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Select Economic and Financial Indicators2014201520162017e2018f
Real GDP (% change)1.71.30.30.71.1
GDP (USD bn)351.1317.6294.9344.1361.2
Inflation (average)6.14.66.35.45.3
Fiscal Balance (% GDP)-4.2-4.6-4.0-4.5-4.3
Broad Money (% change, end period)21.2117.4142.51.636.2
Population (mn)54.555.356.056.757.4
Exports (USD bn)109.696.489.496.397.5
Imports (USD bn)115.799.989.093.796.7
Current Account Balance (% GDP)-5.3-4.4-3.3-2.9-3.3
FX Reserves (USD bn, end period)44.341.542.744.645.7
Exchange Rate (average)10.8512.7814.7013.3914.21
Sources: IMF, World Bank, UN, Bloomberg, Ecobank Research

Economic outlook

Economic outlook

Real GDP: The South African economy is showing signs of recovery after experiencing a recession in late 2016/early 2017 amid heightened political risks, continuing struggles in the mining and manufacturing sector and a subsequent fall in investor sentiment. The economy posted a growth rate of 2.5% q/q in Q2 2017, thanks to increased activity in agriculture, forestry and fishing. Despite this, the country’s economic prospects remain blighted by a confluence of factors, specifically high political risks, a weak mining sector, significant contingent liabilities with state-owned enterprises, policy uncertainty and weaker governance levels. These factors, which have already prompted investment downgrades of the country’s credit rating by Fitch and S&P to junk status, will continue to blight the country’s economic prospects, sustaining growth rates below trend levels over the short-term. Although electricity supply problems are being addressed, power distribution challenges are likely to persist, restraining output growth in mining and manufacturing. Similarly, increasing government debt will reduce fiscal space and erratic weather conditions will continue to affect agricultural production sustaining upward pressure on food prices. Amid these factors, we expect growth to remain weak in 2017-18 (averaging below 1.5% per year), undermining prospects for business opportunities.

Inflation: is likely to slow over the forecast period supported by a stronger currency in 2017 (supported by robust portfolio inflows since late 2016 as investors sideline growing domestic imbalances in search for higher yields) and still weak domestic demand. However, high food prices will continue to maintain upward pressure on domestic prices, with the consumer inflation rate projected to remain close to the upper limit of SARB’s 3% to 6% target band. Our expectation of renewed rand weakness over 2018 will also add further pressure and we believe inflation could be higher for longer than is currently anticipated.

Fiscal balance: The budget aims to continue reducing annual deficits over time by improving spending priorities and efficiencies, cutting wasteful spending and increasing taxes cautiously. However, the government’s objective to lower the deficit to below 3% of GDP is unlikely to be met over the short term. We expect the budget position to deteriorate over the short term. Tax revenue growth will continue to be constrained by lower-than-expected corporate taxes and Value Added Tax collections, which reflects weak domestic demand. Tax revenue will nevertheless be bolstered by a potential rise in tax collection, following tax hikes proposed in the 2017/18 budget: this includes hikes in personal income tax, fuel tax, withholding tax and excise duty for alcohol and tobacco. However, this will be insufficient to finance the government’s growing expenditure. The government aims to strengthen fiscal buffers, but the high public sector wage settlement and rising debt–servicing costs creates major challenges in achieving this goal, setting back efforts to improve the composition of government spending, putting “pressure on capital and other critical inputs” and leaving little room for other spending priorities over the short term. Over the medium term, education, social protection, and health are the key priorities.

Current account: Despite weakening domestic demand, the current account will remain in structural deficit over the short term, reflecting weak international prices of South Africa’s main commodity exports against a backdrop of high capital imports. This is likely to sustain pressure on the rand.

