Fitch cuts growth forecast to 0.7 percent
FITCH Ratings subsidiary BMI Research yesterday joined the World Bank in revising South Africa’s economic growth for this year to 0.7 percent from its previous forecast of 1 percent, warning that pursuing a nuclear programme would put significant strain on the sluggish economy.
BMI said although it expected the government to remain committed to expanding the country’s nuclear capacity, no new nuclear capacity would come online over its 10-year forecast period.
“The significantly higher costs associated with nuclear technology compared to coalfired or renewable electricity generation mean that the financial headwinds facing Eskom, and the government’s weakening ability to provide support to the company, will place a significant financial strain on the country if the nuclear power plants are pursued,” the company said.
The government said in February it expected the economy to grow 1.3 percent this year, 2 percent next year and 2.2 percent in 2019.
The country is in a technical recession after the economy contracted 0.7 percent in the first quarter of this year, following a contraction of 0.3 percent in the fourth quarter of 2016.
BMI’s revision of the country’s growth prospects are in line with the dominant sentiment among economists. Earlier this month, the World Bank slashed the country’s economic growth outlook for this year to 0.6 percent, down 0.5 percentage points from its January forecast of 1.1 percent.
First National Bank has also toned down its optimism about growth prospects, saying growth would settle at 0.6 percent this year, down from its previous prediction of 0.7 percent.
Only the International Monetary Fund expects growth to average 1 percent, up from its previous forecast of 0.8 percent, based on anticipated higher agricultural production this year. BMI said it expected the government’s nuclear agenda to face headwinds over the coming years because of legal obstacles, public opposition, financial constraints at Eskom and the construction delays typically associated with nuclear power plants. “Even if South Africa does secure contracts for new nuclear capacity over the coming year, we expect the development of projects to be hindered by the inhibitive costs of the technology, delays to construction and cost overruns, which are commonplace with nuclear projects across the world.”
Meanwhile, the governor of the Reserve Bank told a television station that the cycle of interest rate increases has ended. John Ashbourne, the African economist at Capital Economics, said he expected the central bank to lower its key policy rate from 7 percent to 6.75 percent when its Monetary Policy Committee meets in July.
“We expect that the July cut will be the beginning of an easing cycle that will take the policy rate from 7 percent down to 6 percent by the end of 2018. This is more than the consensus expects, and will provide a welcome boost to growth in the economy,” Ashbourne said.