World Bank growth forecast shock could finally tank Moody's rating for SA - analysts


South Africa will have to keep its fingers crossed that the only rating agency that still has the country on investment grade ignores its below 1% growth forecast for 2020, say economists.

This comes after the World Bank became the first key institution to cut its economic growth projection for SA to below 1%, putting it at 0.9% for 2020 when it released its Global Economic Prospects report on Thursday.

The revised forecast is below the National Treasury’s last projection that SA's economy would grow by of 1.2% in 2020, or Moody's which expected 1%. But it is almost in line with the bank's own Africa Pulse report, which projected 0.8% in October last year.

Interruptions in electricity supply – as Eskom continues to roll out rotational load shedding – was a key reason repeatedly highlighted by the bank for downgrading its initial growth forecast for South Africa by 40 basis points in 2020 and 2021.

It now expects SA’s economy to grow by an average 1.4% in the two years to 2022.

Even then, that growth rate will only be attained if government makes the necessary structural reforms and if policy certainty improves so that the environment can be conducive for private sector investments, said the Washington-based lender.

"Increasingly binding infrastructure constraints - notably in electricity supply - are expected to inhibit domestic growth, while export momentum will be hindered by weak external demand."

Greater risk

Annabel Bishop, chief economist at Investec, said Moody’s is due to review SA’s credit rating on March 27, after the Budget speech.

Government will need to show marked commitment to fiscal consolidation to avoid a downgrade, including reducing public expenditure, in order for the fiscal debt and deficit projections to moderate, she added.

"Moody’s expects SA’s GDP at 1.0 to 1.5%; avoiding a downgrade means the agency would need to come to terms with a likely weaker growth outcome for 2020, of potentially around 0.8% year-on-year," she said.

Bishop said the rating agency has previously expressed heightened concern over SA’s weak economic growth, and that lower growth forecasts for SA – including the recent drop from the World Bank – adds to the risk of a downgrade.

Dr Azar Jammine, chief economist at Econometrix, said lower economic growth would take a toll on revenue collection, heightening the risk of a ratings downgrade.

"With less tax collections, you have a likelihood of an even bigger budget deficit, unless there are commensurate cuts in expenditure," said Jammine.

The Eskom thorn

Jammine said given the levels unplanned breakdowns reached at Eskom when the power utility implemented stage 6 load shedding in December, the logical conclusion was that when everyone returned to work and business production returned to normal levels, power interruptions could yield even worse economic growth than anticipated for 2020.

"The latest manufacturing data for November shows production was down 3.6%, one of the worst we’ve had in a long time. We haven't even seen December figures."

Breakdowns at Eskom have remained elevated for most of December and January.

On Thursday, when the utility announced stage 2 load shedding, it said over 14 000MW of generating capacity had broken down, almost the same level as 14 200 MW that was reported when stage 6 load shedding was implemented in December.

Bishop said persistent load shedding would support a further contraction of GDP in the first quarter of 2020, when there was already a 0.6% reduction in GDP in the third quarter of 2019. The fourth quarter GDP numbers are yet to be released, but are expected to also show a contraction.

"The first quarter of each calendar year has seen a contraction in GDP in the past four years, and Q1.20 is expected to be no different, particularly with the negative impact of load shedding."

 "SA risks potential GDP continuing to drop to 0%, and then below, without drastic action to repair the productivity of public services and infrastructure, including consistent electricity supply," said Bishop.

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