President Cyril Ramaphosa. Picture: ESA ALEXANDER
President Cyril Ramaphosa. Picture: ESA ALEXANDER

The economic nosedive in the first quarter of 2019 has ended hopes that President Cyril Ramaphosa’s eight-month-old promises of economic stimulus has boosted confidence, pointing to faster and deeper cuts in state spending as the country seeks to stave off credit-ratings downgrades.

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SA’s shock 3.2% first-quarter contraction will require the government to downgrade its growth forecasts, analysts said, although a widening budget deficit is likely to draw a negative reaction from ratings agencies for now. SA’s GDP fell by R56bn in the first quarter, its worst performance in a decade, wiping out all the growth SA managed in 2018, while SA looks headed for a first-half technical recession.

The numbers underline the economic challenge for Ramaphosa, who now faces increased pressure to implement his policy reforms, said Capital Economics senior emerging markets economist John Ashbourne.

The rand reacted negatively, falling as much as 2.1% against the dollar in intraday trade. Shortly before the JSE closed, the rand was down 1.68% at R14.6821/$, having lost 10.8% from its 2019 best of R13.2421 reached on January 31.

SA’s GDP print on Tuesday was half of the Bloomberg consensus of 1.6% quarterly growth, with some economists saying they now expect SA’s growth to average 0.5%-0.7% in 2019.

Finance minister Tito Mboweni had pencilled in a growth rate of 1.5% in February. In its May meeting, the Reserve Bank had said it expected growth of 1%, changing its guidance from an interest-rate increase to a cut by the end of the first quarter of 2020.

Tuesday’s numbers were likely to bring forward both Reserve Bank interest rate cuts and accelerate policy reforms, analysts said. It also reflects negatively on Ramaphosa’s 14-point stimulus plan unveiled in September 2018.

The worse-than-expected GDP performance was driven by a 13.2% contraction in agriculture, a 10.8% mining contraction and an 8.8% contraction in manufacturing, the latter two hit by load-shedding.

The dismal figures would probably prompt a 25 basis point cut from the Reserve Bank in July, Ashbourne said, but were not on their own likely to lead to a downgrade by Moody’s Investors Service. Moody's has previously warned on SA’s tepid economic growth.

Citadel chief economist Maarten Ackerman talks to Business Day TV about the decline in economic activity in the first quarter

“The big problem for SA’s finances is on the revenue side, and that will remain a concern as long as growth is weak. But the difference between growth of 0.5% and growth of 1% isn’t going to be the deciding factor here — either outcome would be very poor,” Ashbourne said.

SA’s economy would now need to grow at or above 2.5% in the next three quarters of the year to meet the government’s budgeted target of 1.5%, which was a huge challenge, said Citadel chief economist and advisory partner Maarten Ackerman.

Although a widening budget deficit would be viewed negatively, ratings agencies were likely to acknowledge that the economy was likely to pick up, and give the country more time, said Ackerman.

Agencies were also likely to acknowledge the government was only now getting into a post-election implementation phase, and that the global economic picture, although deteriorating, remained somewhat supportive, he said.