2020q1
Regional eXplorer (ReX) update – 1st quarter of 2020
IHS Markit is glad to announce the first quarter update for 2020 of Regional eXplorer (ReX) – the South African knowledge base of municipal level insight. Each quarter, data from a vast number of sources are incorporated into the ReX database to provide users with the most up-to-date statistics.
- Main data releases incorporated in this update
- COVID-19 impact on the model
- COVID-19 lockdown and Moody's rating downgrade to hit South African economy
- Tourism module revision
Main data releases incorporated in the update
2019 data is now available: ReX has been updated with the latest data available from StatsSA (incl. QLFS and GDP), SARB, SARS and many more that allowed us to model and incorporate 2019 data on a sub-national level for most modules in ReX. Topics that are heavily dependent on information from the General Household Survey, such as household access to services, will only have 2019 later in the year when StatsSA releases that data.
COVID-19 impact on the model
Due to the impact COVID-19 has on the economy, our team had to make several adjustments to the economic forecasts in ReX. We are now forecasting a contraction of 3.5% on the South African economy for 2020. Because the current environment we deal with changes very rapidly, we have decided to release our data based on what information was available on the 31st of March. As always, we encourage you to provide feedback were necessary.
Regarding the adjustments on the sectoral level we are expecting a massive knock on the construction sector with a negative growth outlook of 7.9% for South Africa, where Gauteng and KwaZulu-Natal are contributing the largest decline (7.4% and 8.6% respectively). The same can be observed for the mining and manufacturing sectors - contracting at 6.6% and 5.6% respectively.
On the other hand, agriculture experienced a solid recovery from the year before with an overall 3.9% increase for this sector. Also, the standard utilities such as water and electricity are expecting not to contract that much compared to other sectors.
COVID-19 lockdown and Moody's rating downgrade to hit South African economy
A 21-day lockdown period to combat the spreading of the coronavirus disease 2019 (COVID-19) virus came into force in South Africa on 27 March and will inhibit the movement of individuals and enforce the closure of all businesses deemed non-essential in the South African economy. On the same day, international ratings agency Moody’s Investors Service downgraded South Africa’s local and international debt rating to sub-investment status, with a Negative outlook.
Restrictions have been placed on public-sector transport, while the government has guaranteed uninterrupted food supplies and essential services such as electricity, healthcare, and water provision.
Although trade across borders with smaller Southern African Development Community (SADC) members and other international trade partners will be uninterrupted, the movement of people across borders has been restricted.
The 21-day lockdown resulted in the suspension of some mining operations and non-essential manufacturing and transport and hospitality services, and it will result in a disruption of production and a significant drawdown of inventory levels during the second and third quarters of 2020.
Later on 27 March, Moody’s downgraded South Africa’s local and international debt ratings to sub investment status, with a Negative outlook. Rising public-sector debt and projected structurally very weak growth led to the downgrade, said Moody’s.
Moody’s revised its expectation for South Africa’s economic performance in 2020 to a 2.5% contraction in GDP. Although Moody’s warned that the impact of the COVID-19 pandemic heightened the uncertainty of near-term growth prospects, persistent impediments to longer-term growth continue to prevail. These include “continued disruptions to electricity supply, weak investor confidence and structural constraints, especially labour market rigidities”, Moody’s stated. Financial support announced by the South African government to combat the effects of the lockdown on the national economy appears modest and will do little to mitigate the impact on the overall economy, Moody’s warned.
Moody’s expectation is that South Africa’s fiscal deficit will widen to an estimated 8.5% of GDP in 2020, fuelled by rising support to state-owned entities (SOEs), a rising interest rate bill, and a deterioration in tax performance on the back of weaker tax buoyancy. Although the South African government has pencilled in a ZAR160-billion (USD9-billion) spending cut over the next three years, achieving this objective depends on a lower public-sector wage bill, which will be difficult to achieve through renegotiated wage agreements with trade unions and the already agreed wage indexation. Moody’s expects public-sector debt (including guarantees) to reach 91% of GDP by 2023.
