Growth needed despite rating agencies stable outlook

Statistics South Africa confirmed on Wednesday that the economy contracted by 1.2% on a seasonally adjusted and annualized basis in the first quarter of the year, a much steeper contraction than had been expected.

Shortly after this announcement, ratings agency Fitch affirmed the rating as Triple B- minus – it also said that our outlook was stable.

But it warned of low trends in GDP growth.

Stephen Grootes talks to Mohamed Nalla, head of strategic research at Nedbank Capital and Investment about what this means for South Africa's economic outlook.

There was an expectation, a risk, that they may change the stable outlook to a negative outlook, given the kind of growth drives you see in the domestic economy, as well as the heightened local political risk premium that's coming through.

Mohamed Nalla, Head of Strategic Research Nedbank Capital and Investment

Nalla says that though they chose to affirm the stable rating, the concerns underlying the statements from Fitch and S&P are firstly, low growth and secondly, political risk.

We need to see this political side show being put to the side and much more emphasis placed on putting the right policies in place and implementing them.

Mohamed Nalla, Head of Strategic Research Nedbank Capital and Investment

With regard to the GDP report, Nalla says there is always much made in the media about going into a technical recession. He says the official definition of recession is two consecutive quarters of negative growth.

You can avoid a technical recession by having one quarter negative, next quarter positive and then another negative quarter. We are splitting hairs. This is an economy in distress.

Mohamed Nalla, Head of Strategic Research Nedbank Capital and Investment

The largest negative contribution over the quarter was mining and quarrying falling 18% on a year on year basis.

But it is the structural factors that add an additional level of vulnerability and even further deterioration to growth, says Nalla.

Kevin Leng, Chief Economist at Stanlib, agrees. He says the concern is broad-based weakness in primary sectors like mining and agriculture, but also transport and communication.

But ratings agencies have acknowledged that growth rates have been impacted by the drought as well as the global economy. Leng says they have taken these factors into account.

What agencies are highlighting is the deterioration of broad social cohesion in South Africa, the increase in political risk and policy uncertainty.

Kevin Leng, Chief Economist at Stanlib

He says we have breathing space, but policy officials need to focus on getting politics and policy environment right, or a downgrade will certainly follow.

EWN's Gia Niccolaides at the Economic Indaba in Gauteng says Finance Minister Pravin Gordhan spoke just before these two major announcements. He said that government was doing the right work to gain breathing space.

He added that investors locally and internationally are tired of hearing about plans, and it's time to implement ideas that will ensure the 3 to 5% growth the National development Plan requires.

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