National Treasury’s growth projection of 1.5% in 2018 is likely to be revised downwards following the country entering into a recession, according to research notes by Goldman Sachs, FNB and Investec.
Economist at Investec Lara Hodes said that additional heightened risks remained, including financial market stresses, escalating trade and geo-political tensions. The bank revised its Gross Domestic Product (GDP) growth downwards to 1.4% in 2018.
Statistics South Africa revealed on Tuesday that South Africa had entered its first recession since 2009, with two quarters of negative growth.
Senior economist at FNB Jason Muscat said that the data already available for the third quarter of the year, including the August Purchasing Managers Index (PMI) and vehicle sales, suggested growth would remain weak for the rest of 2018.
International investment bank Goldman Sachs was even more pessimistic, revising its expectation for 2018 to 0.8%.
The bank in January predicted 2.4% economic growth, calling SA “the big emerging market story of 2018”.
“This contraction follows a 2.6% decline in output in the first quarter, placing the economy in a technical recession and calling into question our expectation for a cyclical recovery to become more entrenched,” Goldman Sachs said in a note.
According to Muscat, government does not have the fiscal headroom to add any impetus to growth, as current spending crowds out infrastructure investment.
Finance Minister Nhlanhla Nene has previously expressed optimism that the 1.5% growth projection will be revised upwards as the new government administration provides policy certainty and investor confidence.
Ratings agencies
Muscat warned that weak GDP figures would jeopardise tax revenue and fiscal consolidation targets, “drawing the unwanted attention of rating agencies”.
Hodes agreed, saying low economic growth remained a risk to SA’s sovereign credit rating.
“The ongoing populist direction of some of SA’s actual and proposed economic policies continue to damage investor sentiment and therefore economic growth,” Hodes added.
The ratings agencies are expected to make their next decisions about SA after October’s medium-term budget speech.
Moody’s has SA at one notch above sub-investment grade, with a stable outlook, while both Standard & Poor’s and Fitch rate SA as one level below investment grade or junk status.
Nene told reporters on Tuesday that government was confident it could turn the situation around, and an economic stimulus package will be announced soon by Cabinet.
Meanwhile, the rand fell by more than 3% on Tuesday, amid news of the recession and a stronger US dollar. It breached R15.62 to the dollar on Wednesday morning, and was trading at R15.54 to the greenback at 12:28.
Source: IOL
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