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South Africa Country Risk Report Q2 2016

South Africa Country Risk Report Q2 2016

Core Views

We maintain our 2016 real GDP growth forecast at 1.5%. The absenceof load shedding at least until May 2016 justifies a minor increasefrom 1.4% in 2015, but strikes are likely to pick up in 2016. Thedeterioration in the business environment at end-2015 will extendinto 2016, depressing investment growth, while private consumptionremains limited by high unemployment and rate hikes.

Given the rand has continued to weaken despite the return of FinanceMinister Gordhan and food price pressures show no sign ofabating, inflation expectations are at risk of becoming disanchored.

To prevent this, the South African Reserve Bank will have to hikerates significantly to maintain its credibility hence we are rampingup our expectations to 75 basis points in hikes this year.

South Africa’s current account deficit has improved from 5.5% ofGDP in Q1-Q314 to 3.9% in Q1-Q315. Recent rand depreciationwill boost the current account data from Q415. But for a sustainableimprovement in the current account without experiencing a collapsein investment, savings must increase with the support of structuralreform, which we do not expect.

South Africa’s ruling African National Congress party will graduallyadopt more populist, leftwing policies over the next four years in anattempt to retain dwindling popular support. Policy proposals will bemainly rhetoric until the 2016 municipal elections, after which pointwe expect an increasing focus on genuinely distributive policies.

Major Forecast Changes

We have revised our 2015 growth forecast to 1.5% from 1.9%. Therevision is driven by Q215’s 1.3% y-o-y contraction and a furtherdeterioration in the domestic demand outlook, as the July tax ratehike kicks in. Medium-term growth will be undermined by the lackof structural reforms and a low savings rate.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
No Cure For Structural Ills
We maintain our 2016 real GDP growth forecast at 1.6%. The absence of load shedding at least until May 2016 justifies a minor
increase from 2015's 1.4%, but strikes are likely to pick up in 2016.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Monetary Policy
Tightening The Monetary Screws Of Credibility
Given that the rand has continued to weaken despite the return of Finance Minister Gordhan and food price pressures show no sign of
abating, inflation expectations are at risk of becoming disanchored.
Monetary Policy Framework
Fiscal And Debt Outlook
South Africa Is Not Junk
Fitch's downgrading of South Africa to BBB- and S&P's move to negative outlook are in line with our negative reading of the Medium-
Term Budget. However, we do not expect credit metrics to deteriorate significantly in the next 12 to 18 months, which would be required
for an S&P downgrade to junk. South Africa's real crisis is a growth crisis, not a fiscal one.
TABLE: MEDIUM-TERM BUDGET 2015, % OF GDP
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
External Trade & Investment
Current Account Still A Problem As Savings Too Low
South Africa's current account deficit has improved from 5.5% of GDP in Q1-Q314 to 3.9% in Q1-Q315. Recent rand depreciation will
boost the current account data from Q415.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 GOODS IMPORTS IN 2014
TABLE: TOP 5 GOODS EXPORTS IN 2014
Chapter 2: 10-Year Forecast
The South African Economy To 2025
Underperformance Among EM Peers Ahead
The South African economy will grow at a slow pace of around 2.5% annually over the coming ten years. Power shortages, industrial
action and divestment in the mining sector will weigh on economic expansion, resulting in long-term economic underperformance versus
emerging market peers.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
ANC Rhetoric And The Post-Zuma Era
The ANC will ramp up its populist rhetoric in the run-up to the 2016 municipal elections. Land reform in particular will resonate with the
voters, which the ANC is losing to the Economic Freedom Fighters. Yet the ANC is likely more preoccupied with Zuma's succession, as
Nkosazana Dlamini-Zuma is displacing Cyril Ramaphosa as the strongest contender for the ANC leadership.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Socio-Economic Issues To The Fore Over The Coming Decade
Many issues threaten South Africa's political stability over the long term, not least the social and economic inequalities still stemming
from the apartheid era. Although our core scenario envisages no major change to the political backdrop, we present a number of
alternative scenarios.
TABLE: PRESIDENT ZUMA'S APPROVAL RATINGS PER PROVINCE, %, NOVEMBER 24 2015
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: IMPORT AND EXPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
TABLE: SSA TRADE PROCEDURES AND GOVERNANCE RISKS
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: SOUTH AFRICA – MACROECONOMIC DATA & FORECASTS

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