Moody’s says the odds of another recession are high for SA

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An economic decline in the second quarter of 2019 would result in another recession for SA in the past year after GDP contracted 2.6% in the first quarter of 2018 and 0.7% in the second.

SA emerged out of recession in the third quarter of 2018, expanding 2.2%, boosted by manufacturing, finance,transport and trade industries. Earlier this week, Statistics SA said first-quarter GDP for 2019 shrank 3.2%. 

The worse-than-expected figure further fueled expectations that the Reserve Bank will cut interest rates, after keeping it unchanged at 6.75% at the last monetary policy committee meeting. Moody’s said it expects the Bank to cut rates at its next meeting in July.

Despite the negative outlook, Moody’s has penciled in a 1% growth rate for SA in 2019, maintaining there is still hope that the recent elections outcome may result in renewed reform efforts.

The ratings agency said it expects SA’s GDP to grow by 1% this year, in line with the Reserve Bank’s forecast. Moody’s said it sees growth of 1.5% in 2020 and expects the inflation rate to remain within the 3% to 6% target range at 5.1% for 2019, and 5.4% for 2020.

“The task of reviving the economy will be challenging and reforms will take time to show effects. We expect a gradual pickup in real GDP growth in 2019, but we expect continued lacklustre momentum,” Moody’s wrote. 

Moody’s said President Cyril Ramaphosa’s victory in the general elections offered hope for renewed structural and economic reforms, including fixing troubled state-owned enterprises (SOEs) such as Eskom; and curbing unemployment, which currently sits at 27.6%. 

Moody’s said geopolitical concerns including the US-China trade war are denting the prospects of global economic growth.

“If the tensions drag on, they will leave a lasting impact on global economic linkage. Second, a worsening of tensions between the US and Iran could tip an already delicate balance in the Middle East, potentially sending oil prices soaring and further complicating economic decisions in an already uncertain environment,” the report read.  

In March, Moody’s opted to skip SA’s scheduled rating review, keeping the country's debt rated at Baa3, the last investment grade. Should Moody’s downgrade SA’s credit status to sub-investment grade, SA would fall off international bond indices, which would prompt automatic selling by institutional investors.

“If there is no serious policy reform between now and November, when Moody's has to come out with its decision again, then there is a decent chance that Moody's could downgrade the outlook statement of SA from stable to negative. I don't think they will immediately downgrade the investment-grade rating,” Old Mutual chief economist, Johann Els said. 

“The economic data has been so weak and volatile that it is quite possible that we may experience a recession, but the more important point is that growth is very weak.

“After the first-quarter GDP, I have also revised my forecast to 0.9% growth for the year, but it does mean that in the second half we should expect, or we're at least hoping for, a rebound in growth — that's not impossible,” Els said. 

mjoo@businesslive.co.za