South Africa's currency rating and low business confidence chief among 2017 risks

May 13, 2017
Source: Reuters
South Africa's currency rating and low business confidence chief among 2017 risks

A downgrade of the South African rand's credit rating and sagging business confidence are the biggest risks to growth this year, a Reuters poll found, and would make it difficult for the economy to escape a slow-expansion trap.

Both Standard & Poor's and Fitch Ratings Agency downgraded South Africa's credit rating to below investment grade last month, citing likely changes in economic policy after Finance Minister Pravin Gordhan was fired, shaking confidence.

Some economists say the bar is not high for a currency rating downgrade this year but it remains a significant risk.

Christopher Shiells, an emerging market analyst at Informa Global Markets in London, said a downgrade would impact GDP growth and put upward pressure on South Africa's cost of capital, further dampening investment.

"Businesses may now choose to withhold investment decisions that would otherwise have supported economic growth," added Shiells.

According to the poll of twenty six economists, taken this week, growth will remain subdued at 0.9 percent this year, trimmed from 1.0 percent in the previous poll. Next year it is expected to expand 1.3 percent, slower than last month's 1.5 percent forecast.

The business confidence index in South Africa edged up last month, however it is still very low by historical standards.

"Without a lift in business confidence, private sector fixed investment, which has already contracted for five straight quarters is unlikely to recover much, further undermining the creation of desperately needed jobs," said Miyelani Maluleke, economist at Absa Capital.