Why SA’s smartest investors are keeping an eye out for what lies beyond junk
Although the downgrades came sooner than expected, policy uncertainty and an eventual foreign currency downgrade to sub investment grade had been included in many economists’ forecasts for some time, says Sizwe Nxedlana, Chief Economist at FNB.
According to Nxedlana, the odds of a downgrade occurring at some point between 2017 and 2019 was high on the list of expectations for South African investors, and as a result, the recent political and economic turmoil has not greatly altered the country’s economic expectations.
“The further shock to sentiment that is likely to be confirmed in upcoming confidence numbers, and the associated negative impact on GDP growth, would have been even more pronounced if it weren’t for a global backdrop characterised by a rise in both emerging and developed economy growth and slightly higher. commodity prices,” said Nxedlana.
“Another advantage for the domestic economy will be agricultural output, which, post the drought, stands to make a notable contribution to GDP growth. Related to this is the likely drop in food price inflation, which should help drive CPI inflation lower in the near term, albeit now at a slower rate given that the rand has weakened noticeably.”
Nxedlana believes that these factors combined with broader spillover effects from the prospective rebound in external focused sectors, should still ensure a slight pickup in growth this year and next.
“It is important to consider what it would take to shift South Africa’s growth expectations even lower,” said Nxedlana.
“This downside scenario would come to pass if South Africa lost its local currency investment grade sovereign credit rating.”
Nxedlana believes that any shift away from fiscal consolidation and/or towards increased populist policies would signal a move towards such a scenario.
“As it stands, the risk of this scenario has increased, but not sufficiently to warrant a significant change in the outlook.The extent to which incoming data point to significant deterioration in the outlook would also increase the probability of this scenario,” he said.
“Keep an eye on what may lie beyond junk”.
Read: Why understanding inflation is so important – Kganyago
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