Risks:

  • Growth in South Africa’s economic output is constrained by rising political risk, weakening institutional capacity and infrastructure challenges, particularly power distribution challenges. In addition, concerns about the adequacy of the country’s water supply have also emerged as a source of risk to the country’s electricity-supply. These factors will continue to keep economic growth lacklustre over the next few years.
  • The economy’s limited capacity to create jobs is exacerbating socio-economic challenges, which manifest in a high rate of joblessness, with the official unemployment rate rising to 27.7% as of June 2017, and large income gaps.
  • Weak economic activity, rising unemployment rate and a rapidly-rising public debt stock have already resulted in a sovereign downgrade to non-investment grade and with political risk expected to remain high for some time, undermining economic prospects, we expect South Africa to remain below investment grade over the short term, increasing the country’s financing costs.
  • The South African economy is highly dependent on foreign capital inflows to finance the current account deficit and a sudden reversal of these could result in a tightening of financing conditions that impact on the economy, especially in light of further US monetary policy tightening.

FX, FI and Commodity Information

FX, FI and Commodity Information

Exchange rate structure

RegimeFixed
TargetCVE110.265 to EUR1
Type of interventionVia Banco De Cabo Verde
Convertible currency?Yes
Market participantsn/a
Source: Bloomberg, IMF, and Ecobank Research

FX

FX ProductsSpotForwardsNon-deliverable ForwardsOptionsSwaps
On offerYesNoNoNoNo
Daily trading volume (USD mn)n/an/a
Average trade size (USD mn)n/a
Average spreadn/a
Trading hoursLimited
Settlement cycleT+2
FX Market StructureThe BCV maintains an exchange system free of restrictions, except for those maintained for security reasons.
Non-resident FX RegulationsSpotForwardsNon-deliverable ForwardsOptionsSwaps
Trade and FDI flowNo restrictionsn/a
Financial flow
Resident FX RegulationsSpotForwardsNon-deliverable ForwardsOptionsSwaps
Trade and FDI flowNo restrictionsn/a
Financial flow
Source: Bloomberg, IMF, and Ecobank Research

FI

Primary MarketTreasury billsTreasury notesTreasury bondsCentral Bank billsOMOs
IssuerGovernmentn/aGovernmentCentral Bankn/a
End useGovernment & infrastructure financingGovernment & infrastructure financingLiquidity management
Maturity structure90 – 180 days10-yrs14 – 90 days
CouponFixedFixedFixed
Coupon paymentsUpfrontSemi-annualOn maturity
Secondary Market 
Daily trading volumeLimited tradingn/a
Average trade sizeLimited trading
Settlement cyclen/a

Ecobank local affiliate contact details:
Ecobank Cabo Verde, Avenida Cidade de Lisboa, Praia, Santiago
Tel: +238 260 36 90
Source: Bloomberg, IMF, and Ecobank Research

FI primary market information

FI primary market information

South Africa debt

South Africa Debt2014201520162017e2018f
Government debt (% GDP)46.949.850.552.454.0
Sub-Sahara average44.351.554.754.854.8
External debt (official creditors, % GDP)15.313.017.916.616.9
Sub-Sahara average25.429.531.333.033.4
External public debt stock (USD bn)53.840.952.852.855.3
Share of total sub-Sahara debt (%)21.716.521.221.222.3
Source: IMF; Ecobank Research

Banking Sector Information

Banking Sector Information

South Africa commands the largest and most sophisticated banking sector in Sub-Saharan Africa, hosting several of the region’s strongest financial institutions. South Africa’s banking sector is regulated by the South African Reserve Bank (SARB). At end-2016, there were 16 registered banks, 15 registered local branches of foreign banks, three mutual banks and 36 approved local representative (rep) offices.

South Africa’s banking sector is dominated by five large banks: Standard Bank, Barclays Africa (ABSA), FirstRand, Nedbank and Investec, which collectively held 90.7% of the total banking-sector assets at end-December 2017, up marginally from 89.2% the previous year. The local branches of foreign banks accounted for 5.8% of total banking-sector assets at end-December 2016, down from 7.3% the previous year, with remaining banks operating in South Africa accounting for the balance. In recent years South African banks have expanded their pan-African footprint. At end-2016 three of the top four banks – Standard Bank, Absa and Nedbank – had a presence in 33 African countries.

