is behind us. Following the 'Marikana Massacre' on August 16 2012 - in which 34 striking miners were shot dead by police at a mine owned by Lonmin - strikes spread across the mining sector and spilled into other sectors, ballooning in the second half of September when around 75,000 miners were participating in illegal industrial action, most notably at AngloGold Ashanti's Kopanang mine, Anglo American's Rustenburg mine and Gold Fields' KDC mine. The strikes were partly catalysed by the generous pay offer that Lonmin put forward: the company offered to raise wages by 22% following the Marikana Massacre, and this emboldened other miners to push hard for wage increases. Throughout October, however, the industrial action died down, and the mining companies became more militant, with Gold Fields dismissing 8,500 striking miners and AngloGold Ashanti dismissing a further 12,000.
|Mining Sector Slumping|
|South Africa - Gold and Platinum, Production and Output Growth|
The South African Treasury estimates that the strikes have cost ZAR10.1bn (US$1.2bn) in lost gold and platinum production. BMI's Mining sector analysts agree that the output losses have been significant. We have revised down our forecasts for both platinum and gold production, now expecting platinum output to fall by 2.7% in 2012 while previously we were forecasting 0.4% growth, and similarly, we now expect gold production to drop by 6.5% in 2012 while previously we anticipated 1.5% growth. We have also reduced our long-term production forecasts, since output is likely to suffer due to the higher wage bill. Even prior to the recent wave of unrest, margins were very thin and labour accounted for 60% of costs for South African miners. The increase in the wage bill will only serve to make South Africa even less attractive for investors, and we anticipate that several projects will be scaled back.
Given the importance of the mining sector in South Africa's economy, the production outages will undoubtedly weigh on headline real GDP growth. The first quarter of 2012 serves as a useful precedent for gauging the potential impact. During the first three months of the year, South Africa's mining output suffered a 10% contraction year-on-year (y-o-y, according to data from Statistics South Africa) with the decline concentrated in the gold sector, owing to a combination of power shortages and industrial unrest. Our calculations indicate that this shaved around 0.6 percentage points off headline growth in Q112, dragging total GDP growth down to 2.1% y-o-y in Q112 from 2.6% in Q411.
|Q1 Set A Precedent|
|South Africa - Total GDP and Percentage Point Contribution Of Key Sectors, % y-o-y|
However, it is not just the mining sector slump that we need to take into account. In addition to the impact of industrial unrest in other sectors, the effect on business, consumer and investor confidence must be considered - investment, especially, could suffer a long-term impact. That said, financial markets present a mixed picture in this regard. Although the rand initially sold off by over 5.0% in early October and came within a whisker of the psychologically important ZAR9.0000/US$ level as the strikes escalated, it has since stabilised. It now looks set to trade between ZAR8.5000/US$ and ZAR9.0000/US$ from a technical perspective, which is a weaker trading range than the ZAR8.0000-8.6000/US$ range that prevailed prior to the crisis, but the losses have been relatively benign considering the ructions in the economy.
|Not Too Much Weaker, Considering|
|South Africa - Exchange Rate, ZAR/US$|
Many of the people we spoke to commented that a key supporting factor behind the rand's performance is relatively robust foreign investor demand for South African bonds. Throughout September and October, foreigners have generally remained net purchasers of bonds, partly due to the impact of QE3 in the US, and partly owing to the inclusion of South African bonds in Citigroup's World Government Bond Index in October. Although these factors have given a timely boost to demand, the fact remains that foreign investors still view the instruments as attractive in spite of the uptick in political risk and two significant downgrades from the ratings agencies ( Moody's downgraded South Africa's government bond rating to Baa1 on September 27 and S&P cut its rating to BBB on October 12). Equity flows have been less robust, with significant net outflows seen in October, but the Johannesburg All-Share index continues to push to new all-time-highs, and this being the case, inflows may well pick up over the short term, especially as the industrial action abates.
