South Africa’s largest pharmaceutical manufacturer, Aspen Pharmacare, may have announced a relatively tepid set of annual results for the year ended 30 June 2019, but the anticipation of a reduced debt load freeing up cash flows pushed its share price up 12% the day after its results announcement.
South Africa’s economy is not out of the woods yet
The South African economy grew more than expected in the second quarter of 2019, narrowly avoiding a technical recession.
But economists are warning against popping the champagne just yet.
South Africa posted 3.1% growth in the second quarter of 2019, according to figures released by Statistics South Africa (StatsSA) yesterday. Economists polled by Reuters had predicted an expansion of 2.4% for the quarter. The news comes on the back of a 3.1% contraction in the first quarter of the year, an expanding unemployment rate of 29%, and rising levels of inequality.
Moody’s remains the only credit rating agency among the big three to give South Africa an investment grade rating, however, it also warns that the country faces long-term weak growth. “The sovereign’s credit profile will most likely continue to erode, with fiscal strength weakening and growth remaining low,” said Lucie Villa, a Moody’s Vice President – Senior Credit Officer and the report’s co-author.
Both Gina Schoeman, the South Africa economist at Citibank, and Elize Kruger, a senior economist at NKC African Economics, agree with Moody’s. Schoeman also points out that the central bank puts the country’s growth potential at 1%, while StatSA figures show that the economy grew at a year-on-year rate of 0.9% in the second quarter of 2019.
Several crucial sectors of the economy have delivered strong results, driving the country’s recent growth.
- Mining: 14.4%
- Finance, real estate and financial services: 4.1%
- Trade: 3.9%.
Bottom of the class
Analysts are worried about other segments that are weighing down the economy.
Transport, storage and communication: -0.3%
These second quarter figures are “definitely a relief, but not a celebration,” according to Schoeman.
- “The numbers tell us that things did not get worse, but they did not get better. We talk about a technical recession being two consecutive quarters of negative growth, but there are other academic definitions of recessionary conditions. One of those definitions is when you are growing below your potential, which South Africa has been doing for a long time,” warns Schoeman.
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While Kruger says the second quarter number looks good on the day, she cautions against expecting the same momentum going into the third quarter after a dismal performance in the first quarter.
- “There remain many headwinds for the economy. The best we could hope for in terms of annual growth is in the region of 0.5% to 0.6%,” according to Kruger.
Battle of ideological wills
The country’s economic hurdles are a major talking point among credit ratings agencies, the central bank, politicians, businessmen, and the electorate.
Last week, South Africa’s Treasury Department asked the public to comment on its 75-page paper titled “Towards an Economic Strategy for South Africa”. The paper borrows heavily from the country’s National Development Plan (NDP), which aims to address the structural impediments to growth, including an overly concentrated and uncompetitive economy.
The NDP, released in 2011 at the height of Jacob Zuma’s presidency, was championed as the country’s economic blueprint.
The new paper has earned the scorn of unions, specifically the Congress of South African Trade Unions (Cosatu) which is an alliance partner of the governing African National Congress (ANC). Cosatu and its affiliates have dismissed the paper as advancing a “right-wing agenda”.
Schoeman believes National Treasury’s paper has been a long time in the making.
- “It is asking the country to become more efficient. We know that many of our inefficiencies are driven by political stumbling blocks, such as the trade unions. Although the trade unions are important, they have created quite a headache, particularly in some sectors,” she said.
Bottom Line: South Africa may need political consolidation before a growth path emerges.