Banking and financial services group BNP Paribas has credited renewed concern over the sustainability of South Africa’s domestic electricity supply, what is likely to be another tumultuous period for labour relations and political instability for its forecast of a below-consensus 2% growth rate for South Africa in 2015.

It expected a slight recovery the following year, forecasting yearly growth of 2.6% in 2016.

The group outlined in an economic outlook document released on Wednesday that lower global oil prices should, however, help prop up consumption through greater purchasing power and an easier inflation outlook.

“The latter should give the South African Reserve Bank a little more breathing room when it comes to normalising monetary policy, allowing it to keep policy fairly accommodative,” it stated.

Meanwhile, the actions of the US Federal Reserve and the European Central Bank and the extent to which they put pressure on the rand in what was likely to be a global reassessment of “carry versus risk”, would be significant pressure points.

“We expect the rand to remain weak,” it cautioned, forecasting an average exchange rate of R11.50 to the dollar for the year.

The consumer price index was expected to narrow from 6.1% in 2014 to 5% in 2015.

‘HERD’ MENTALITY
Looking to political risk, BNP Paribas noted that there was “widespread” consensus that South Africa was in “serious political trouble”, but added that potential investors should be “cautious about consensus”.

“When everyone agrees – for example, that South Africa is about to collapse in a puddle of Nkandla-induced incompetence and corruption – this is precisely
the time to be most wary of joining the herd.

“In 2015, our focus will be the African National Congress’ (ANC’s) National General Council in June, evidence of further lost support for and discontent with the ANC under President Jacob Zuma, volatility in industrial relations and the ANC’s attempts to up the ante on its transformation agenda.

“Couple this with what is likely to be another extremely challenging year for South Africa’s economy and we can expect 2015 to be another ‘black swan’ year on the political front,” noted BNP Paribas economists Jeffrey Schultz and Nic Borain.

CAUTIOUS APPROACH
The bank further outlined that the South African economy had shown “modest” signs of improvement in recent months, with key manufacturing purchasing managers’ index’s at their highest level in more than a year, new vehicle exports having bounced back and corporate lending continuing to prop up overall credit growth.

“There are, however, a couple of factors that have prompted us to take a much more cautious approach to the relatively optimistic growth estimates of most analysts at the start of the year,” it stated.

Its first concern was the sustainability of South Africa’s domestic electricity supply, which was not a new risk but was recently exacerbated by what BNP Paribas said was “clear evidence” showing a lack of or delayed maintenance to energy utility Eskom’s ageing fleet.

Eskom reported in its 2014 financial year that its unplanned capability loss factor had reached a record high of 12.6% of total supply, compared with 5% in 2010.

It added that a more obvious downside risk to domestic growth had emerged from the projected weaker economic growth of South Africa’s key trading partners, China and Europe, in particular.

Further, while South African export growth to Africa had been “admirable” in recent years, it needed to be seen in the context of strong global commodity prices.

“With the outlook for global commodity prices less than certain at present, we also see this as a tail risk to South Africa’s growth outlook,” the group noted.

BNP Paribas continued to have concerns about the country’s domestic industrial relations environment, expecting the breakup of the Congress of South African Trade Unions and the subsequent split from the ruling tripartite alliance of the National Union of Metal Workers of South Africa to create a higher degree of volatility and uncertainty within the country’s labour-relations framework.

Meanwhile, momentum growth in retail sales and household credit uptake were expected to remain weak; largely a function of the still-depressed levels of consumer confidence, a weak private-sector labour market and the “tightening up” of lending standards applied by domestic retail banks.

CONSUMER UPSIDE
On the positive side, BNP Paribas said the South African consumer looked set to benefit from a slightly less grim domestic inflation outlook, largely thanks to the softer global oil prices that were likely to persist in 2015.

Consumer wealth effects also continued to make strides owing to resilient domestic equity market growth and house prices, which were growing at an average 8% a year.

“This has allowed the consumer net wealth-to-disposable income ratio to climb back to its precrisis peak. All of this means the consumer remains a positive counterbalance to what is otherwise a less-than-sanguine structural growth outlook,” the group held.