Moody’s warns South Africa by cutting its 2018 economic growth forecast by half

Ratings agency Moody’s published a brief commentary on South Africa’s latest GDP figures, indicating that the country is in recession.

Stats SA reported on Tuesday (4 September) that South Africa’s economy declined by 0.75% in the second quarter of 2018, marking a technical recession following a first quarter decline of 2.2%.

In a statement on Thursday (6 September) Moody’s said that this economic performance was weaker than expected, and was a credit negative for the country, adding that put further pressure on the country’s standing fiscal and monetary challenges.

“The Reserve Bank faces increasingly challenging decisions from an acceleration in inflation, driven in part by petroleum prices and rand depreciation,” Moody’s said.

The agency also followed international banking groups in cutting South Africa’s growth forecast, slicing it down from 1.5% expected at the start of the year, to just 0.7%.

Earlier this week, Goldman Sachs cut its forecast from 2.0% to 0.8%, with Merrill Lynch cutting it from 1.6% to 0.9%.

Moody’s is the only ratings agency still holding South Africa above ‘junk status’, having affirmed the country’s rating at one notch above sub-investment grade in March 2018, following the ouster of former president Jacob Zuma.

The outlook was set to stable.

At the time, Moody’s said its affirmation was on the basis that South Africa’s institutions would improve under a more stable policy framework, and that there would be fiscal consolidation amid rising social cohesion.

However, the group was still mindful of the “political, policy and practical challenges of meeting diverse economic, social and fiscal objectives”, as well as the reality of the fundamentals that were tying the South African economy down – ie, low growth, high unemployment etc.

While South Africa enjoyed a few months of optimism and euphoria around the political changes in the country, economic data – both internal and from abroad – have brought investors and analysts back to reality.

Amid policy uncertainty around land reform, government increasing spending, and state companies struggling to find any financial stability, South Africa has also had to contend with a strengthening dollar, a global trade war and contagion from financial crises in other emerging markets.

Read: Tax credits, spectrum rollout and other ‘interventions’ the ANC is proposing to help fight the recession

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Moody’s warns South Africa by cutting its 2018 economic growth forecast by half