So far, the South African economy has remained under pressure in 2019, amid faltering output growth, massive inequality, rising unemployment, and power sector crisis. This remains a major concern for investors, as the economic outlook for the country seems rather melancholic. Despite President Cyril Ramaphosa’s economic stimulus and recovery plan launched in Sept 2018, Q1-19 annualized GDP growth sank to a new low since the financial crisis, down in the negative region at –3.2%.
Recently, the South African rand and government bonds surged after a renowned global rating agency, Moody’s, kept the country’s investment-grade credit rating, with South Africa’s sovereign debt rating at Baa3. However, the rating agency revised the outlook for the economy from ‘stable’ to ‘negative’, implying a deterioration in economic growth and rising debt as alarming issues. The negative outlook signifies that there is a cover of 12-18 months, in which a downgrade could be delivered. Nevertheless, Moody’s made it clear that a credible budget statement in Feb -2020 would be crucial in maintaining the current rating.
In our opinion, South Africa must hasten the pace of reforms, in order to strengthen investors’ confidence, avoid massive outflows of funds and the potential increase in costs of debts, should investors price in these growing risks.
United Capital Research
