A downgrade by Moody’s in February would result in the country being excluded from Citi’s World Government Bond Index. Photo: Reuters
JOHANNESBURG - The new leadership of the ANC and its government will face many economic headwinds next year, with the threat of further credit rating downgrades key among the challenges.

The country will enter the new year with the knowledge that a downgrade by Moody’s in February would result in the country being excluded from Citi’s World Government Bond Index (WGBI).

RMB Morgan Stanley projects a potential outflow of $5billion (R63.6bn) if the country is excluded from this index, which would be triggered by Moody’s dropping its rating by one notch.

In November, Moody’s kept its Baa3 rating for the country, but placed South Africa on 90-day review for a downgrade.

Tumisho Grater, an economic strategist at Novare Actuaries and Consultants, said South Africa must do everything in its power to avoid further downgrades.

“The slip in the credit ratings increases the calls for reforms even louder and falling deeper into the red. (In the instance that Moody’s follows suit after the 2018 February budget), this may lead to more aggressive falls in the rand, government bonds, and business and consumer confidence, which is needed to attract investment, create jobs and grow the economy,” Grater said.

The SA Reserve Bank (Sarb) earlier this year lowered its benchmark repo rate by 25 basis points to 6.75percent, its first interest cut since 2012. This was on the back of improved inflation.

The central bank said it expects to cut rates by 75basis points until 2019, but this would be determined by inflation and other economic indicators.

Kamilla Kaplan, an economist at Investec, said she expects inflation to be at the upper-end of Sarb’s target band next year. “For the year (2017) as a whole, CPI inflation is estimated to average 5.3percent year-on-year, compared to 6.3percent on an annual basis in 2016.

“However, for 2018 and 2019, we forecast CPI inflation to rise to 5.7percent year-on-year and 5.8percent year-on-year respectively on a strengthening global cycle, a further lift in commodity prices and higher local administered tariffs,” Kaplan said.

South Africa would also enter 2018 with economic growth expected to remain muted, below 1percent. The National Treasury in October cut South Africa’s growth forecast for this year to 0.7percent and indicated that annual growth would remain below 2percent for the next three years.

Both the Inter­national Monetary Fund and World Bank have similar growth forecasts for the country.

However, John Ashbourne, the Africa economist at Capital Economics, believes the rebound in the economy will be stronger than expected.

“The increased momentum picked up in the middle of 2017 supports our view that growth will remain strong going into next year. We will be adjusting our 2018 forecast in our forthcoming outlook, but we expect that the economy will maintain growth of about 1.5 to 1.7percent,” Ashbourne said.

The rand, which endured a volatile 2017, was expected to remain volatile in the new year.

Carlos Teixeira, a South Africa economist at Credit Suisse, said the rand would remain under pressure next year.

“The balance of payments funding gap (albeit currently in modest surplus at 1percent of gross domestic product for the first time since the second quarter of 2011) now has negative momentum, suggesting a lack of support for the currency. The rand has already discounted the funding gap, deteriorating back into deficit territory,” Teixeira said.

Daniel Mminele, the deputy governor of the Reserve Bank, said next year presented an opportunity for a fresh start.

“In South Africa, 2018 provides an opportunity to press the 'reset button' and, through a collaborative approach, to try and break the self-reinforcing negative feedback loop of policy uncertainties, low private-sector confidence, subdued investment in productive capacities and poor competitive performance,” Mminele said.