South Africa gradually slumping to recession with redemption seeming impossible

From the slump in commodity prices to policy uncertainties, impact of extreme weather phenomenon El Nino and the pressure being put on Finance Minister Pravin Gordhan, there are multiple factors paving the way for a recession in South Africa.

Thea Fourie, senior economist at IHS Global Insight noted in new analysis released by the company that the weak GDP growth numbers assumed for the first quarter could push South Africa into recessionary conditions much sooner than IHS initially projected.

“It now appears as if the sharp fall in international commodity prices since end-2014 and the impact of dry El Niño weather conditions, combined with there being very little policy space to support economic growth, is paving the way for a significant recession,” Fourie stated. “This bodes extremely worrying for South Africa’s jobs market, with latest statistics already showing the country’s unemployment rate reaching 26.7 percent in the first quarter, while a credit risk downgrade by S&P will be hard to avert in 2016.”

Moody’s Investors Service affirmed South Africa’s credit rating at Baa2, two levels above junk, on May 6 and kept its outlook on the rating on negative. S&P Global Ratings and Fitch, which both have South Africa one level above junk will assess the country soon, according to Gordhan.

While the government claims to be working with business and labour leaders to try to avert a sovereign credit-rating downgrade and boost the economy, South African President Jacob Zuma seems to be working against the economy by frustrating Gordhan’s efforts, repeatedly undermining his authority, among other things.

Gordhan had requested that tax chief Tom Moyane be fired for defying his order to halt an overhaul of the South African Revenue Service, but Zuma ignored the request. He also refused to intervene in a police probe into allegations that Gordhan established a rogue investigative unit when he headed the national tax agency. Reports of the minister’s imminent arrest drove the rand to a two-month low despite a denial by the presidency.

Nothing seems to be working in South Africa’s favour at the moment.

“Growth momentum is unlikely to show any turnaround in the near term,” IHS stated. “Consumer spending, accounting for more than 60 percent of GDP, is highly unlikely to improve. A higher interest rate burden, a larger tax obligation since no provision was made for fiscal drag in the latest budget, ongoing price pressures for essential non-substitutable goods such as food, and a challenging jobs market set the stage for significantly weaker consumer spending during 2016.”

The firm noted that South African companies’ net operating surplus growth rate has been falling trending down since 2012, but showed a contraction of 1.8 percent y/y in 2015, the first actual decline since the 1980s. Therefore, more and more companies will be compelled to improve their bottom lines, either by hiking prices or cutting jobs during the year. “Either way, this bodes negative for South African consumers, but also for the prospects of investment in the private sector.”

Fourie stated that the low-growth outcome being experienced by Africa’s most advanced economy will “most definitely” weigh on its sovereign risk ratings, scheduled for assessment by S&P and Fitch during June.

“IHS maintains the view that a credit risk downgrade to sub-investment status remains a material risk for South Africa,” the company states. This is because, a cut in the country’s investment rating could force a sell-off of domestic financial assets.

“Although the South African financial market is sophisticated enough to absorb most of any sell-off, capital outflows could place pressure on the country’s foreign reserve holdings and require a more decisive policy response by the country’s central bank to shield economic fundamentals against additional outflows. This likelihood, combined with the prospects of higher inflation towards year-end, will intensify the central bank’s dilemma of either risking recession or allowing higher price pressures and declining foreign reserves in the economy,” IHS said.

South Africans will be hoping, for their sakes and the future of their country, that there is no serious policy misstep anymore as this could give the country an economic death punch. “South Africa isn’t on a good path, there’s no question about that,” according to Dominic Barton, global managing director of McKinsey & Co. Inc.