Moody’s sees recovery as ‘slow’ in SA

Ray Mahlaka

Moody’s Investor Service expects SA’s economic growth to “pick up slowly” due to weak investor confidence and slow policy reforms, which will prevail until the 2019 election.

“We are expecting a very slow pickup in the economy. We think things look fairly stable. The worst has passed but things are not going to be rosy,” says Moody’s vice-president Lucie Villa.

Moody’s recently halved its economic growth forecast for SA, after the news that the economy plunged into a recession in the second quarter (Q2). It expects the economy to grow 0.7% to 1% this year (earlier estimate 1.5%). It has also cut 2019’s growth outlook to 1.5% from 1.8%.

Villa says weak investor confidence, slow reforms on growth policies, the governance of stateowned enterprises (SOEs) and the political administration itself, poses economic recovery risks.

The 0.7% contraction in economic growth in Q2, and 2.2% contraction in Q1, will put “more pressure on fiscal policy.”

Although Moody’s expects finance minister Nhlanhla Nene to unveil fiscal adjustments in October’s mini budget, it says the 2018/19 year will be difficult.

Moody’s expects a fiscal deficit of around 4% of GDP in 2018/19 financial year – much higher than Treasury’s 3.6%.

“In the medium term, we believe there is still fiscal flexibility. But the main risks to our budget deficit expectations include rising interest costs in the context of increasing emerging market risk aversion and potential support to SOEs,” says Villa.

It expects government’s debt burden to stabilise at 56% of GDP.

The biggest policy risk it has identified is the public sector wage agreement for fiscal years 2018/19 to 2020/21, which will bring extra, unbudgeted costs to the fiscus. It expects the wage bill to rise from 0.8% of GDP in 2018 to 1.5% in 2019 and 2.2% in 2020.

Moody’s is the last of the three major rating agencies to rate SA’s sovereign credit rating at investment grade.

It affirmed this rating in March when kept SA’s local and foreign debt at Baa3, which is investment grade and one notch above junk. Moody’s revised its outlook to stable from negative, citing an improving policy framework.

The next review will potentially be on October 12.

It sees a “small chance” of a ratings move.

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