Moody’s cuts South Africa’s growth forecast after shock GDP numbers

Ratings firm Moody’s has lowered South Africa’s GDP growth prospects for 2019 – cutting it to 1.0% from a forecast of 1.3% previously.

In a research note published on Monday (10 June), Moody’s attributed the cut to the shocking GDP numbers that were published last week, where Stats SA reported a quarterly decline of 3.2%.

Initial predictions for the GDP numbers were expected to be a drop of around 1.6%, primarily due to load shedding and other economic pressures, such as the sustained decline of SOEs.

“The quarterly decline, the largest in 10 years, is credit negative for the Government of South Africa’s (Baa3 stable) revenue and policy options,” said Lucie Villa, Moody’s lead sovereign analyst for South Africa.

“The first-quarter contraction presages low growth in the year as a whole,” Villa added.

Villa said that assumption was for economic activity to recover over the rest of the year as policy uncertainty dissipates following May’s general elections.

However, she said that the government’s “policy objective to boost economic activity while consolidating its fiscal position will prove even more difficult in this environment”.

“Beyond the implications for the 2019 budget, the historically large contraction in GDP will complicate the government’s economic and fiscal policy,” Villa said.

“For instance, any fiscal stimulus would likely come with immediate or nearly immediate costs, but potential economic benefits that would take longer to accrue. Because we expect lower growth, we also expect South African banks’ asset quality to come under further negative pressure.”

Forecasts for South Africa’s economy in 2019 now range between 0.5% – the position of local economists and analysts – to 1.3%, which is the latest figure out of the International Monetary Fund (pre-GDP numbers).

Downgrade risks

Another ratings firm, S&P Global, warned last week that South Africa’s slowing economy, as well as policy uncertainty bred by political infighting, was putting the country at risk of another downgrade.

While S&P already has South Africa in sub-investment grade (so-called “junk status”), further declines on the grading system could have a knock-on effect on sentiment towards the country, while also making it more expensive to borrow money.

Moody’s is currently the only major ratings firm to have South Africa above junk, with the group last saying that the country’s economic status is in-line with other nations that are on the same level.

Even with a growth forecast, the group noted that there were still a number of factors that mitigate the challenges the country currently faces.

“At 38% of GDP, according to the Institute of International Finance, South African corporates have lower debt levels than other emerging market corporates and generally have ample capacity to maintain loan repayments even in difficult times.

“In addition, South African household debt to disposable income had fallen to 72% as of December 2018, from 79% at the beginning of 2014,” Villa said.

Read: Attack on Reserve Bank could lead to a ratings downgrade

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Moody’s cuts South Africa’s growth forecast after shock GDP numbers