Moody’s forecast 1.8% growth for South Africa in 2019

Moody’s Investors Service says¬†trade tensions between the United States and China are likely to deteriorate this year and will affect global growth in 2019. The credit rating agency thus forecast real GDP growth for South Africa to fall to 1.8 percent in 2019, having earlier projected a growth of 2.1 percent.

“We expect to see more restrictions on Chinese acquisitions of firms in the US and Europe, and our base case scenario now assumes that the US administration will go forward with some of the proposed restrictions on imports from China,” Elena Duggar, Chair of Moody’s Macroeconomic Board says in the credit rating agency’s¬†quarterly Global Macroeconomic Outlook update.

Moody’s noted that for most G-20 economies, growth prospects remain solid.

“G-20 countries are expected to grow 3.3 percent in 2018 and 3.1 percent in 2019. The advanced economies will grow by 2.3 percent in 2018 and 2.0 percent in 2019, while G-20 emerging markets will remain the growth drivers, at 5.1 percent in both 2018 and 2019,” the report said.

Moody’s, however, noted early signs showing that growth has peaked, with many major emerging markets experiencing a decline in economic activity as a result of elevated oil prices, mounting trade tensions and tightening of financial conditions. According to the credit rating agency, financial market volatility and reversals of capital flows away from emerging markets are to be expected amid tighter global financing conditions.

“Given the mix of weak macroeconomic fundamentals, loose monetary policy and economic dependence on foreign financing, it is not surprising that Argentina and Turkey have been under most stress. A risk of wider disruptive contagion event engulfing other emerging market countries remains small, given relatively better fundamentals.

“Investors’ need for portfolio rebalancing has led to increased exchange market pressure in a number of countries. In the case of South Africa, Moody’s had raised real GDP growth projections for the country in May with the expectation that the economy will start to recover faster because of a restoration of confidence and optimism after the election of Cyril Ramaposa as the new President in February.

However, growth indicators for the second quarter suggest sluggishness following the first quarter contraction of 2.2 percent on a quarterly annualized basis, hence Moody’s revised down the 2018 real GDP growth forecast for South Africa to 1.5 percent, from 1.6 percent and real GDP growth forecast for 2019 to 1.8 percent from a previous projection of 2.1 percent.

The South African Reserve Bank (SARB) cut the benchmark rate by 25 basis points to 6.5 percent in March 2018 consistent with weak growth, moderate inflation and appreciation of the rand earlier in the year. But like other emerging market central banks, ongoing monetary policy tightening in the US limits the ability of the SARB to pursue further easing without risking further depreciation of the domestic currency, and subsequent pass-through to inflation.

Moody’s, thus, expect that South Africa’s central bank will follow a tighter monetary policy, to maintain a reasonable interest rate differential with the rising US federal funds rates and to manage downward pressure on the rand.