Fall in GDP may translate into rate cut

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