Johannesburg - Despite the improvement in the medium-term inflation outlook, the weakening trend in the rand is threatening to delay the start of the South African Reserve Bank's monetary easing cycle, said Moody's Economy.com in a research note on Friday.
"The recent sharp deterioration in emerging market sentiment has led to a sharp withdrawal of portfolio investment funds. Not surprisingly, this has heightened concerns about the country's precarious balance of payments position and will weigh heavily on the rand in coming quarters," say the Moody's Economy.com economists.
They note that after almost 10 years of uninterrupted economic expansion, Africa's largest economy is showing increasing signs of stress.
"South Africa's important retail industry remains under intense pressure as consumers rein in spending. Consumer spending on interest rate-sensitive goods, such as durable consumer goods, remains particularly weak.
"The spending slump reflects tighter credit conditions and the central bank's aggressive tightening campaign, which has pushed interest rates to five-year highs. Vehicle sales have also plummeted since the beginning of the year," say the economists.
Unemployment major threat to outlook
On the production side of the ledger, output from South Africa's important manufacturing and mining industries is struggling amid slowing domestic and external demand.
"Infrastructure bottlenecks and operational difficulties, stemming in part from electricity restrictions, are hindering performance. Mining production contracted 3.5% on a seasonally adjusted basis compared with the previous three months, whilst manufacturing output fell 2.5%. Plummeting production of motor
vehicles remains the major contributor to the slump in manufacturing output," they add.
In addition to slowing domestic and foreign sales, the combination of still-elevated input costs and tight borrowing conditions is taking a toll on producers' cost curves and corporate profits, forcing some firms to trim their workforces.
"With unemployment idling near a quarter of the labour force, rising joblessness is a major threat to South Africa's outlook, especially given consumers' heavy indebtedness: Household debt as a percentage of disposable income is near a record high, whilst savings as a percentage of GDP has fallen to nearly a record low," say the economists.
In recent years, a surge in consumer borrowing and spending had rapidly widened the savings-investment gap, increasing South Africa's reliance on foreign investment to finance the gaping current account deficit, conclude the Moody's Economy.com economists.
- I-Net Bridge