Johannesburg - The International Monetary Fund (IMF) is likely to slash South Africa’s economic growth forecast for the year to below 2 percent, while some analysts expect rating agencies Standard & Poor’s (S&P) and Fitch to downgrade the credit rating from A- to BBB+ as the country edges closer towards recession.
Nedbank had already reduced its growth forecast to 2 percent following the 0.6 percent contraction in gross domestic product (GDP) in the first quarter, bank economist Isaac Matshego said yesterday.
Whether the forecast goes up or down depends on how long it takes to find a solution to the platinum strike, which is the main cause of the IMF’s proposed cut.
Natasha Mavee, a representative of the IMF in South Africa, said the institution was likely to revise its forecast following the release of the first-quarter GDP figure.
According to Bloomberg, the IMF in April expected an expansion of 2.3 percent this year.
Rating agencies such as S&P and Fitch review ratings twice a year. It is widely expected that South Africa will be downgraded to BBB+ on Friday.
The next rating would take place on December 12. By then we would know what had happened during the second quarter to June, Matshego said.
One of the repercussions of a downgrade from S&P and Fitch is that the rand might weaken, which would mean higher inflation and lower growth prospects. This would result in higher food and fuel prices, plunging South Africans deeper into financial hardship.
The government has denied the country might slip into its first recession in five years despite a 25 percent drop in mining output. The sector is embroiled in the worst strike to hit South Africa, with 70 000 platinum workers downing tools almost 20 weeks ago.
Members of the Association of Mineworkers and Construction Union are demanding a basic salary of R12 500 to be achieved over four years at Lonmin, Anglo American Platinum and Impala Platinum.
Another catastrophe, said Azar Jammine, the chief economist at Econometrix, was that the National Union of Mineworkers was considering a strike in the metal processing sector. “That is a lot more serious than the platinum strike because it will increase the chances of a full-blown recession.”
He said it was not clear if S&P and Fitch would move in the same direction because at the last rating review S&P put the country on a negative watch while Fitch rated South Africa as stable.
“What may happen is that they may adopt a wait-and-see approach but that depends on the wage negotiations in the platinum industry.”
Another indication of where the country was headed would be the government’s mini-budget in October, which would provide some insights into the government’s finances.
A downgrade by Fitch and S&P would mean South Africa was seen as more risky, resulting in higher risk premiums.
“At the moment [our premium is] under 2 percentage points and if there is a downgrade we will be higher risk and pay higher interest rates,” Matshego explained.
“Essentially, the cost of borrowing money by the state will go up, resulting in higher taxes for ordinary South Africans. If interest rates go up, that means there is less to spend on key sectors such as health and education.”
Chris Hart, a strategist at Investment Solutions, said a rating downgrade was likely because the growth drivers of the economy were weak and households were over-indebted.
The government was over-extended and could not afford to spend more money. It was already in a deficit and the economy was not strong enough to boost growth. There would not be a stimulant through monetary policy and the only real area for growth was investment, he said.
Hart said the main challenge facing the government was to avoid downgrades beyond what might happen on Friday.
“We have to get higher growth, which will be unattainable as long as we continue with our macro-economic mismatch,” he said. - Business Report