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All eyes on GDP and ratings agency Fitch

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Economists expect a negative GDP reading for the first quarter of 2016, while ratings agency Fitch should follow Moody’s and Standard Poor’s and not downgrade SA to junk status.

Many economists expect a negative gross domestic product (GDP) reading when Statistics SA announces the figures for the first quarter of 2016 on Wednesday.

Expectations are that rating agency Fitch will follow the lead of Moody’s and Standard Poor’s (S&P) not to lower South Africa’s rating, but will also change the future prospects for the rating to negative, indicating that South Africa is not out of the woods yet. Fitch’s announcement will be made on Wednesday after the markets close.

“We expect Fitch to affirm the rating at BBB- but change the outlook to negative, bringing them in line with S&P,” said RMB analyst John Cairns. “The announcement will be a small negative and will not fully offset the positive news from S&P.”

Stats SA statistician general Pali Lehohla will release the GDP statistical release in Pretoria at 11:30 on Wednesday.

South Africa’s economy grew by 0.6% in the fourth quarter and 0.7% in the third quarter of 2015.

Overberg Asset Management (OAM) expects a decline in GDP growth.

“According to consensus forecast quarter-on-quarter annualised GDP growth is expected to deteriorate from 0.6% in the fourth quarter (Q4) last year to -0.1% in Q1,” it said in its weekly overview of the economic and political landscape in South Africa.

“With the agriculture and mining sectors already in recession many economists expect a negative GDP reading.”

Negative indicators

On Tuesday it was announced that South Africa’s business confidence fell to the lowest in more than two decades as political and economic woes deepen.

The South African Chamber of Commerce and Industry’s (SACCI) Business Confidence Index (BCI) fell to 79.3 in May from 82.5 the previous month.

Another survey released on Tuesday, the Rand Merchant Bank (RMB) index said South Africa’s business confidence slipped to a seven-year low in the second quarter of this year as two thirds of businesses surveyed reported dissatisfaction with a fall in sales volumes for retailers.

The Bureau of Economic Research’s (BER) Business Confidence Index (BCI) also decreased for the sixth consecutive quarter, declining to its weakest level since the fourth quarter of 2009.

The overall index dipped to 32 points suggesting that two-thirds of all respondents (1 700 firms surveyed) viewed business conditions as unsatisfactory in the second quarter of the year.

Of the five contributing sectors, the retail sector experienced the sharpest deterioration in business sentiment.

Lacklustre business confidence

The lacklustre business confidence reflects falling growth in corporate profitability, downbeat domestic demand and elevated economic policy uncertainty, said economist for Momentum Asset Management Sanisha Packirisamy and Momentum head of Asset Allocation Herman van Papendorp.

“As such, private fixed investment spend is unlikely to stage a meaningful recovery over the next year. With consumers facing increasing headwinds (including a deceleration in real disposable income growth, dismal employment growth and rising interest rates), overall domestic demand is likely to remain under pressure well into 2017,” they explained.

In their view, an inability to raise export selling prices and muted global demand will likely limit the export sector’s contribution to overall GDP growth this year.

“We expect a marginal improvement in GDP growth from around 0.5% this year to above 1% in 2017 as (business and consumer) sentiment improves on a rosier outlook for emerging markets. We anticipate a correction in the demand-supply imbalance in commodities in late 2017 to drive commodity prices higher, leading to an improvement in growth conditions for net commodity-exporting countries.”

Finance Minister Pravin Gordhan warned on Monday that the country needs to focus on boosting economic growth and creating jobs after narrowly avoiding a downgrade to “junk status” by S&P.

S&P Global Ratings affirmed the investment grade rating of Africa’s most industrialised country on Friday.

“We must demonstrate to the world that we are capable of raising growth above the 0.6 and 0.7% mark and begin to head to the 2% mark,” Gordhan said during an interview on SABC television.

Junk on the cards for later this year

“There is always a chance that they (Fitch) change the ‘stable’ outlook on their BBB- rating to ‘negative’, although this is not a given just yet,” said Standard Chartered’s head of Africa research, Razia Khan.

“Having just downgraded South Africa and assigned the stable outlook to the rating last December, they too could give it another six months or longer before changing the outlook.”

Analysts say a downgrade to “junk” status could be on the cards later this year if policy measures did not turn around an ailing economy.

“Fitch’s decision to hold the rating outlook at stable or to adjust the outlook to negative has valid arguments on both sides, and will therefore be a very close call,” NKC African Economics’ Hanns Spangenberg said.

“However, given the deterioration in South Africa’s economic growth outlook, as well as an uptick in political risk over the last few months, our view is that the correct decision for Fitch would be to adjust South Africa’s rating outlook to negative.”

[Source: news24/Reuters]
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