South Africa’s Ducked Live Wires
South African stocks kept positive despite the reintroduction of rolling power blackouts from Eskom’s strained grid as ratings agencies postponed a sovereign junk downgrade on proposed medium term budget and energy strategies. However the central bank admitted to “more uncomfortable” economic imbalances on meager 1.5 percent growth and the current account gap at 6 percent of GDP sending the rand to a post-crisis 11.5/dollar low. The outages come as heavy industries were already ordered to curtail use 10 percent, as mining began to recover from strikes but now faces diminished world demand and prices. Inflation has dipped below 6 percent on reduced oil and food costs keeping the benchmark rate steady, but local bond yields approached 8 percent on expectations exchange rate pass-through and foreign investor outflows could prompt tightening. President Zuma embroiled in corruption and spending probes has maintained minimal visibility on the first anniversary of Mandela’s death and has not openly endorsed fiscal consolidation at odds with ANC union member wage and social pleas. On the foreign policy front he has also been silent on President Mugabe’s purge of top officials in Zimbabwe after his deputy was accused of coup-plotting. He named a former security minister loyalist almost age 70 as vice president defying rumors of grooming his wife as successor as the MSCI Frontier component fell 10 percent extending Sub-Saharan Africa’s 2014 correction. The intrigue followed preparation of a new IMF staff-monitored program at a “crossroads” as domestic reform and international creditor normalization lagged post-election. Growth will end the year at 3 percent on massive company manufacturing and mining shutdowns despite ample agricultural harvests. Inflation will be near zero on foreign currency use and reserves meet less than a month’s imports on a 20 percent of GDP current account chasm funded by Chinese and private borrowing and chronic arrears buildup. The government wage bill rose 15 percent on campaign promises, and the banking sector continues to contend with a near 20 percent NPL ratio.
The Fund foresees “sluggish” growth in 2015 as fiscal policy aims for primary balance through civil service rationalization. Diamond industry royalties will be revised with the state-run company to publish annual accounts. Over $250 million in securities were issued to cover unpaid bills which declined last year. Central bank recapitalization is in course as the government assumed non-core debt and treasury deposits were transferred from the commercial system. A lender of last resort pool may be established with outside technical help as the number of problem banks was halved. A special purpose vehicle will be launched to centralize and resolve problem assets alongside a credit register as stricter capital standards are phased in by end-decade. External debt distress lingers despite more concessional Chinese borrowing and minimal Bretton Woods institution payments which would still not pave the way for HIPC relief. The indigenization law will be clarified by March with detailed guidelines for foreign direct investors as portfolio players brace for further shocks.
