BAD TIMES AHEAD FOR JUST ABOUT EVERYONE
A’s economy is expected to grow by less than 1% this year — an indication that urgent and extraordinary action is needed.
Incoming economic data, such as mining and manufacturing, is supporting the view that there will be a further slowdown this year. Growth moderated to 1.3% last year from 1.5% in 2014 and 2.2% in 2013.
Business confidence also remains very low. It is a proxy for private-sector investment spending and if it is low, so will be investments and job creation.
The contraction in SA’s mining production deepened to 4.5% in January compared with a year ago from 1.2% year on year in December, Statistics SA data shows. Manufacturing production declined by 2.5% year on year in January after a 0.5% year on year increase in December.
The two sectors, which together account for 20% of gross domestic product, are taking strain from lower commodity prices and sluggish global demand, particularly the slowdown in Chinese demand. China is one of the main export markets for local mining commodities.
These challenges are made worse by rising input costs for producers and have resulted in a reduction of operations as well as retrenchments. All this puts pressure on economic growth because the fewer the working people, the smaller the pool of people who are spending and driving economic activity.
Monetary and fiscal policies are tightening and can no longer support economic growth.
Government will reduce its spending ceiling over the next three years, raise taxes this year, and shed jobs. It hopes that its continued spending of over R800bn on infrastructure development will still drive job creation and support growth.
Monetary policy is also under pressure. Interest rates are going up, which will negatively affect economic growth. But the Reserve Bank is more concerned about rising inflation and the weak rand.
The Bank’s monetary policy committee started raising rates in January 2014. The cumulative rate hikes since then amount to 200 basis points and more rate hikes are in store this year.
The Bank raised the repo rate by 25 basis points to 7% in March, citing concerns over rising food prices and continued weakness in the rand.
As if these were not enough problems for Africa’s second biggest economy, SA is on the brink of a ratings downgrade by Moody’s. The bit of good news is that markets seem to have already priced it in, so there may be limited market reaction by the time a downgrade happens.
Markets are prepared for the downgrade because Moody’s has already issued a statement in March placing SA’s rating on review for a downgrade.
The big question is: did local authorities convince the agency beyond doubt during its visit to SA earlier this month that they have concrete plans in place and are implementing them to grow the economy faster and stick to fiscal consolidation? If so, then an affirmation rather than a downgrade will occur.
Though a one-notch downgrade by Moody’s will raise the cost of borrowing, it will not be too disastrous as it will only bring the agency’s rating in line with those of Fitch and Standard & Poor’s (S&P).
The rating agency to worry about most is S&P. Not only does it rate SA just one level above speculative grade (or junk), it also has a negative outlook on the rating. Fitch also rates SA one
Finance minister Pravin Gordhan has already gone on a UK and US road show to talk to investors about the budget