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Downgrade, job losses on horizon

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The decision by the SA Reserve Bank to slash its growth forecast for this year to zero means South Africa is near certain to be downgraded by ratings agencies and experience job losses in the second half of the year.

Economists interviewed by City Press said the central bank’s alignment of its growth forecast with most market economists and the International Monetary Fund forecast of 0.1% was overdue given the economy’s contraction in the first quarter and recent local mining output, manufacturing production and ­retail growth numbers.

“The risk of a downgrade is extremely high given the strong growth weighting [in ratings agencies’ models],” said Isaac Matshego, Nedbank Group economist.

Earlier this year, South Africa managed to avoid having the country’s credit rating cut to junk status, or sub-investment grade. However, the three major rating agencies – S&P Global, Moody’s Rating Services and Fitch Ratings – are all set to review their assessments of South Africa’s ratings later this year.

Having an investment-grade rating is vital to ensure as-low-as-possible cost of borrowing, particularly given government’s mounting level of debt.

Reserve Bank governor Lesetja Kganyago on Thursday announced that the central bank had revised its 2016 growth forecast to zero from 0.6% and to 1.1% from 1.3% for next year. However, he said he didn’t expect the economy to fall into a recession even after it contracted by 1.2% in the first quarter, and that the first quarter would likely be the low point of the cycle.

Investment Solutions economist Lesiba Mothatha said there was little prospect of a material improvement in the economy in the second half of the year. There would be further job losses, he added.

“Although manufacturing and agriculture are ­improving, I just don’t think that will be sufficient to turn the tide,” he said.

However, Econometrix chief economist Azar Jammine differed in his opinion, arguing that the central bank and other economists were over­reacting to a bad first-quarter growth outcome.

“If government manages to keep the downward trend in the budget deficit, the rating agencies might not downgrade us,” he said.

In February, Finance Minister Pravin Gordhan forecast the local economy would grow by 0.9%, but he is likely to cut that when he issues his “mini budget” in October.

He said last week that he believed the growth would be above 0.1%.

However, Gordhan also warned this month that if state revenue didn’t grow, government would have to make some tough decisions in terms of expenditure.

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