JOHANNESBURG – As the World Bank yesterday lowered its outlook for the South African economy, local economists said they predict an even gloomier outlook, with a sovereign ratings downgrade for the country this year.
The World Bank has revised down its June 2018 estimate of 1.8 percent growth for the South African economy in 2019 to a lacklustre 1.3 percent and a subsequent recovery to 1.7 percent in 2020-21, citing high unemployment, slow growth in household credit extension as well as fiscal consolidation which limits government spending.
Local economists reacting to the World Bank forecast said they expected a grimmer outcome this year, with a sovereign ratings downgrade in a few months due to electricity supply scares, protracted labour disputes and policy uncertainty ahead of the 2019 elections.
Moody’s has South Africa’s rating at Baa3, one notch above sub-investment grade. The agency has a stable outlook for South Africa and out of the three main agencies, it is the only one to have the country above junk status.
There is also no cheer from a Bank of America Merrill Lynch note issued yesterday that predicts South Africa’s public debt to rise above 56 percent of gross domestic product in 2019 and the fiscal deficit to reach 4.3 percent.
Analysts Rukayat Yusuf and Ferhan Salman said in the note to clients that “in this scenario we would see room for a Moody’s downgrade to sub-investment grade in the next year, likely after the October mid-term budget”.
Bank of America Merrill Lynch said Eskom's request for support via a transfer of debt to the government could prove “a key fiscal and rating risk this year. Increasing debt levels and elevated financing needs of state-owned enterprises pose the main downside risk to the rating outlook,” it said.
Local commodity exports
The World Bank’s report was downbeat on local commodity exports, whose activity contracted in the first half of 2018 and, despite a recovery in the second half, remains subdued – reflecting challenges in mining production, low business confidence, and policy uncertainty.
While the World Bank is mildly optimistic that higher South African growth in 2020 reflects the expectation that the government's structural reform agenda will gradually gather speed, helping to boost investment growth as policy uncertainty recedes and investor sentiment improves, local economists would not airbrush the waning confidence.
Mike Schussler, the director at Economists.co.za, said while business confidence was rooting on the continuity of a President Cyril Ramaphosa administration, it immediately “does not matter who is in power, if you do not have electrical power for production, the economy will not grow, which will be the sixth time in a row that economic growth has been below the population growth of 1.7 percent.”
Schussler said other factors that would play a role in the subdued growth included drought and the re-emergence of foot and mouth disease.
The Sub-Saharan Africa (SSA) outlook was also downgraded as the World Bank expects domestic risks and political uncertainty to remain elevated In countries including South Africa, Nigeria, Mozambique and Malawi, which are holding elections in 2019.
SSA’s growth reached an estimated 2.7 percent in 2018 – a downward revision from previous projections, reflecting a sluggish expansion in the region's largest economies amid moderate trade growth, tightening financial conditions, and weak prices for key metals and agricultural commodities.
“Domestic political considerations could undermine the commitment needed to rein in fiscal deficits or implement structural reforms, especially where public debt levels are high and rising in particular, remain elevated. Political uncertainty and a concurrent weakening of economic reforms could continue to weigh on the economic outlook in many countries,” the bank said.
Regional growth is expected to pick up, reaching 3.4 percent in 2019 and an average of 3.7 percent in 2020-21, predicated on diminished policy uncertainty and improved investment in large economies, together with continued robust growth in non-resource-intensive countries.
“Recovery in sub-Saharan Africa continues, albeit at a softer pace. Growth in the region is estimated at 2.7 percent in 2018, significantly slower than expected, partly due to weaknesses in Angola, Nigeria, and South Africa. Growth is foreseen to rise to 3.4 percent in 2019 and 3.7 percent in 2020-21, as reduced policy uncertainty helps support a cyclical rebound in these large economies,” the World Bank said.