Distressed retail buying, particularly of food, alcoholic beverages, and health products, ahead of the 21-day lockdown could ensure a modest improvement in South Africa’s quarter-on-quarter annualized GDP growth during the first quarter, depending on the draw-down of inventories over the period.
Preliminary estimates suggest resilience in mining production during January. Electricity provision once again contracted during January and February following load shedding over the period, while manufacturing production continued to perform poorly and contracted by 2.1% year on year during January.
Outlook
IHS Markit expects South Africa’s GDP growth rate to contract by 3.5% in 2020, with a deep contraction expected during the second quarter of the year. Around 34% of total consumer spending (clothing and footwear, household equipment and maintenance, transport, recreation and culture, restaurants and hotels) could be directly impacted by the 21-day lockdown. Payment holidays will hamper the financial sector’s bottom line, while late payments to suppliers, rent deferrals, and contract cancellations bode less positively for companies’ profit margins and salary increases during 2020/21. The anticipated uptick in unemployment, particularly of small and medium-sized enterprises’ workforces, bodes less positively for consumer spending for the remainder of the year. Delays in building operations and loss of business confidence are likely to leave private and public-sector investment under pressure. IHS Markit assumes a decline in inventory levels during the second and third quarters, while production disruptions and weak global demand will impede exports of goods and services.
The recent downgrade of South Africa’s local and international debt rating by Moody’s will limit the ability of the South Africa Reserve Bank (SARB), the central bank, to lower its policy rate further. The SARB has cut its policy rate by 125 basis points since the beginning of 2020. The weakness of the South African rand’s exchange rate, combined with high real interest rates to attract much-needed capital inflows, will override a favorable near-term inflation trajectory, in IHS Markit’s view. IHS Markit is of the view that headline inflation could average 3.5% in 2020 as international oil prices fall to USD10 per barrel in April–May 2020 and weak domestic demand prevails.
In a statement following the Moody’s decision, South Africa’s National Treasury warned, “The sovereign downgrade will further see South Africa being excluded from the FTSE World Government Bond Index (WGBI) and the government bond market will experience further capital outflows as fund managers with investment grade mandates will be forced to sell South African government bonds. Non-residents currently hold approximately 37% (R800 billion (USD45 billion)) of the total domestic government bonds and the number is expected to substantially decline with the combined impact of COVID-19 and the downgrade.” In an earlier research note, SARB estimates place the expected portfolio outflows following the downgrade at around USD8 billion. Consequently, the SARB has announced that the central bank will be buying government bonds in the secondary market to ensure financial stability in the wake of the expected sell-off of local-currency-denominated debt in coming days. Exchange-rate pressures on the rand are expected to escalate in the near term, with the rand weakening to above ZAR18.00 : USD1.00.
Finance Minister Tito Mboweni also stated in an interview over the weekend (28–29 March) that there is a strong possibility that South Africa will approach the International Monetary Fund (IMF) and the World Bank to bridge near-term funding needs.
The Moody’s downgrade is likely to add impetus to the South African government’s reform agenda, given the tighter fiscal measures that will have to be applied should there be emergency assistance from the IMF or the World Bank. It is very likely that the government will take a tougher stance in public sector wage negotiations, likely cutting back on benefits for the final year of the existing agreement, which begins on 1 April 2020. The government is also very unlikely to agree to an above-inflation wage increase in the new three-year agreement beginning on 1 April 2021. These measures will very likely
Tourism module revisions
During the past quarter we revised and updated the Tourism module’s methodology to better represent our understanding of the industry’s trends up to 2019.
As the tourism surveys mature and undergo constant revisions, the quality of the data also improves and provides more insights into the trends seen in the industry. This led us to revise the weightings we apply to the various tourism surveys which feed into the ReX model – emphasizing the larger, more reliable surveys such as the Domestic Tourism Survey (DTS), the South African Tourism (SAT), and the Tourism Satellite Account (TSA). Understandably, this revision of these weightings caused historic changes to all our tourism variables: trips, bed nights and tourism spending
Enjoy the update!
The IHS Markit ReX team