Difficult year ahead for SA – BNP Paribas

The outlook for the country’s economy remains grim, says BNP Paribas in its ‘South Africa Outlook 2021: Likely headwinds to recovery’ report.

It says “energy supply constraints and other structural weaknesses” along with delays in the Covid-19 vaccine rollout, were the reasons it revised its GDP growth forecast downwards for the first half of the year.

The French bank has a dimmer economic forecast than other institutions, which also expect the country to struggle.

“We maintain our sub-consensus 2021 growth forecast of 2.5% which compares with a current Bloomberg consensus of 3.8%,” says BNP Paribas SA senior economist Jeff Schultz.

There was some good news. The ending of national lockdown has seen a pickup in the economy.

“We have, though, upgraded our estimate for last year by 0.9 percentage points to a contraction of 7.1%, reflecting a faster return to pre-pandemic activity levels for sectors such as mining,” Schultz adds.

Despite this, the country still has some difficult challenges it must deal with in order to overcome its economic difficulties.

Underpowered

One of the biggest drags on the economy is the unpredictability of the country’s electricity supply. The report notes that despite collapsing domestic demand and curtailing supply-side activity, Eskom implemented record load shedding in 2020, despite more than 1 600 gigawatt hours (GWh) of power generation being taken offline.

BNP Paribas says energy supply estimates from the Centre for Scientific and Industrial Research (CSIR) indicate that the supply gap could be more than 60% larger this year.

“Large swathes of load shedding, therefore, seem unavoidable this year, in the absence of a marked improvement in Eskom’s energy availability factor, which fell to just 55% in the early weeks of January.”

BNP Paribas says given the extent of the energy crisis, it’s crucial that there is a continuation of the deregulation in the power sector and Eskom’s separation into generation and transmission happens.

Long wait

SA’s slowness in rolling out its Covid-19 vaccine programme is also an issue. In contrast with countries such as Russia, China, Chile, Argentina and Egypt, which expect to have 70-80% of their populations vaccinated by the end of the year, BNP Paribas does not see SA reaching ‘herd immunity’ by the end of the year.

Read: Health leaders ask SA to axe officials on vaccine lag

The emergence of a more transmittable strain of the virus has also made containing the spread of the virus harder.

BNP Paribas does not see the emergence of the ‘second wave’ of the Covid-19 pandemic leading to tighter restrictions – for now.

“Our base case forecasts do not assume that a ‘hard lockdown’ will be implemented because we think that economic considerations will be given more weight than in the initial wave. Should infections be seen to be spiralling out of control, however, we cannot rule out harder regulations with a greater economic impact.”

Some good news

On the positive side, the weakness of the dollar to the rand and a recovery in the Chinese economy could support “key industrial and precious metal commodity exports”. This in turn could boost the contribution of exports to GDP growth.

National Treasury’s eagerness when it comes to issuing bonds has also provided it with a cash buffer, which will create a “safety cushion for possible fiscal slippages in the short run”.

This has created an opportunity for investors, as the yields on the country’s bonds are high when compared to other emerging markets.

Read: Just how attractive are SA government bonds?

“In our local markets model portfolio, we continue to hold South Africa rand and SAGB [South Africa Government Bond] duration as an overweight.”

Fiscal cliff

Though the bond issues provide some cushion, they essentially just buy time for the government to make big cuts to its budget. With little space to raise taxes, it’s likely that the state will push through with “austere budget plans”.

This, however, means getting control of the public sector wage bill.

Read: Unresolved public sector wage bill clouds MTBPS

The bank says this will be a real test for the government because the trade unions’ relationship with National Treasury has taken strain since the Labour Appeals Court ruled that the state had the right not to increases public servants’ wages.

BNP Paribas foresees a difficult negotiation.

“We see a good chance of widespread strike action as early as February, possibly tempered by Covid-19 restrictions and existing high levels of unemployment.”