Keep an eye on what may lie beyond junk

POLITICAL and macroeconomic uncertainty have taken centre stage following President Jacob Zuma’s cabinet reshuffle and the firing of the minister of finance and his deputy on March 30. The subsequent downgrades by S&P Global Ratings and Fitch have further increased concerns about South Africa’s economic outlook.

Although the downgrades came sooner than expected, policy uncertainty and an eventual foreign currency downgrade to sub-investment grade had been included in many economists’ forecasts for some time.

The odds of a downgrade at some point between 2017 and 2019 had always been high on expectations of low per-capita growth.

It is therefore not yet necessary to significantly alter expectations of how the economy will perform.

Nonetheless, growth expectations will be tweaked lower to reflect even greater political and policy uncertainty than before and the impact of the earlier-thanexpected downgrade. The macroeconomic environment has also become even more uncertain.

As a result, companies will become even less inclined to invest and to hire. Simultaneously, a probable rise in precautionary savings will see spending on durable consumer goods taking another knock.

Notably, renewed downward revisions to capital investment forecasts imply a further erosion of South Africa’s ability to increase its longerterm growth potential, and to generate the higher growth in tax revenue necessary to limit the rise in public debt.

The increased uncertainty will also require a higher interest-rate risk premium in domestic financial markets. This should put to bed any speculation of interest-rate cuts later this year, expectations of which had begun to rise.

The further shock to sentiment that is likely to be confirmed in upcoming confidence numbers, and the associated negative impact on GDP growth, would have been even more pronounced if it weren’t for a global backdrop characterised by a rise in both emerging- and developed-economy growth and slightly higher commodity prices.

Another advantage for the domestic economy will be agricultural output, which, post the drought, stands to make a notable contribution to GDP growth. Related to this is the likely drop in food-price inflation, which should help drive CPI inflation lower in the near term, albeit now at a slower rate given that the rand has weakened noticeably.

These factors, combined with the broader spillover effects to come from the prospective rebound in external-focused sectors, should still ensure a slight pickup in growth this year and next, but not at the same rate as we previously anticipated.

Given the extraordinarily high level of uncertainty, it’s

Companies will become even less inclined to invest and hire

important to consider what it would take to shift South Africa’s growth expectations even lower.

This downside scenario would come to pass if South Africa lost its local-currency investment-grade sovereign credit rating. Important signals to track any move towards such a scenario are those that reflect a shift away from fiscal consolidation and/or towards increased populist policies.

As it stands, the risk of this scenario has increased, but not sufficiently to warrant a significant change in the outlook. The extent to which incoming data point to significant deterioration in the outlook would also increase the probability of this scenario.

Nxedlana is FNB chief economist