Balance sheet overview

 Dec-15Jun-16Sep-16Dec-16
Total assets (R billions)4,8304,8474,8534,877
Total assets: year-on-year growth (%) 16951
Gross loans and advances (R billions)3,6013,6983,6913,708
Gross loans and advances: year-on-year growth (%)11743
Total equity (R billions)342380386401
Source: SARB

Balance sheet overview

South Africa remains a loan-driven market, with gross loans and advances accounting for 76% of total assets at end-2016. Commercial banks’ loan book grew by 3% year-on-year in 2016. Lending is driven by four products: mortgages (residential and commercial), term loans, leases and overdrafts. Collectively, these four products accounted for 73% of outstanding credit at end-2016. Credit risk remains low in South Africa. At the close of December 2016 the ratio of non-performing loans to gross loans (NPL ratio) slowed to 2.9%, down from a peak of 6% in late 2009. The reduced elevation of credit risk was driven by two core factors: (i) strong credit practices employed by banks, partly supported by exhaustive credit referencing; and (ii) the stringent impairment regime that disincentivises asset non-performance (South Africa operates under a Basel III regime).

Balance sheet funding remains deposit-driven with deposits accounting for 93% of funding liabilities. However, purchased funds account for the largest share of deposits, accounting for 58% of total deposits at end-2016. Current-Accounts-Savings-Accounts (or CASA), the largest source of low or zero cost funding, accounted for 26% of total deposits.

Liquidity and capital adequacy remains strong

The primary liquidity measurement regime used in South Africa’s banking is based on the liquidity coverage ratio, one of the tenets of the Basel III guidelines. The liquidity coverage ratio (LCR) measures the ability of a financial institution to cover for its liabilities as they fall due and it should, ideally, be above 100%. At end-2016 the sector’s LCR improved to 106.5%, up from 84.5% at emd-2015. Commercial banks’ capital adequacy remained strong with the common equity Tier 1 (CET 1) ratio improving by 120bps year-on-year to close 2016 at 12.22%, while the total capital adequacy ratio strengthened by 153bps year-on-year to 15.73%.

Funded income drives earnings

Total gross revenues generated by South African banks in FY2016 stood at R263.9bn, out of which funded revenues made up 57% of revenues and non-funded revenues accounted for the balance. While this confirms that the South African market is loan-driven, the level is relatively glow given that loans account for around three-quarters of total assets. This is a result of the low net interest margins (NIMs) in South Africa, which are below 5%. In FY2016 the sector’s return on equity (ROE) rose by 140bps year-on-year to 17.6% in local currency terms, driven by two factors: (i) a 20bps rise in NIMs; and (ii) the stable cost-to-income ratio of 55%, which helped drive up banking sector profit by 20% year-on-year to R80.4bn.

Commodity and trade information

Commodity and trade information

Hydrocarbon & mineral production

South Africa is Sub-Saharan Africa’s leading mineral producer, reflecting its abundant mineral resources and its developed industrial capacity. The country is the world’s leading producer of platinum, with output of 142 tonnes in 2015, and also of gold, with output of 145 tonnes. South Africa is the region’s second largest diamond producer (after Botswana), with output of 8.3mn carats in 2016, and also produced 52 tonnes of silver in 2015. South Africa is also a significant producer of industrial metal ores, including iron ore (47.3mn tonnes in 2015), manganese ore (7mn tonnes), chromium ore (6.9mn tonnes), titanium ore (1.2mn tonnes) and zirconium ore (400,000 tonnes), as well as refined metals, notably aluminium (695,000 tonnes) and nickel (57,000 tonnes). In recent years labour unrest, coupled with weak global prices, has shaken South Africa’s mining sector, leading to the closure of several large mines and casting a shadow over the sector’s future. South Africa is also one of Africa’s largest cement producers, with 21.4mn tonnes of installed capacity in 2015.

South Africa holds 95% of Africa’s thermal coal reserves and is by far the continent’s largest coal producer, with estimated output of 249mn tonnes in 2015. Although the country’s coal consumption is high, led by the state power generator Eskom, there is still an average surplus of 70mn tonnes per year which is exported to the global market via one of the world’s largest coal export terminals at Richards Bay.

