Limping economy faces uphill
anything to do with what we are doing locally”.
They included improved commodity prices and an expected uptick in sales volumes, improved agricultural output and an increase in tourism because of a weaker rand and the shutting down of North African destinations typically popular with European holidaymakers.
But she has reduced her growth forecast to about 1% in the wake of the downgrades and the likelihood that any positive domestic developments, such as an interest rate cut, is now off the cards.
The tailwinds of these positive factors could help to stave off a technical recession in the short term but another year of only 0.5% to 1% economic growth will “certainly feel like a recession” for ordinary people. “We might technically avoid a recession but for all intents the domestic economy is in recession,” she said.
These tailwinds will taper off over the next nine months. After that everything will depend on state policy and developments at the treasury.
Nerina Visser, an exchange traded fund strategist and adviser at eftsa. co.za, said South Africa has been flirting with recession for the past two years but for technical reasons has not experienced it yet.
“For all intents and purposes you can argue that, economically, we are in a recession even though technically it hasn’t [been] measured as such,” Visser said.
The factors buoying up economic growth — agriculture and mining — are coming off a very low base and do not mean that either sector is strong or vibrant, she said.
Factors such as declining inflation, because of a stronger rand and lower food prices, contributed to South Africa avoiding a technical recession, “but I don’t think it removes the fact that the consumer … is in an economic recession”, she added.
It is not all doom and gloom, she said, because South Africa has still retained its place in the WGBI despite a negative credit ratings trajectory, and other key bond indices such as the JP Morgan Emerging Market Bond Index don’t depend on credit ratings status.
To be excluded from the WGBI, S&P Global and Moody’s must rate a country’s local currency debt as subinvestment grade (junk status). In its recent ratings decision, S&P kept South Africa’s local debt one notch above junk, albeit on a negative watch. Moody’s has South Africa’s foreign and local currency debt at two notches above junk, although it has placed the country on review and it is likely to be downgraded.
Even if South Africa is excluded from the likes of the WGBI, there will still be an appetite for South African bonds from “risk-seeking, high-yield” investors, particularly in a world where developed market interest rates are flat or negative.
In addition, in a world in which the easy monetary policy, particularly by the United States Federal Reserve, props up the dollar money supply, that money needs to find a home, which typically goes into more risky assets, namely commodities and emerging market assets. South Africa benefits from these on both counts.