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Business confidence drop a blow to investment - Moody's

Jun 19 2017 11:37
Carin Smith

Cape Town - Expect investment in South Africa to stagnate at best this year, a senior analyst at Moody's Investors Service cautioned on Monday.

Reduced business confidence in SA implies reduced investment, which would negatively affect growth in the country’s already-weak economy, and will ultimately make fiscal consolidation more challenging, Zuzana Brixiova, a Moody’s vice-president, senior analyst and lead sovereign analyst for SA, warned in a research note.

Moody's emphasised that it is a research report and does not constitute a rating action.

Last week, the Bureau of Economic Research announced that business confidence in SA is at its lowest level since the financial crisis of 2009. Its Business Confidence Index (BCI), for which 50 is neutral and below 50 indicates a lack of confidence, fell 11 points in the second quarter of 2017 to 29 from 40 in the first quarter. There was a decline across all sectors surveyed.

According to Brixiova, persistently low business confidence reflects the ongoing uncertainty about future political leadership in the ANC and policy priorities of the new leader.

"Investment will be further delayed and with it a sustainable growth recovery. Real investment in 2016 declined by 3.9%, similar to the drop recorded during the global financial crisis," reported Brixiova.

"The credit-negative drop in business confidence follows a March Cabinet reshuffle, which sent mixed signals about policy direction and intentions, and disrupted an emerging partnership between the government, the business sector and labour to support policy stability and investment."

Brixiova's report points out that the SA government has continued to delay the implementation of key structural reforms, and that this is another barrier to sectors seeking a stable policy environment for investment.

"Dampened investment will adversely affect SA’s weak economy, which recently entered into recession," said Brixiova.

READ: SA business confidence tanks

Earlier in June Moody's revised down its forecast for SA’s real gross domestic product (GDP) to 0.8% from 1.1% in 2017, and to 1.5% from 1.7% in 2018.

Low-growth trap

"Without improved trust in policymaking, it is likely that SA will remain in a low-growth trap. As a small open economy and commodity exporter, SA is well integrated into the global economy," said Brixiova.

"We, therefore, expect it to benefit from the gradual global recovery and rebound in commodity prices. At the same time, though, given SA’s close trade ties with China and the links between the two countries’ GDP growth, China’s slowdown and rebalancing pose a setback to SA’s growth."

According to Brixiova, reduced investment and reduced potential growth stemming from weakened confidence amplify the risks from China’s slowdown.

"Slow growth makes fiscal consolidation increasingly challenging. Strict adherence to expenditure ceilings has been a hallmark of the National Treasury, but falling growth has reduced revenue collection," reported Brixiova.

In the 2017 Budget, the public debt-to-GDP ratio is projected to peak next year at 53% of GDP and decline thereafter.

In Brixiova's view, this would be a positive turnaround after years of gradual debt accumulation with the ratio of public debt to GDP more than doubling during 2009 to 2016, weakening the government’s fiscal position.

"However, this objective is more difficult as growth slows. We project that instead of stabilising, debt to GDP will continue to rise, even after exceeding 55% next year," cautioned Brixiova.

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