subscribe: Daily Newsletter

 

Ratings downgrade could push SA into recession

0 comments

Downgrades in South Africa’s sovereign rating status could trigger a recession in the South African economy in the near term.
This is the word from Thea Fourie, senior economist at IHS Global Insight, who says that although the country faces severe global headwinds, particularly surrounding major trade partners such as China and the European Union, domestic structural issues will continue to impede growth in the coming years.
Fourie adds that further mining-sector employment lays-offs remain a high probability, with the risk of strikes and production disruptions ahead of wage agreements in 2016 still high.
IHS currently has a Negative outlook for South Africa’s medium-term sovereign risk rating. A further downgrade will push the IHS ranking into sub-investment status.
According to Fourie’s analysis: “Moody’s placed South Africa’s Baa2 Issuer Rating on review for a downgrade. The country’s relatively weak medium-term economic prospects combined with fiscal consolidation continue to pose a significant risk to the country’s current rating status.
“IHS views the probability of a downgrade by Moody’s as very high. Of more concern will be the possible downgrade by Standard & Poor’s in June this year, which could push South Africa into non-investment grade status.
“The downgrades in South Africa’s sovereign rating status could trigger a recession in the South African economy in the near term.
“The soft manufacturing and mining data released during the past week is therefore a blow to South Africa’s near-term growth and sovereign risk rating prospects. Currently, mining and manufacturing account for more than 20% of South Africa’s overall GDP.
“Although the country faces severe global headwinds, particularly surrounding major trade partners such as China and the European Union, domestic structural issues will continue to impede growth in the coming years. Rising cost structures due to an inflexible labour market and high electricity tariffs, loss in production base due to the large steel plant closure, import competition, and an ailing farming sector will be reflected in first-quarter 2016 growth numbers.
“Further mining-sector employment lays-offs remain a high probability, with the risk of strikes and production disruptions ahead of wage agreements in 2016 still high. The adverse impact of the drought-induced El NiƱo weather phenomenon will leave South Africa’s agricultural production under additional pressure in the current farming season, requiring well above normal food imports for local and regional consumption.
“Of bigger concern is the well below-required allocation in the 2016/2017 national budget to the agricultural sector that will ensure sufficient planting and livestock restocking during 2016. Rising food prices, combined with the lagged impact of the weaker rand exchange rate may raise interest rates sooner than projected by current consensus forecasts.
“Overall, IHS expects South Africa’s GDP growth rate to average 0,5% in 2016, edging up marginally to 0,9% in 2017. However, a sovereign ratings downgrade by S&P in 2016 could push South Africa’s economy into recession by 2017. This outcome depends primarily on the magnitude of potential capital outflows, from the domestic equity and bond markets (triggered initially by the mechanical sell-off of then more risky financial assets by institutional investors) and authorities’ policy response. IHS currently has a Negative outlook for South Africa’s medium-term sovereign risk rating.
“A further downgrade will push the IHS ranking into sub-investment status.”