South Africa’s hydrocarbons sector is dominated by gas, with annual output of 41bcf of natural gas and estimated reserves of 0.5Tcf. South Africa is a marginal crude oil producer, with the single Oribi complex field producing just 1,300 bpd. Despite the low level of hydrocarbon output, South Africa’s refining capacity dwarfs that of its neighbours. South Africa has six refineries with total installed capacity of 715,522 bpd. However, only four of these refineries refine crude oil, while the other two are a Gas-To-Liquid refinery and a Coal-To-Liquid refinery. South Africa’s refinery capacity outweighs local demand, making the country a net exporter of petroleum products. In response to capacity constraints for the state-owned power producer, Eskom, the government is considering building its first LNG terminal in the Saldanha Bay which would import gas to supply a 3,126MW gas-fired power plant. Currently 82% of South Africa’s 47.55GW of installed capacity is coal-fired.

Soft commodity production

South Africa has a diverse and well-developed agricultural sector, enabling the country to be a net food exporter. South Africa is Sub-Saharan Africa’s largest sugar producer, with output of 1.75mn tonnes of raw sugar in 2016/17 (October-September). This was well down on the 2.5mn tonnes produced in 2013/14 and the average output of around 2mn tonnes during the previous decade, reflecting the impact of erratic weather and localised droughts on the sugar sector.

South Africa is a leading producer of grain, notably maize and wheat, both for sub-regional and world markets. The country produced an estimated 12.5mn tonnes of maize in 2017, down from the record 17.5mn tonnes achieved the previous year, but substantially above the low outturns in 2014-15 which were badly impacted by the El Niño weather phenomenon. South Africa also produced 1.9mn tonnes of wheat in 2017, on a par with the previous season. Large volumes of grain output are committed for export, and given the high level of domestic & regional demand for grain, the country is a large importer of maize and wheat from the global market.

South Africa is also Sub-Saharan Africa’s leading producer and exporter of edible fruit, nuts and vegetables, and has one of the continent’s largest livestock sectors.

Trade flows

Imports

South Africa’s imports totalled US$74.7bn in 2016. Capital goods were the largest imports, including US$17.2bn of machinery, vehicles & aircraft and US$8.1bn of electronics, reflecting both the size of South Africa’s consumer class as well as the country’s role as a re-export hub. The country imported US$6.5bn worth of crude oil for its domestic refining sector, mostly from Saudi Arabia, Nigeria and Angola, but also imported US$3.5bn worth of petroleum products, both to meet domestic demand as well as for re-export to the sub-region. The country also has significant imports of inputs for its industrial sector, including US$3.6bn of chemicals, US$2.2bn of plastics, US$2bn of iron & steel, and US$1bn of rubber. Following several severe droughts that have affected the agricultural sector, South Africa has become a large importer of cereals, including US$630mn worth of maize (46.1% of SSA’s imports), US$491mn of rice (10.1% of SSA’s imports) and US$305mn of wheat (10.1% of SSA’s imports). South Africa also imported US$286mn worth of palm oil in 2016, equal to 9.1% of SSA’s palm oil imports.

Exports

South Africa’s exports totalled US$74.1bn in 2016. Exports are dominated by a mixture of metals, minerals and capital goods (including some re-exports), both to sub-regional and world markets. In 2016 South Africa exported precious metals and stones worth US$12bn, including platinum (US$6bnn), gold (US$3.4bn), and diamonds (US$2bn).

Industrial metal exports included US$6.3bn worth of iron & steel, US$3.6bn of iron ore, US$1.4bn of manganese ore and US$1.3bn of chromium ore. South Africa remains Africa’s largest exporter of coal, exporting US$3.9bn worth of thermal coal in 2016, primarily to South Asia & Western Europe, and is a re-export hub for petroleum products, worth US$3.2bn in 2016, mostly to the sub-region. The country’s most successful industrial export is vehicles and machinery, worth US$14.3bn in 2016, exported to the EU, USA and Japan, as well as to sub-regional markets. South Africa is also one of Sub-Saharan Africa’s largest exporters of horticultural goods, with US$2.9bn worth of exports of fruit & nuts in 2016.

  • Flag
  • Population
    54,956,900
  • Area
    1,221,037 km2
  • Capital
    Pretoria
  • Largest city
    Johannesburg
  • Offical language
    English
  • Major languages
    Afrikaans, Northern Sotho, Southern Ndebele, Southern Sotho, Swazi, Tsonga, Tswana, Venda, Xhosa, Zulu
  • Currency
    South African Rand (ZAR)

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