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SA is not heading to recession

June 6, 2016

Ratings firm S&P Global Ratings said on Monday it does not see South Africa's economy slipping into a recession soon, but warned that economic reforms had to be implemented to avoid a downgrade in December.

S&P affirmed the investment grade rating of Africa's most industrialised country on Friday, keeping at BBB- with a negative outlook, but lowered its economic growth estimate to 0.6% from 1.6%. South Africa expanded by only 1.3% in 2015 and has seen major industries contract as a weak currency, low consumer demand and rising inflation weigh.

On Monday, S&P said government needs to implement the reforms it promised to boost growth between now and December. “We are looking at improvements between now and the next six months,” S&P Global Ratings sovereign analyst Gardner Rusike said on a conference call with reporters on Monday.

If the “government moves on to clarify some of the policy areas, it helps on confidence and it helps on investment, which to us would ultimately help the overall growth level of the economy”.

This six-month period has placed the country in a precarious position, said Stanlib chief economist Kevin Lings. "Ultimately, the country remains precariously close to another ratings downgrade. S&P’s next review South Africa’s credit rating is in December 2016.”

The agency also said it was concerned that political upheavals could derail the economy and that it expected tensions to intensify ahead of local government elections on August 3.

"The key issue is around turning the economic growth story," said Rusike.

"The potential impact of increasing political tensions within the ruling ANC and within government can potentially derail policy implementation and the reform endeavours that have been intensified since the beginning of this year."

President Jacob Zuma has faced increasing accusations from the opposition of mismanaging the country's economy after he changed finance ministers twice in one week in December.

“It is important that we try and analyse the potential impact of the political risks on the economic assessment,’’ Rusike said. “The issues around the political risks increased since December 9 and also around the issues of the Constitutional Court ruling.’’

The ratings agency said on June 3 that slow growth put the economy at risk and rising political tensions increased the country’s vulnerability of being downgraded to junk. It’s next due to review South Africa’s BBB- rating in December.


South Africa’s economy grew by 0.6% in the fourth quarter and 0.7% in the third quarter of 2015. Statistics SA is set to announce the gross domestic product (GDP) figures for the first quarter of 2016 on Wednesday.

S&P said on Friday that low GDP growth is putting South Africa's economic metrics at risk and could eventually weaken the government's social contract with business and labour.

“The outlook remains negative, reflecting the potential adverse consequences of low GDP growth and signaling that we could lower our ratings on South Africa this year or next if policy measures do not turn the economy around,” it said.

“As weather patterns and terms of trade revert to mean levels, economic growth should improve,” it said.

S&P said it was concerned that the “socioeconomic dynamics of race and skewed income distribution have the potential, in our view, to shift policy toward intervention and income redistribution, at the cost of headline GDP growth”.

Moody’s Investors Service kept its assessment of the country’s creditworthiness at two levels above junk last month, after putting it on review for a downgrade. Fitch Ratings has reviewed its BBB- rating, on which it has a stable outlook, in recent weeks and hasn’t said when it will publish the results of its analysis.

 

 

 

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