Sluggish growth for SA over mayhem - report

Cape Town - South Africa is currently experiencing economic and political mayhem and will continue to face headwinds, which would lead to real gross domestic product (GDP) growth in 2017 likely being at a sluggish pace of 0.9%, Euromonitor International.

In its latest briefing on SA's economy, finance and trade on Tuesday, the Euromonitor report points out that SA's sovereign status, which was downgraded to "junk" by the credit rating agencies Standard & Poor's (S&P) and Fitch in April 2017, could lead to heightened capital outflows, reduced investor confidence, job cuts and depreciation of the rand.

"The downgrade to 'junk' status will increase borrowing cost and put immense pressure on the rand," cautions the report.

Public debt equated to 49.8% of GDP in 2015, an increase since 2010, owing to the need to service the budget deficit and the high proportion of debt held by state-owned enterprises (SOEs).

"Going forward, there is a risk that public debt could rise further, should the government need to support indebted SOEs," states the report.

Escalating inflation and the high current account deficit are some other key concerns. The current account deficit reduced from a period high in 2013 to 4.3% of GDP in 2015.

READ: Downgrades, politics could trip up recent economic gains

According to the report, this was owing to the positive impact of lower imports. The report points out, however, that by major emerging market norms, the current account deficit is high. It is made more problematic by the fact that it is financed by liquid foreign investment inflows, such as stocks and bonds, which can be quickly withdrawn.

However, the biggest risk to SA's economic outlook continues to be a slowdown in the Chinese economy, according to Euromonitor.

Furthermore, the large value of South African financial instruments held by foreign entities also makes it vulnerable to volatility in the global financial system, it pointed out.

As for political factors, the report says SA is struggling to cope with the negative outcome of the "ongoing political turmoil".

"President Zuma's last cabinet reshuffling move of replacing Pravin Gordhan with Malusi Gigaba received major criticism leading to the status downgrade. This has caused unprecedented panic among foreign investors, who are already withdrawing or seeking to pull out their investments from the SA economy," states the report.

"This in turn, will lead to a rise in borrowing costs and weakening of the rand, thereby adversely impacting public finances and limiting spending on infrastructure projects."