South Africa Business Forecast Report Q2 2008

Publication Date	April 2008
Publisher	Business Monitor
Product Type	Report
Pages	57
ISBN Number	1745-0713
Product Code	BMI01538

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Summary

Testing Times For Political And Macroeconomic Stability

Risks to South Africa's political stability are to the downside over the course of 2008. In particular, fears that Thabo Mbeki could turn into a lame-duck president during his last year in office are rapidly becoming reality, potentially undermining policy continuity during the remainder of his term.

Furthermore, we believe that the rising influence of South Africa's left wing factions, particularly the Congress of South African Trade Unions, will also add to policy uncertainty. Indeed, the trade unionists have been actively pushing for greater participation in the African National Congress (ANC)'s decision making apparatus, and their potential to influence ANC policy will be unmistakable, especially with regards to social spending and labour laws. Meanwhile, despite strong real GDP growth in Q 07, we believe that economic expansion will slow to .0% in 2008, mainly driven by deteriorating external and internal demand. In our view, aside from high borrowing costs, the ongoing power crisis is likely to constitute one of the main risks to growth over the medium term.

Jacob Zuma's corruption trial, which is scheduled to start in August 2008, will add a further dimension of political risk over the coming year. A key concern is that the trial will be highly politicised and could lead to an even deeper rift within the ANC. This is because many of Zuma's allies will regard the legal proceedings as a political tool to oust and discredit their main presidential candidate ahead of the 2009 elections. Given Zuma's popular appeal, which was highlighted during his ANC election campaign, his trial and a potential conviction could lead to a popular backlash, thereby increasing the risk of mass demonstrations and even rioting.

We believe that the deterioration of risk appetite in international financial markets will continue to be a key driver of rand depreciation. The outlook for the US economy is dire, and negative growth figures in H108 are a real threat, thus likely weighing on risk appetite for emerging market assets.

Perhaps more importantly, South Africa's domestic macroeconomic and political challenges significantly amplify the risks of global risk aversion. Indeed, an expected slowdown in economic growth in 2008 and a sharp rise in inflationary pressures are a potent mix for further currency weakness.

South Africa has one of the most sophisticated business environments in sub-Saharan Africa (SSA), representing a key component of its status as a regional economic power house. Strong state institutions fostering relative political and economic stability have been key in attracting foreign investors and maintaining growth. However, a weakened power sector has recently dented South Africa's image as a top investment destination and could limit FDI inflows going forward. Furthermore, high levels of crime and an inflexible labour market will continue to constitute significant structural problems that will blemish the attractiveness of the country's business environment over the longer term.

Content

Executive Summary
- Testing Times For Political And Macroeconomic Stability
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Risky Years in Politics
- In light of rising policy uncertainty and a potential deeper rift within the African National Congress
- (ANC), combined with worsening macroeconomic fundamentals, we believe that a further deterioration
- in South Africa's political risk profile is likely to be on the cards in 2008
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic risk ratings
- Economic Activity
- Growth in 2008 to Lose its Sparkle
- Despite strong real GDP growth in Q407, we believe that economic expansion will slow this year, mainly
- driven by deteriorating external and internal demand.
- Monetary Policy
- Risks Of Stagflation On The Rise
- We believe that the central bank is unlikely to increase interest rates at its monetary policy meetings in
- Q208, mainly due to clear signs of a slowing real economy.
- Exchange Rate Policy
- Risk Aversion Key risk to rand Weakness
- The South African rand has had a bad year so far, depreciating by more than 16.0% and 23.0% against
- the US dollar and the euro, respectively, year-to-date, and we forecast that the currency is likely to experience
- further downside over the coming months.
- Fiscal Policy
- Infrastructure And Politics to Weigh on Budget
- We believe that rising infrastructure expenditure and calls for greater social spending will remain the
- main risks to South Africa's budget surplus going forward. Should Jacob Zuma ascend to the national
- presidency in 2009, we could see a return to deficit spending as soon as fiscal year 2010-2011
- Balance of Payments
- External Accounts under Pressure
- We forecast that South Africa's current account deficit will decline only marginally to 7.2% of GDP in
- 2008, as weaker external demand and high commodity prices will weigh on the trade balance.
Chapter 3: Special report
- Looking Beyond 2008
- The future of the World, in three Acts
- We believe that a substantial, multi-year shift in the US external accounts is under way. A weak US
- dollar and subdued domestic consumption should lead to a narrowing in the US's structural current
- account deficit.
- US: the rebalancing Act
- Unwinding the imbalances
- China: What if We're All Wrong?
- Our core Scenario for China
- We are retaining our positive headline growth projections for China across the forecast period to 2012,
- with our expectations of the continued success of the urbanisation process and export-driven growth
- model underpinning our assumptions.
- Japan: immigration Key to Long-term Growth
- Demographic Woes Portend Long-term Decline
- Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
Chapter 4: Business Environment
- SWOT Analysis
- BMI Business Environment risk ratings
- Business Environment outlook
- Institutions
- Infrastructure
- Market orientation
- Top Export Destinations, uS$mn
- Operational risk
Chapter 5: Key Sectors
- Defence
- Food & Drink
List of Tables
- Table: South Africa Cabinet List
- Table: Economic Activity
- Table: Monetary Policy
- Table: Exchange rate Policy
- Table: fiscal Policy
- Table: Balance of Payments
- Table: BMI Business And operational risk ratings
- Table: BMI Legal framework ratings
- Table: South Africa Annual FDI Inflows
- Table: BMi trade ratings
- Table: South Africa Defence Sector - Armed forces
- Table: South Africa MGr Sector - Sales Value by format (uS$bn) - historical Data & forecasts