|Robust Portfolio Flows|
|South Africa - Weekly Net Inflows Into Bonds & Equities, ZARbn|
Although portfolio inflows have held up relatively well, we hold a very cautious stance regarding longer-term investment inflows. The strikes have been high profile in the news globally, exposing various insidious factors in South Africa's risk profile. In addition to the highly-unionised workforce, other endemic problems include poor levels of education and a high degree of inequality and poverty, especially among black youths in urban areas. Indeed, several people commented to us that despite Black Economic Empowerment initiatives, there has been little progress in terms of addressing the race-based inequality that stems from the apartheid era. Of course, these problems are well known to investors familiar with South Africa, but the Marikana Massacre has shown how the underlying risks can quickly manifest themselves in severe economic disruption. Certainly, the Credit Default Swap market suggests that general investor sentiment has deteriorated in recent months, with South Africa's CDS spread widening relative to other emerging markets such as Brazil and Mexico.
|5-year Sovereign Credit Default Swap Spreads, bps|
Taking all the above into account, we have revised downward our forecasts for South Africa's real GDP growth over the coming years, now forecasting growth of 2.3% in 2012, 2.8% in 2013 and 3.4% in 2014, compared with prior estimates of 2.5%, 3.3% and 3.9% respectively. The changes were primarily made to both the private investment and private consumption categories of GDP by expenditure, although exports were also revised down. Incidentally, we hold to our view that interest rates will be kept on hold through 2013 in spite of the subdued growth environment, given the upside risks to inflation stemming from food prices and aggressive union wage bargaining.
As regards the impact on the political outlook, the Marikana Massacre and subsequent unrest has undoubtedly dented support for President Jacob Zuma, with many seeing it as symptomatic of a weak government that has not done enough to raise living standards and address deep-rooted poverty and inequality. Even prior to August, there was a growing chorus of criticism of Zuma given his indecisive nature, polygamy and past accusations of corruption. Nevertheless, he remains in pole position to be re-elected as leader of the African National Congress (ANC) at the party's internal elections in mid-December 2012, which would make him a shoe-in to retain the presidency in 2014 since presidential elections are held within government, rather than being a national vote. There had been speculation that Deputy President Kgalema Motlanthe would stand against Zuma in December, which would have provided some serious competition for Zuma, but Motlanthe has not announced his candidacy as yet. This being the case, our core scenario is for 'more of the same' on South Africa's political scene, ie a de facto one-party state, with the ANC making continued promises of job creation and infrastructural improvements that ultimately disappoint, and the unions remaining all-powerful because the ANC depends on them to win votes.
|Notes: e BMI estimates. f BMI forecasts. 1 Fiscal Years (April - March); 2 Repo rate. Sources: 3 South African Reserve Bank/BMI calculations; 4 World Bank/UN/BMI; 5 South African Finance Ministry/South African Reserve Bank/BMI calculations; 6 Statistics South Africa; 7 South African Reserve Bank; 8 BMI.|
|Real GDP growth, % change y-o-y 3||2.9||3.1||2.3||f||2.8||f||3.4||f||3.5||f||3.5||f|
|GDP per capita, US$ 3||7,252||8,088||e||7,610||f||8,393||f||9,071||f||9,818||f||10,620||f|
|Population, mn 4||50.1||50.5||e||50.7||f||51.0||f||51.2||f||51.4||f||51.7||f|
|Private final consumption, real growth % y-o-y 3||3.7||5.0||2.7||f||3.0||f||3.7||f||3.8||f||4.0||f|
|Fixed capital formation, real growth % y-o-y 3||-1.6||4.4||2.0||f||2.0||f||3.0||f||3.0||f||3.0||f|
|Budget balance, % of GDP 1,5||-4.4||-4.3||-4.9||f||-4.7||f||-4.2||f||-3.6||f||-3.3||f|
|Current account, % of GDP 3||-2.8||-3.3||-6.2||f||-6.7||f||-7.1||f||-6.9||f||-6.8||f|
|Consumer prices, % y-o-y, ave 6||4.3||5.0||5.5||f||5.1||f||5.0||f||5.0||f||5.0||f|
|Central Bank policy rate, % eop 2,7||5.50||5.50||5.00||f||5.00||f||5.00||f||5.00||f||5.00||f|
|Exchange rate ZAR/US$, ave 8||7.32||7.26||8.20||f||8.00||f||8.00||f||8.00||f||8.00||f|
|Exchange rate ZAR/EUR, ave 8||9.71||10.09||10.41||f||9.76||f||10.00||f||10.00||f||10.00||f|