Downgrade risk still real - analysts on 0% growth forecast

Sarb governor Lesetja Kganyago.
Sarb governor Lesetja Kganyago.

Johannesburg – Events in the global economy, such as Brexit and the recent terror attacks in Europe have triggered uncertainty in markets and as a result the South African Reserve Bank (Sarb) has taken a cautious stance and revised down the growth forecast to 0%.

Earlier on Thursday July 21 2016, the Sarb’s Monetary Policy Committee (MPC), decided to keep the repo rate at 7%, as was expected by analysts. Economists, however, believe a hike of 25 base percentage points is still possible before the end of the year.

“The South African economy is undergoing a protracted period of weak growth. This is partly due to exceptionally weak growth in domestic spending that is likely to continue because of ongoing government belt-tightening, low growth in credit extension to households, low consumer confidence and the impact of previous interest hikes,” said FNB chief economist Sizwe Nxedlana in a statement.

“It is not as if South Africa will be going into a recession,” said Kevin Lings, chief economist at Stanlib. Some sectors such as mining and manufacturing showed positive signs. The country has implemented a new build programme for electricity and export trade is gaining traction. Some commodity prices such as coal and iron ore have shown improvements too. The agricultural environment is also expected to get better, following the drought, he said.  

Uncertainty following Brexit

“The global economic outlook has been influenced by the outcome of the UK referendum. The financial markets displayed a high degree of volatility in the immediate aftermath of the outcome, but have stabilised to some extent since then,” said Sarb governor Lesetja Kganyago at the rates announcement. Since the referendum, global growth forecasts have generally been revised down.

Global uncertainties have delayed monetary policy tightening in advanced economies, said Kganyago. “The uncertainty drives investment out of emerging markets and towards safe havens,” said Lings. These include gold and US government bonds. The reserve bank will most likely review the long-term implications of Brexit. For now the reserve bank should take a “wait and see” approach and make judgements based on developments, he added.

“The uncertainty is not good, it impacts growth and investments,” added Lesiba Mothata, chief economist at Investment Solutions. Following Brexit, negotiations could take up to three years and this will impact GDP outcomes and eventually impact emerging markets like South Africa.

Possible hike later in the year

The Sarb has not ruled out the potential for further interest rate tightening, stated Sanisha Packirisamy, economist at Momentum Investments.  Sarb remains mindful of the second-round impact of inflation expectations and an inflation outlook which is still on the upside.

Nomura SA believes the Sarb won’t be cutting rates anytime soon. As a result, their projection for the rates was adjusted from 7.75% in November to 8% in January.

“Overall, we think this forecast reflects well the MPC framework of not wanting to cut, delaying hiking where possible, but still reaching neutral rates, and the fear of short-run positives quickly reversing,” stated emerging markets economist Peter Attard Montalto of Nomura.   

Impact on credit ratings decision

“The risk of a credit downgrade is still real,” said Lings. Ratings agency S&P flagged growth as a significant concern when it decided to keep South Africa a notch above junk status earlier this year. However, the agency acknowledged that the weak growth in South Africa is a function of an overall weaker global economic environment.

“The global economic outlook also influences ratings,” said Mothata. This could help South Africa in that S&P could delay their decision in December.

S&P is focusing on whether the country will implement policies that will lead to growth - so far there have been none, said Lings. Since taking the role as finance minister in December last year, Pravin Gordhan’s main focus was on stabilising the budget and private public partnership development. This is not enough to guarantee growth, said Lings.

“Government needs to follow up with the implementation of policy that will stimulate growth. That is critical.”

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