Slow growth heightens risk of more credit rating downgrades
Even if SA avoids a recession, the country remains at risk of further credit rating downgrades if growth continues to disappoint, analysts said at the weekend.
The economy is likely to grow marginally in the second quarter, meaning SA at least avoided slipping into its first recession since the outbreak of the global financial crisis a decade ago. GDP shrank by 2.2% in the first three months of 2018.
Statistics SA’s June figures, expected in the next few weeks, will provide a clearer indication of whether the economy contracted or expanded. However, the agricultural sector, which contracted by 24% in the first quarter, remains a wildcard.
Many institutions have revised down their growth forecasts in recent weeks on weaker than expected production figures in the mining, manufacturing and retail sectors.
"Should 2018 growth disappoint, and 2019 look to do the same, key credit rating agencies have warned that SA could face further credit rating downgrades," said Investec chief economist Annabel Bishop.
This would mean SA’s cost of borrowing would increase, lowering the ease of borrowing, in an environment where the country is already battling fiscal consolidation. All three credit rating agencies have said that among other factors, such as contingent liabilities and a large fiscal debt burden, SA’s credit ratings are constrained by the slow pace of growth.
A recession in the first half of the year would lead to more revisions to the 2018 growth outlook for SA.
"We cannot rule out the possibility of further credit rating downgrades over the next two years," said Econometrix MD Azar Jammine, adding that SA would likely escape another downgrade in 2018.
While he is confident SA will not have a recession, he warned that if growth continued to fade and there were more bailouts of state-owned enterprises, there would be further downgrades.
Importantly, Bishop added that the subdued nature of growth implied that unemployment would remain high.
Reserve Bank governor Lesetja Kganyago said he was confident SA would not slump into a recession, but warned that growth remained too low to create jobs.
"At this stage, the high-frequency data for the second quarter indicate that a modest improvement is likely in the quarter, and the Bank does not expect a second consecutive quarter of contraction," he said in an address to shareholders at the Bank’s annual general meeting in Pretoria on Friday.
This comes ahead of the quarterly labour force survey on Tuesday, which is expected to show that unemployment remains at 26.7%.
However, Kganyago said: "At these growth levels, we cannot expect to make appreciable inroads into the unemployment problem of the country."
FNB chief economist Mamello Matikinca said it was difficult to see where job growth would come from. She anticipated job losses in the agriculture, mining, manufacturing and construction sectors.
Earlier in July at the monetary policy committee meeting, Kganyago announced the bank had slashed its growth forecast to 1.2% in 2018, compared with a previous estimate of 1.7%.
While there will likely not be a recession, SA will see a slower pace of growth than previously expected, said economist Thabi Leoka. "There’s a lack of support for GDP and it’s not clear where strong growth is going to come from. We’re just bumping along at the bottom," she said.
"Credit rating agencies will be less reactive if we see growth in the second quarter rather than a recession."