Fall in GDP may trans­late into rate cut

The Star Early Edition - - BUSINESS REPORT - Siseko Njobeni

GROSS do­mes­tic prod­uct (GDP) is likely to drop to­wards 0.5 per­cent year-on-year this year, down from the ini­tial 0.8 per­cent, In­vestec chief econ­o­mist Annabel Bishop said yes­ter­day.

South Africa has slipped into tech­ni­cal re­ces­sion for the first time since 2009 af­ter the econ­omy con­tracted in the first quar­ter, Sta­tis­tics South Africa data showed this week.

This has laid bare the ex­tent of the lethar­gic eco­nomic growth, which leaves the coun­try vul­ner­a­ble to credit down­grades in fu­ture.

Speak­ing in Joburg yes­ter­day, Bishop said that GDP could come in at 1.1 per­cent next year, from the pre­vi­ous 1.3 per­cent fore­cast.

She ex­pected the GDP to rise steadily to 2 per­cent in 2020.

But Bishop said the growth pro­jec­tions were be­low the growth fore­cast for sub-Sa­ha­ran Africa and the rest of the world. She said sub-Sa­ha­ran Africa was ex­pected to fol­low the global trend of re­cov­er­ing eco­nomic ac­tiv­ity.

South Africa’s pick-up was likely to be mod­est. “With busi­ness con­fi­dence de­pressed, on av­er­age since 2009, pri­vate sec­tor in­vest­ment and job cre­ation has been too weak.”

She said fac­tors such as ris­ing gov­ern­ment debt and tur­bu­lent po­lit­i­cal and eco­nomic pol­icy pro­pos­als con­strained South Africa’s growth. “South Africa has lost growth mo­men­tum, with the econ­omy in a down­ward growth trend over the past sev­eral years.

“Eco­nomic growth of around 1 per­cent year-on-year is in­suf­fi­cient to pre­vent fur­ther credit rat­ing down­grades, par­tic­u­larly if gov­ern­ment debt to GDP ra­tios do not fall, and there is in­suf­fi­cient (state-owned en­ter­prises) re­form,” she said.

Bishop added that con­sumer in­fla­tion could drop fur­ther from the cur­rent 5.3 per­cent to be­low 5 per­cent be­cause of the al­le­vi­a­tion of the drought. But the drop in in­fla­tion would not nec­es­sar­ily lead to an in­ter­est rate cut.

“The SA Re­serve Bank does not look at what in­fla­tion is to­day. They look at what in­fla­tion is in their fore­cast pe­riod and that could be any­thing be­tween six to 24 months.”

Bishop said, given Re­serve Bank gover­nor Le­setja Kganyago’s as­ser­tion that in­fla­tion should not be un­com­fort­ably close to the up­per end of the 3 to 6 per­cent tar­get range, the cen­tral bank was likely to cut rates if it be­lieved that in­fla­tion would touch the 4.5 per­cent point in the fore­cast pe­riod.

Bishop added po­lit­i­cal and eco­nomic un­cer­tainty had risen with South Africa cur­rently see­ing its key credit rat­ings split be­tween in­vest­ment grade and sub-in­vest­ment grade. The rand this year caught the tail­wind of global “risk-on” sen­ti­ment, as it opened the year at R13.74 to the dol­lar, R14.45 to the euro and R16.93 to the pound and strength­ened to R12.29 to the dol­lar, R13.29 to the euro and R15.31 to the pound.

How­ever, the change in fi­nance min­is­ter in March and a drop in the coun­try’s sov­er­eign credit rat­ings, saw the rand weaken to R13.96 to the dol­lar, R14.87 to the euro and R17.34 to the pound.

“The rand’s post-down­grade strength re­flects the con­tin­u­a­tion of the global risk-on ap­petite, par­tic­u­larly for emerg­ing mar­kets lo­cal cur­rency debt, with South Africa still at­trac­tive in this re­spect as the coun­try re­tains two in­vest­ment grade rat­ings on its lo­cal cur­rency de­nom­i­nated long-term sov­er­eign debt.

“For­eign­ers have favoured lo­cal cur­rency emerg­ing mar­ket debt given the lower yields in de­vel­oped economies, par­tic­u­larly the euro area,” she said.

Bishop said the sov­er­eign yields of ad­vanced economies were sub­stan­tially lower than South Africa’s yields.

For­eign­ers have pur­chased R42bn worth of South African bonds this year.

“Credit rat­ing down­grades in emerg­ing mar­kets have seen some yield strength,” said Bishop.

“This oc­curred in Brazil and Rus­sia in 2015 and South Africa (this year), with Turkey also see­ing some strength af­ter its late 2016 and early 2017 down­grades,” she added.

South Africa has lost growth mo­men­tum, with the econ­omy in a down­ward trend

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