Home Foreign South African Economy Contracts 0.6% in Third Quarter

South African Economy Contracts 0.6% in Third Quarter


PRETORIA – South Africa’s economy shrank for second time in three quarters this year, data showed on Tuesday, as productive sectors fell across the board and companies slashed inventories, amplifying the chances of ratings downgrades to junk.

Africa’s most advanced economy has struggled to emerge from a deep slump in the nearly two years since President Cyril Ramaphosa took the helm with promises to reform and is now on the cusp of losing its last investment grade rating from Moody’s, and billions of rands of investment with it.

Gross domestic product contracted 0.6% in the third quarter against a 3.2% expansion in the second quarter, Statistics South Africa said.

In the first quarter, GDP contracted by 3.1% following nationwide electricity blackouts by state power firm Eskom, and while the cash-strapped utility resumed blackouts in September third quarter activity was hit hard by lower production in mining, manufacturing and agriculture that analysts said was linked to lower investment by firms and smaller exports.

Inventories, a measure of investment by firms, fell 9.5 billion rand in the quarter, with exports subdued at q/q growth of 3.5%. The stats agency said some companies had indicated cutting stocks in the previous quarter in anticipation of lower demand.

“If there’s no production in mining and manufacturing, and those are the type of products we are exporting, then inventories will fall. And if we’re not producing goods, you don’t have anything left to export,” said Joe de Beer, senior economist at Stats SA.

Sharp dips in mining, manufacturing and agriculture were the largest contributors to the negative growth in the third quarter, with agriculture affected by a severe drought which has forced government to ration water supplies nationwide.

Mining production fell 6.1% in the quarter, manufacturing was down 3.9% while agriculture contracted by 3.6%. The three taken together represent about a quarter of domestic product and a large chunk of taxes revenues and employment.

The latest data piles the pressure on Ramaphosa, particularly from ratings agencies which have flagged weak growth as a major risk, and investors weary of increasing state debt as revenues slide. [nL8N27F5LX]

“Growth in the Moody’s criteria is a highly sensitive measure. They already expect sub-1% long run average growth and this will impact the fiscus and imply that our debt and deficit metrics have worsened,” said economist at Nedbank Reezwana Sumad.

Moody’s is the last of the top three agencies to rate the country’s debt at investment level, and it is set to review the rating in March after downgrading the outlook to negative in November. [nL8N27H62H]

“These numbers certainly do support the notion of a downgrade by Moody’s in 2020,” Nedbank economist Sumad said.

“In a political environment where it is difficult to cut government wages you could see treasury forced to raise wealth and personal taxes, and that’s something it doesn’t want to do.”


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