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The news that the local economy is officially in recession places South Africa on the back foot, with the prospect of the country receiving a “junk” status credit rating from all three major credit ratings agencies.
The news of the recession caused the rand to depreciate against all major currencies. The local unit touched 15.68 to the US dollar – its weakest level since June 2016 – but by Friday it was quoted at 15.11.
The rand has depreciated by 20% against the US dollar this year.
The weakening rand will boost the price of imported goods such as oil, and increase the price of fuel.
After the shock of the recession, local consumers could be hit by another bombshell as early indicators are that the fuel price could rise by R1.14 a litre in October, according to Central Energy Fund calculations this week.
This would push the inland price of 95 octane petrol to a record high, possibly above R17 a litre, creating a knock-on effect of higher food and transport costs.
Substantial increase
Isaac Matshego, an economist at Nedbank, said he expected that there would be a substantial increase in the petrol price in October because of the weaker rand and the higher international oil price.
A big fuel price hike will wipe out the 20 cents a litre fuel price subsidy – at a cost of R400 million – which the government put through for September to assuage repeated calls for the state to reduce the fuel price.
The Cape Chamber of Commerce and Industry said that, while it welcomed the state’s decision not to increase the price of diesel and to reduce the petrol price increase to only 5c a litre in September, it warned that this remedy may prove to be a Band-Aid for a broken leg. Currently, the price of 95 octane petrol inland is at a record high of R16.08 a litre.
Matshego said the combination of a recession and record fuel prices would place consumer spending under pressure. “Consumers face a double whammy,” he added. Stats SA announced this week that South Africa’s real gross domestic product (GDP) decreased by 0.7% in the second quarter of 2018, following a decrease of 2.6% in the first quarter.
This means that South Africa is in recession, which is defined as two successive quarters of negative growth. This, for the first time since 2009. In contrast, the rest of the world is growing, on average, by close to 4%.
The biggest drag on GDP in the second quarter was a 29% drop in agriculture on a quarter-on-quarter basis, which economists attributed to the drought in the Western Cape and a reduction in the maize crop.
“The worst effects of the drought in the Western Cape will probably fade, but conditions will remain difficult over the duration of this year,” London-based research consultancy Capital Economics said.
'All is not lost'
President Cyril Ramaphosa was slightly more upbeat this week, saying South Africa would avoid an extended recession as the agriculture sector was set to recover, “so all is not lost”.
He said the economic contraction was “disappointing but not disheartening”, adding that his administration was “finalising a stimulus package that will be announced to inject impetus and growth in our economy at a number of levels”.
Finance Minister Nhlanhla Nene said the country was pinning its hopes of recovery on an economic reform package that the Cabinet was drafting.
“South Africa will need to make much more strenuous efforts to break out of the ‘low growth trap’ into which a recession has now pushed it,” said Raymond Parsons, a professor at North-West University’s Business School.
“The economy desperately needs a jumpstart,” said Michael Ade, chief economist at Steel and Engineering Industries Federation of Southern Africa.
Tanya Cohen, CEO of Business Unity SA (Busa), said: “South Africa’s slide into a technical recession ... is a timely warning and a reminder for the country to get its economy in order, failing which it will lose its only investment-grade rating.”
During his campaign for the ANC presidency last year, Ramaphosa put growth for 2018 at 3%, while earlier this year Goldman Sachs had forecast local growth in 2018 to be at 2.3%.
However, most economists are now forecasting that South Africa’s economy will grow by between 0.5% and 1% – down from between 1% and 2% at the time Ramaphosa became president in February.
For ordinary people, a recession means job losses as companies scale back to maintain their profit margins and reduce investment.
This means higher unemployment and more people on social grants. And, more people are likely to default on their microloans, car loans, mortage bonds or credit cards. For those who are employed, a recession means potentially little or no pay increases or bonuses.
This comes amid an official unemployment rate of 27.2% and is set to boost South Africa’s ranking as the world’s most unequal society.
The local recession means that, on average, South Africans will be poorer on a per capita income basis for the fourth consecutive year in 2018.
The news about the recession will be bad for government finances too.
Ahead of the medium-term budget policy statement, which lays out government’s fiscal plans and will be delivered by Nene in October, Citadel economist Maarten Ackerman said: “Treasury will need to find ways to fund items not budgeted for in February, such as above-inflation public-sector wage increases, National Health Insurance and President Ramaphosa’s economic stimulation package.
“This means that it is going to be extremely difficult for government to remain within the budget targets and keep ratings agencies happy,” Ackerman added.
Further slippage
BNP Paribas economist Jeffrey Schultz said: “October’s medium-term budget looks set to highlight a further slippage in deficit and debt metrics on a weak economy and poor revenue buoyancy.
“Negative growth and a worse fiscal picture do not bode well for sovereign ratings. We see a good chance that Moody’s will change the outlook on its ratings to negative on October 12.”
Ratings agencies S&P Global and Fitch already have the South African government rating on subinvestment grade, while Moody’s Investors Service is the last of the big three agencies that has the country on the last rung of investment grade.
This week, Moody’s said: “This weaker-than-expected economic performance will exacerbate fiscal and monetary challenges, a credit negative.
“On the fiscal side, we had already anticipated the government would miss its fiscal targets this year due to low tax performance, higher-than-budgeted interest payments and the wage bill.”
Additional reporting by Setumo Stone
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