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According to economist Prof Danie Meyer, director of the TRADE research focus area at the North West University, 2020 is expected to be a...

According to economist Prof Danie Meyer, director of the TRADE research focus area at the North West University, 2020 is expected to be a year full of economic and geopolitical instability and volatility. The year has started on the wrong foot already, with Eskom implementing load shedding as early as the first week of the year. “It is a worrying situation, as most mines and large factories have not yet started their operations!

The government is currently not creating an enabling environment for citizens and businesses to prosper. The South African economy can be compared to a racing car, with many businesses ready to grow, but as soon as the accelerator is pushed, it is blocked by a speed limiter. That limiter is Eskom.”

Prof Meyer says it is predicted that Eskom will continue to struggle throughout 2020 to provide reliable power to the economy. “Therefore, even if we had a good economic policy – and we do not even have a policy – the economy would still not grow. In addition, none of the economic base sectors, such as mining, manufacturing and agriculture, are showing growth signs.”

A further scary statistic is that 76% of all businesses that submitted tax returns in 2019 indicated a loss, and therefore did not pay tax. The year 2020 is also the year in which Moody’s ratings agency – the last agency that has kept the country’s credit rating above junk status – will have no option but to pull the downgrade plug.

The chain reactions from such a decision will be immense, including a rapidly depreciating currency, increasing inflation, rising government debt, and an outflow of investment.      

  1. GDP

According to Prof Meyer, GDP growth for 2019 is expected to be dismal at between 0,4 and 0,6%, which is far too low to create a significant number of jobs for the millions of unemployed people. “With a number of constraints still affecting the economy, such as Eskom and global fears for economic growth slowdown, predictions for 2020 are not very positive. The World Bank is expecting 0,9% growth for South Africa, while the SARB forecast is just above 1%. It is my prediction that the economy will struggle to grow in 2020, and GDP growth of less than 0,7% is predicted.”

  1. Inflation

He says during 2019 the inflation rate was well under control and comfortably within the SARB’s target range of 3 to 6%. The year ended with an inflation rate of 3,6% in November 2019. “The SARB predicts an average inflation rate of below 4,5% for 2019. However, the pressure on inflation is expected to increase in 2020, taking into account, for example, increases in petrol and electricity prices. It would therefore not be surprising if the inflation rate comes close to the upper bound of 6% during 2020. Movements in inflation are still mainly caused by cost-push factors rather than by demand-pull factors. Prof Meyer says a serious note of warning is that if Moody’s downgrades the country’s credit rating to junk status, we could face “hyperinflation” due to rapid increases in prices. Such a situation will have a devastating impact on the economy.

4. Interest rates

The repo rate is currently firmly set at 6,5% by the SARB, with the aim of maintaining the inflation target (3 to 6%). As there is major concern regarding a possible downgrade and price hikes in 2020, the SARB is not expected to change the repo rate during 2020. If there are changes effected during the year, the change is expected to be upwards rather than downwards due to the economic uncertainty.

5. Exchange rate (R/US$)

The value of the rand against the US$ has been extremely volatile over the past decade and this trend will continue. The main aspects that could negatively impact the exchange rate are internal political infighting by the ruling party, weak institutions such as the SOEs, and a possible downgrade by Moody’s ratings agency. “It is anticipated that the currency will depreciate during 2020 and move between R14,30 and R17,50 to the US$ if there is relative stability on the economic and political front. However, if the downgrade becomes reality, it is expected that the rand could depreciate to R19,50 per US$ by year-end.”     

8. Oil and petrol price

According to Prof Meyer two factors influence the petrol price in South Africa: firstly, the price of Brent crude oil in the international market, and secondly, the rand/US$ exchange rate. In 2019 the price of Brent crude oil moved in a narrow band of between $56 and $75 per barrel, with a current level of $65. “Geopolitical conflict affects the global oil prices and the US-versus-Iran conflict could still have a massive impact on oil prices, but it seems stable at the moment.” He says it is expected that oil prices could move between $60 and $80 per barrel during 2020. On 1 April 2020, an additional fuel levy will be added to the fuel price, and it is expected to be approximately R0,50 per litre. “No major increases are expected during 2020 if stability continues and the country is not downgraded by Moody’s. If a downgrade occurs during the year, the fuel price could reach record high prices.”

In conclusion, Prof Meyer believes in order to rescue the South African economy, urgent structural change with clear policy certainty are required. “Structural changes regarding government spending and debt, SOEs, labour regulations, small business support and education are essential.”  

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News desk writes, collates and publishes relevant news for Yiba.

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