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Cautious Optimism As South Africa Snaps Out Of Recession

Cape Town

For South Africa, the third quarter of this year marked the end of a surprise recession, with 2.2-percent annualized GDP growth thanks largely to the manufacturing, agriculture, transport and finance industries. 

It was no small feat, either, considering that the country’s economy had shrunk 0.7 percent in the previous quarter.

South African President Cyril Ramaphosa took the opportunity to score some political capital for the ruling African National Congress on the news, noting that “In the end, smart governments are governments that respond and give guidance to what needs to happen”.

The 2nd quarter recession was South Africa’s first since 2009. 

And in terms of “giving guidance”, the South African president said he planned to hold meetings with the business community and to launch a series of measures designed to stimulate the economy and boost investor confidence.

With the tourism industry one of the country’s most important, accounting for around 10 percent of the economy, the plan moving forward is to invest more in infrastructure and ease visa requirements.

While investor confidence has been boosted somewhat by Ramaphosa’s assumption of the presidency in February, the boost has been rather innocuous. Everyone may have been happy to see Jacob Zuma leave office along with his scandalous baggage, but Ramaphosa still hasn’t shown the business community enough so far.

The 2.2-percent GDP uptick beat analyst expectations, with the median estimate of economists surveyed by Bloomberg standing at growth of 1.9 percent. Economists polled by Reuters had forecast a 1.6-percent expansion for the quarter. Related: Vatican Banking Gets A Dose Of Transparency

The third quarter saw manufacturing output increase by 7.5 percent and agriculture rise by 6.5 percent. But mining contracted 8.8 percent.

(Click to enlarge)

Source: Bloomberg

The mining data is troubling as this industry accounts for some 7 percent of South Africa’s GDP, with the country being one of the largest producers in the world of platinum and serving as the largest resource of iron ore in Africa.

The African National Congress will have to proceed with cautious optimism because they aren’t out of the woods yet. The National Treasury is forecasting annual growth of less than 1 percent for the year, according to Bloomberg.

For now, though, fears of credit downgrades have been eased since the top three ratings firms had cited weak growth as a major threat in the second quarter.

Related: U.S. Treasury Sanctions Bitcoin Wallets For First Time

South Africa’s emergence from recession comes right after a 0.25 percentage point interest rate hike. The South Africa Reserve Bank believes that the Rand remains vulnerable and volatile, though it rallied in the last week of November.

Indeed, the rand remains highly vulnerable. While it gained on news that the country was pulling out of recession, it lost those gains Tuesday over renewed U.S.-China trade war fears.

“The rand has given up much ground despite the strong rebound in the economy, which will create a supportive environment for revenue growth,” Reuters quoted ETM economist Halen Bothma as saying Tuesday.

Morgan Stanley, however, is backing a better-performing rand in the New Year.

"We believe that ZAR could outperform," says Hans Redeker, a strategist with Morgan Stanley in London in the last week of November.

While November’s budget had a lot of disappointing downside, Redeker says it "also set a low bar for February’s budget, where the government could find new measures to reduce the deficit".

By Josh Owens for Safehaven.com

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