Ratings agency Moody’s has revised its growth forecasts for South Africa and now predicts that the economy will contract by 2.5% this year as the country slides deeper into recession.
In early March, before it downgraded the country’s credit rating to junk status and before the country entered a lockdown period, Moody’s had forecast growth of 0.4%.
“The lockdown will reduce the country’s productive capacities, with the transport, hospitality, mining and manufacturing industries particularly affected, while weighing on households’ consumption,” it said.
Moody’s added that a return to investment-level for South Africa is unlikely any time in the near future given the negative outlook it is currently facing.
“We would likely change the rating outlook to stable if the government consolidated its finances in line with our baseline expectations, growth picked up slowly but durably and financing risks remained limited,” it said.
Municipalities and tax collection
One of the key concerns cited by the ratings agency is the decreased revenue collection from the country’s municipalities due to the ongoing lockdown restrictions.
“The majority of municipalities will not be operating at full capacity as cities close some of their customer service centres,” it said.
“This will likely cause a delay in sending out invoices and a lack of or limited credit control services. Some municipalities, including the City of Johannesburg, have suspended the cutting off of services to defaulting customers over the lockdown period.
“As a result, the number of customers in default will increase, exacerbating lower revenue collection rates.”
Moody’s noted that some municipalities have already recorded lower collection rates, indicated by an increase in bad debts provisions to operating expenditure in fiscal 2019.
A further increase in bad debts provision will likely lead to a decrease in municipalities’ operating balances over the next 1-2 years, it said.
Local governments will be affected by customers struggling to pay property rates and service charges as unemployment rates continue to increase.
Moody’s said it also expect the number of indigent households to increase as a significant proportion of the labour force is employed in the informal economy, which is severely affected by the lockdown.
Statistics South Africa estimates that approximately 18% of the labour force was working in the informal economy (non-agricultural) as of Q4 2019, which increases to 26% when employment in private households is taken into account.
“If the lockdown is extended, we expect the need for operating transfers to cover indigent households to increase. Municipalities depend on the national government for operating transfers (approximately 15% of their operating income) to cover the provision of basic services to low-income households,” Moody’s said.
“However, a lag in receiving the required rise in operating transfers will also pose liquidity risks for municipalities.”
South Africa’s high level of inequality also increases the risk of social unrest during the crisis as service delivery and access to health services may be negatively impacted, Moody’s said.