JOHANNESBURG – South Africa’s ailing economy received a further blow after Moody’s Investors Service slashed the country's growth forecast by half and said the economy's slide into recession was “credit negative”.

The rating agency was the first yesterday to react to South Africa falling into recession in the second quarter – for the first time in nine years.

“This weaker-than-expected economic performance will exacerbate fiscal and monetary challenges, a credit negative. We now project real growth at 0.7 percent to 1 percent this year,” said Lucie Villa, Moody’s lead sovereign analyst for South Africa. 

The ratings agency had previously pegged South Africa’s growth at 1.5 percent.

The ratings agency is the last of the “big three” international agencies to have South Africa’s long-term foreign-currency debt in investment grade.

Maarten Ackerman, chief economist at Citadel, said the weak economic growth had heightened the country's risk of suffering yet another credit downgrade in the second half of the year.

“It’s going to take hard work to dig ourselves out of this situation while probably also facing heightened populist pressure heading into the election,” Ackerman said.

Moody’s also flagged that the recession added to the fiscal and monetary policy challenges. 

“For monetary policy, notwithstanding the SA Reserve Bank's track record of keeping inflation within the target range, it faces challenging decisions from acceleration in inflation, driven in part by petroleum prices and the rand depreciation,” Villa said.

But the economy yesterday received some welcome respite after the second quarter's current account deficit improved, and eased pressure on the SA Reserve Bank to hike interest rates later this month.

The central bank said that the deficit on the current account of the balance of payments narrowed by R55.6 billion and amounted to R163.8bn compared to R219.4bn in the first quarter. This saw the deficit narrow to 3.3 percent of gross domestic product (GDP), at a seasonally adjusted annualised rate from 4.6 percent in the first quarter.

The data also showed that South Africa’s trade balance switched to a surplus of R41.9bn in the second quarter from a deficit of R15.2bn in the prior quarter.

William Jackson, the chief emerging markets economist at Capital Economics, said the improvement in South Africa’s current account deficit should help to ease concerns about the country’s external financing needs.

“The improvement in the external position, coming alongside the weakness of the latest GDP data, supports our view that the Reserve Bank will probably look through the recent rise in inflation,” Jackson said.

Financial markets appear to be pricing in about 50 basis points of hikes in the repo rate in the next six months. 

The SA Reserve Bank is expected to make its decision at its monetary policy committee meeting on September 20.

The Old Mutual Investment group head of economic research, Johann Els, said it had already been difficult to pass on price increases from a weaker currency given the slow growth in the economy.

“Therefore the SA Reserve Bank will continue to talk hawkishly, but an interest rates hike is imminent given the deflationary impact of recent price increases and the weak state of the economy,” Els said.

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- BUSINESS REPORT