South Africa Business Forecast Report

Economy Past The Worst, But Policy Risks Remain The recent wave of industrial action clearly highlights the formidable policy challenges President Jacob Zuma will face during the remainder of his time in office. With public funds limited and economic conditions unlikely to improve rapidly, Zuma will certainly struggle to fulfil his electoral promises of greater social justice and economic prosperity over the medium term. Aside from further fuelling public discontent, this is likely to create political tensions within the president's own government and maintain uncertainty over policy continuity over the medium term. Despite modest upgrades to our real GDP growth forecasts, we are maintaining our view that the South African economy will contract by 1.8% in 2009, before returning to weak growth of 2.2% in 2010.

While the government has so far refrained from undertaking radical changes to South Africa's policy environment, we believe that Zuma's presidency has left the country more vulnerable to the global recession and risks of a sluggish domestic economic recovery. A key problem is that Zuma's political success is predicated on his close association with the trade unions and his populist agenda.

Against this backdrop, the president will remain under pressure to meet the demands of those that put him into power, a dynamic that has already had negative consequences for the South African economy over the course of 2009.

South Africa's current account deficit is projected to fall noticeably from 7.4% of GDP in 2008 to 5.3% and 4.4% in 2009 and 2010, respectively, which is mainly a result of a rapid contraction in the country's merchandise imports, and service and income payments in H109. Encouragingly, this correction will enable South Africa to register noticeably lower current account shortfalls over the coming years, which will unwind the country's external imbalances and reduce its exposure to economic shocks going forward. However, slower import growth is also symptomatic of weaker domestic demand, which coincides with our view that South Africa will struggle to return to precrisis real GDP growth levels any time soon.

A wave of industrial action has rocked South Africa over the course of Q309, with the risk of further strikes still high. Organised by various trade unions across the country, public and private sector workers have taken to the streets to call for double-digit pay increases. The wage demands have been fuelled by dire economic conditions, as well as the National Energy Regulator of South Africa's recent decision to award utility company Eskom a 31.0% increase in utility prices for the 2009/10 financial year. Aside from disruptions to public services and industrial output caused by these protests, the double-digit wage deals could pose further risks to already rising inflation expectations.