Moody's underwhelmed by SA growth figures

Johannesburg – South Africa is operating in a generally weaker economic environment, and rating agency Moody’s does not expect any significant turnaround in growth.

Economic strength is one of the factors Moody’s is using to measure South Africa’s sovereign credit rating.

Speaking at the Moody’s 11th annual South African credit risk conference in Sandton on Tuesday, the agency’s senior vice-president Kristin Lindow and vice-president and senior analyst Zuzana Brixiova spoke about the global and domestic challenges South Africa is facing.

“We do not expect South Africa will move the growth rate up substantially in the next few years,” said Lindow. A recovery could only push growth up by 2% for the next few years.

The 3.3% growth reported for the second quarter of the year merely indicated that the country avoided technical recession, said Brixiova. “We do not go by cyclical events alone. The medium-term and long-term outlook is more important, and the growth forecast for 2016 is still low at 0.2%. The growth projection for 2017 is at 1.1%."

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The economic outlook also depends heavily on the global economic cycle. “As the commodity crisis hit South Africa, the primary and secondary sectors were hit hardest,” said Lindow. However, the latest quarterly growth results indicate that the mining sector showed a rebound in its output.

South Africa is exposed to slowing global trade. The global financial crisis in 2008 translated into a job crisis. This led to increased protectionism of advanced economies, which impacted global trade, explained Brixiova.

China’s slowing growth had the greatest impact on South Africa. A 1% growth drop in China translates into a 0.3% decline in growth in South Africa, she said. South Africa exports 10% of its products to China. “A decline in growth in China impacts South Africa’s growth more than the happenings of those in Europe and the US,” she said.  

Domestic headwinds

Other domestic headwinds include structural challenges. These are linked to infrastructure bottlenecks, income disparities, and labour market rigidities.

Many infrastructure constraints were linked to energy shortages, which made it difficult for companies to plan investments around expansions. “If companies wanted to expand, they could not count on energy being there,” said Lindow.

Structural rigidities in labour contribute to the persistent income disparities. Reforms in the labour market go along with productivity reforms, explained Brixiova. Better allocation of resources and skills restructuring to match jobs is also important for reform.

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The erosion of the fiscal space is a further concern. Public debt levels have grown since 2009. However, commitments made in 2012 have helped constrain government spending in a meaningful way, added Lindow.

This allowed debt to start stabilising, even though government has had difficulty in keeping debt to GDP down. In 2015 it was at 50.9%, with 52.5% projected in 2016 and 51.9%in 2017; Lindow added that it is expected to tail off.

The high growth in contingent liabilities is also constraining fiscal policy. Government subsidies to support state-owned enterprises such as South African Airways have been extended for longer than expected, and funding levels have risen.

Political divisions have impacted business and consumer confidence. “Political divisions impede government’s ability to fulfil reform commitments and this impacts business and consumer confidence,” explained Lindow.

Business confidence levels are now down to 30, while neutral levels are at 50, she explained. “Confidence is weak compared to historical standards.”