South African economic growth likely to remain weak for some time

The South African rand has been right at the front of the wave of rebounding emerging market currencies and has strengthened markedly against the US dollar, regardless of subdued economic growth data for the third quarter that was released on Tuesday. This rise ended at a USD/ZAR level of just below 13.50 on Thursday.

Weak production data released yesterday accelerated the reversal. The production in the manufacturing sector, which contributes around 13 percent to the GDP, dropped 1.9 percent month-on-month in October, resulting in a decline of 2.7 percent year-on-year.

Indeed, the data is quite erratic; however, it hints that the momentum in the closing quarter would stay subdued and that the rebound for 2017 is built on soft foundations. The leading indicators are no consistent and indicate toward a hesitant rebound. The South African economy is expected to expand 0.4 percent this year and accelerate to just 1.3 percent next year, said Commerzbank in a research report. Weak growth makes it quite challenging for the government to reorganise its budget, a requirement for maintaining the country rating.

The current account deficit, which will be published today, is expected to show that risks on that front have not declined either. A rise in the deficit is expected to exert pressure on the South African rand. A sustainable appreciation of the South African rand would need that the government would execute reforms steps, added Commerzbank.