High chance of recession in South Africa: Moody’s

South Africa’s dismal financial results in Q1 2019 point to a high possibility of a technical recession hitting the country, says credit agency Moody’s.

“Weak survey data suggests that the odds that the economy may experience another technical recession in 2019 are high,” the group said in a macro-analysis released on Thursday.

“We attribute the persistent economic weakness to lackluster domestic private sector demand — both household spending and investment – and the detrimental impact of widespread power outages on the manufacturing and mining sectors.”

However, there is still some positivity surrounding the country.

With the ANC winning the election with a clear majority under the leadership of President Cyril Ramaphosa, there are hopes of a renewed push for structural reforms aimed at igniting growth and reducing unemployment, Moody’s said.

“Immediate policy priorities outlined by President Ramaphosa include restructuring the highly indebted state-owned monopoly electricity utility operator Eskom and shrinking the size of the bureaucracy,” it said.

“The president has also discussed longer-term plans to diversify the economy away from mining.”

However, South Africa’s complex economic problems should not be underestimated, the credit agency said.

“The task of reviving the economy will be challenging and reforms will take time to show effects. We expect a gradual pickup in real GDP growth in 2019, but we expect continued lackluster momentum.

“We project 1% growth in 2019 and 1.5% in 2020.”

Moody’s said that it also expects the Reserve Bank to cut rates in its upcoming meetings in support of the economy.

Avoiding recession

While Moody’s sees the chance of recession being high, several economists believe that the country may be able to avert the outcome.

According to Dawie Roodt, chief economist at the Efficient Group, economies tend to bounce back in the second quarter of a year – unless extraordinary conditions existed, which he did not believe was currently the case.

Things will also look better if government can stamp out policy uncertainty and Eskom can keep the lights on in winter.

“The only thing about such a large contraction is that it creates a large base effect, which helps an economy to bounce – so you would have to do worse in the second quarter than the first quarter in order to get a technical recession,” said Gina Schoeman, an economist at Citibank South Africa.

Among economists and analysts, South Africa’s GDP prospects for 2019 now range between 0.5% and 1.0%.

Rand takes a beating

South Africa’s GPD data and worries over recession have mixed with recent policy uncertainty and infighting among ANC officials to push the rand much weaker.

The -3.2% GDP shock was exacerbated by a double-blow statement from the ANC out of Luthuli House, where the party’s secretary general, Ace Magashule, announced that it would push its deployees in government to adopt and implement a broadened mandate for the South African Reserve Bank, which once again brought the central bank’s independence into question.

Government officials, particularly out of National Treasury quickly moved to deny that any decisions were taken to change the Reserve Bank’s mandate – but this just led to conflicting and contradictory accounts, which left the market with lingering uncertainty.

According to Bianca Botes, Treasury Partner at Peregrine Treasury Solutions, the apparent infighting and policy uncertainty has undermined the small positives made in global trade talks.

“While the dollar has eased off its low, clawing back some ground as optimism improved around trade talks, this has done little for the rand that is struggling to come to grips with ANC infighting and policy uncertainty regarding the SARB,” she said.

At 14h30, the rand was trading at these levels against major currencies:

  • ZAR / USD: R14.86
  • ZAR / GBP: R18.90
  • ZAR / EUR: R16.75

Read: Talk of printing money spooks the rand

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High chance of recession in South Africa: Moody’s