Poor Q1 figures raise spectre of ratings downgrades for SA

South Africa’s economic nosedive in the first quarter of 2019 has ended hopes that President Cyril Ramaphosa’s eight-month-old promises of economic stimulus have boosted confidence, pointing to faster and deeper cuts in state spending as the country seeks to stave off credit-ratings downgrades. South Africa’s shock 3.2% first-quarter contraction will require the government to downgrade its growth forecasts, analysts said, although a widening budget deficit is likely to draw a negative reaction from ratings agencies for now. S&P Global ratings had just given South Africa a stable rating, saying it “reflects our view that, with the elections now over, the South African Government will pursue some reforms and attempt to improve economic growth and try and contain fiscal deficits”, adding: “We project economic growth will pick up modestly from 2020, helping to contain the rise in government debt.” However, it also warned: “We could lower the ratings if we were to observe continued fiscal deterioration, for example due to higher expenditure pressures, the crystallisation of contingent liabilities, if economic performance structurally weakened, or if external financing pressures mounted. We could also consider lowering the ratings if the rule of law, property rights, or enforcement of contracts were to weaken significantly, undermining the investment and economic outlook. “We could raise the ratings if economic growth and fiscal outcomes strengthen in a significant and sustained manner beyond our current projections.” Yesterday, Rhavi Bhatia, director and lead analyst, sovereign ratings, S&P Global Ratings, said at the heart of South Africa’s rating problems is poor economic growth, adding: “And now we have seen the worst quarter since 2009. Recently, we revised our growth and now there will be a struggle even for that. At the heart of the problems is the inability to grow.” The question he said was whether the government would tackle the key issues, including corruption and unionisation. The numbers underline the economic challenge for President Ramaphosa, who now faces increased pressure to implement his policy reforms, agreed Capital Economics senior emerging markets economist John Ashbourne. Maarten Ackerman, chief economist and advisory partner, Citadel, added: “Unfortunately, it seems that in terms of economic data, South Africa’s 2019 film has begun in much the same vein as 2018, and could easily be classified within the ‘horror’ genre, given heightened fears that South Africa could once again enter a technical recession in the first half of the year. “The first-quarter decline was twice the number anticipated by general consensus, and almost immediately saw the rand shed another 20 cents against the dollar, touching ZARR14.60/$, while bond yields rose by nearly 15bps.” He stressed: “This is not a good start to the year for Mr Ramaphosa’s administration, which continues to struggle with numerous legacy issues that have resulted from years of poor economic management and graft. “As long as economic growth remains at these kinds of mediocre levels, government is not going to gain any real traction in resolving key challenges of inequality and unemployment, and specifically youth unemployment.”

Poor Q1 figures raise spectre of ratings downgrades for SA

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