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South African Economic Outlook
Perspective | 11 December 2013

This article is contributed by Shaun Murison, a Market Analyst at IG South Africa. He provides daily analysis on financial markets to IG’s client base.

The South African economic data reported for the third quarter has been less than desirable as labour unrest and a fragile global economy takes its toll.

Recent gross domestic product (GDP) figures were a significant miss on consensus forecasts, coming in at 0.7 percent on a quarterly basis versus estimates of 1.2 percent. The severe drag on GDP growth over the quarter could be attributed to the manufacturing sector as output fell more than 6 percent. This equates to a negative one percent contribution to total GDP which is largely as a result of strikes within the automotive sector. Manufacturing accounts for around 15 percent of the country’s annual GDP. Encouragingly though, mining output grew more than 11 percent over the period, perhaps an early indication of renewed health within the sector. We know mining has had its fair share of labour unrest, but what is encouraging is the increase in speed at which most of the issues have been resolved, evident in the improved production figures.

Trade Balance And Current Account
Trade balance figures reported by the South African Revenue Service showed a large deficit of R20.7 billion in October. The new inclusion of peripheral African neighbors Botswana, Lesotho, Namibia and Swaziland revised the deficit figure significantly to R11.95 billion. The trade balance accounts for around 46 percent of the current account which showed a deficit that now equates to 6.8 percent of GDP in 3Q2013.The widening deficit at R232.7 billion is the largest reported since 2008, five years ago. The revised current account calculation now includes the aforementioned trade with our African neighbours, which if omitted, would worsen the figure to above 7 percent of GDP.

Foreign direct investment for the third quarter was R47.4 billion, which is more than a R30 billion improvement on the previous quarter. This was largely due to the buyout conclusion of South Africa’s third largest pharmaceutical company Cipla Medpro by Cipla India. Sector peer Adcock Ingram is now also a buyout target of CFR Pharmaceuticals (CFR), a Chilean pharmaceutical company. Should the deal manifest, it would provide the region with an R8 billion injection into the South African economy, which would certainly help improve the health of the aforementioned current account deficit. However, Bidvest chief executive officer Brian Joffe is opposing this with an immediate cash offer whilst launching a court dispute questioning the legality of the potential buyout by CFR.

The Rand
The rand has found itself firmly nestled above the R10/$ mark over the period from both domestic and international catalysts. The ongoing theme of the US tapering of current quantitative easing measures has stimulated dollar strength, which has impacted the rand significantly. The currency reached a 4 ½ year low against the dollar on the 6th of December, 2013 but has since started to claw back the recent weakness.

South African Reserve Bank
The South Africa Reserve Bank (SARB) has cited rand depreciation as the biggest risk to South Africa’s domestic inflation outlook. Should the currency continue to weaken (as it has since the MPC meeting), Reserve bank governor Gill Marcus has groomed the market for the possible tightening of monetary policy, which would see interest rates start to possibly rise mid-2014. Unfortunately, GDP isn’t meeting growth expectations and this questions the flexibility of any substantial tightening in the near future.

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