NEWS & OPINION
29 February 2020
SA likely to avoid a recession but not a Moody’s downgrade
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t appears that South Africa will November after remaining about flat discussion with a bearish view on avoid a technical recession, in October. the rand. says Miyelani Maluleke, a “Overall, we expect fourth quarter “We believe that Moody’s is more senior economist at Absa Bank. 2019 GDP data to reflect a small likely than not to downgrade us on He was speaking at an ABSA rebound of 0.4% q/q saar, helping March 27, while S&P and Fitch could round table discussion, attended South Africa to avoid slipping into its perhaps wait until the second half of by MoneyMarketing last month in second recession in as many years,” the year,” he said, adding that he sees Johannesburg. Maluleke added. the rand softening to R15.16/USD South Africa recorded GDP in Absa has cut its GDP forecasts by the end of Q1 20 and reaching the third quarter of 2019 of -0.6%. sharply as weak business sentiment R16.13/USD by year-end. Both Fourth quarter 2019 GDP will only be and bouts of load shedding are Absa’s Structural ZAR model, which published on 3 March and also seems constraining the country’s growth estimates the fair value of the exchange set to be weak, partly due to renewed prospects, while the drought seems rates based on SA’s current account power cuts. However, Maluleke likely to present a significant negative balance and the country’s interest rate believes that a modest recovery from effect in 2020 as well. Maluleke said differentials, and Absa’s Peer model, the third quarter contraction is likely. the forecast was now for real GDP which compares the rand to other He explained that the available growth of just 0.3% for 2019, 0.9% this high-yielding and commodity-based activity data for the fourth quarter of year and 1.2% in 2021. currencies, imply the local currency is 2019 are mixed but generally quite Strategist at Absa Capital, Mike currently overvalued. subdued. After a promising start to Keenan, provided the round table “The rand will be vulnerable to the quarter, with growth of 2.5% m/m (sa) in October, manufacturing output fell by 1.5% m/m (sa) in November. Meanwhile, mining output fell sharply by 3.5% m/m (sa) after growth of 1.7% m/m sa in October. He believes that the severe electricity constraints in December are likely to cause further weakness on the production side of the economy. Electricity output has already fallen by 0.5% m/m (sa) in October and by 1.4% m/m (sa) in November. “However, the demand side of the economy will provide an offset to the production side weakness, thanks in part to the ‘Black Friday’ effect, which is not fully accounted for in Stats SA’s seasonal adjustment framework,” he stated. Encouragingly, passenger vehicle sales rose by a seasonally adjusted and annualised 27.7% q/q saar in Q4 2019. Meanwhile, constant price retail Miyelani Maluleke, Senior Economist, Absa Bank and Peter Worthington, FPI-advert-PR.pdf 4 (sa) 2019/11/15 15:50 Senior Economist: Absa Corporate and Investment Banking sales rose by a solid 3.1% m/m in
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capital outflows during the first half of this year, firstly because Moody’s is likely to downgrade South Africa’s local currency credit rating in March and this will eject SA government bonds from the World Government Bond Index. What the size of the flows will be is the billion dollar question. “Secondly, JP Morgan is scheduled to further reduce South Africa’s bond weighting within its emerging market bond index during the first half of 2020 to make space for Chinese bonds.” The rand could actually weaken by more than expected if the Reserve Bank cuts policy rates by more than what the market currently expects and/or if the economy falls back into recession. However, the rand may be more resilient if global volatility levels continue to subside on the back of reduced global trade tensions, which in turn could rekindle the rand’s carry trade appeal, and any further improvement in South Africa’s terms of trade might also support the local currency. Senior Economist at Absa Corporate and Investment Banking, Peter Worthington, told the roundtable discussion that fiscal policy is a huge problem for South Africa and that the budget to be presented on the 26th of this month is key. “We think the government will again rely mainly on taxes to attempt to narrow the deficit and, in particular, we are making the bold call for a one percentage point rise in the VAT rate. This call is perhaps a bold one, given the likely political fallout, but it is difficult to see what other options the government has. Further increases in personal income tax rates would likely damage the tax base.”
