“In 2015, we have seen a huge decline in commodity prices, particularly metals and energy, and this has had a major impact on the country which was already suffering from high budget and fiscal deficits.
The currency has declined by 18% against the US dollar in 2015 as concerns about slowing Chinese growth have led to a sharp decline in energy prices and fears about future export earnings. These factors have hit an economy that is already suffering due to the industrial action, poor investment, weak infrastructure and rising costs.
The IMF latest forecast for growth in 2015 and 2016 is 1.4% and 1.3% respectively down from 2.1% and 2.0% as recently as April 2015. This shows how quickly the outlook for South Africa’s economy has worsened.”
“Bond investors are worried that South Africa could be downgraded in 2016 if current trends continue. The current debt ratings for South African debt are Baa2/ BBB- and therefore a downgrade of one or two notches by the main rating agencies would see the debt classified as below investment grade or junk. We do not expect this to happen in the short term but could become a concern in the second half of 2016.
The slowdown in growth will also have social consequences. South Africa’s unemployment rate recently rose to 25.5% and youth unemployment is 50%. The current widespread student protests against the high cost of tuition costs are another example of the pressures caused by faltering growth and high costs. It is difficult to be optimistic in the short to medium unless there is a sharp rebound in commodity prices.”