South Africa likely to avoid recession: report
South Africa will likely avoid slipping into a technical recession this year, following surprise improvements in mining and manufacturing data – although the economy remains under pressure due to recent credit downgrades to junk, according to a report by Reuters.
This follows a 0.3% contraction by the economy in the final quarter of 2016, leading many economists to believe that the cabinet reshuffle and subsequent ratings downgrades would lead to another consecutive contraction in Q1 2017 – sending the economy into a technical recession for the first time since the global financial crisis of 2009.
What caused the increase?
According to Reuters, mining output beat expectations of 4.3% due to a demand from China and higher commodity prices globally propelling the sector’s output to a two-year high.
Manufacturing also beat best estimates with a 0.3% year-on-year in March, after shrinking by 3.7% in February, it was comfortably wide of market expectations of a 2% contraction.
“The improved mining, growth in agriculture and the improved vehicle sales should keep first quarter GDP growth in positive territory,” said senior economist at Nedbank Nicky Weimar.
These increases are in line with and international expectations, with the International Monetary Fund noting on Tuesday that it expected South Africa’s economy to grow by 0.8% in 2017.
Not out of the woods yet
However a report released by the Reserve Bank earlier in May indicated that South Africa should prepare itself for future downgrades.
“The possibility of further downgrades to South Africa’s local currency rating and South Africa consequently being excluded from the remaining bond indices is disconcerting given the country’s dependency on portfolio inflows to finance its current account deficit, among other things,” said the report.
“In essence, should further downgrades be effected on South Africa’s local currency debt, this could have a significant impact on the country’s cost of funding and investment flows into the country. Market volatility could increase as a result, with sharp losses likely to be recorded in the currency, bond and equity markets, thereby negatively affecting the stability of the domestic financial system.”
On 3 April 2017, Standard & Poor’s (S&P) downgraded South Africa’s long-term foreign currency rating by 1 notch to BB+ with a negative outlook, pushing the country’s credit rating to sub-investment grade for the first time since the early 2000s.
S&P also lowered the country’s local currency rating by 1 notch to BBB- (also with a negative outlook), which is 1 notch above sub-investment grade.
Rating agency Fitch followed suit by downgrading the country’s foreign and local currency ratings to subinvestment grade (BB+), but with a stable outlook.
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