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Ailing Economy Puts S. Africa Into Trouble

Ailing Economy Puts S. Africa Into TroubleAiling Economy Puts S. Africa Into Trouble

South Africa risks losing its coveted investment grade credit status within five years if it fails to recover from an economic slump that prompted a downgrade by Moody’s last week.

Moody’s decision piled more pressure on President Jacob Zuma’s administration as it struggles to rein in public debt, now nearing 50% of economic output, compared with about 27% just five years ago, Reuters reported.

Weak public revenues and sluggish exports have saddled Africa’s most advanced economy with persistently high deficits on both the budget and the current account, making the rand vulnerable to portfolio outflows during bouts of global risk aversion.

“Because of those two deficiencies, if we maintain things at this pace, within five years we could easily be at speculative (or junk) territory,” said Isaac Matshego, a senior economist at Nedbank.

Lengthy industrial action in the mining sector has also harmed Africa’s biggest economy after Nigeria.

The rand hit a five-week low of R11.3570 against the dollar and government bond yields touched three-week highs after Moody’s cut SA’s rating to Baa2 from Baa1, citing poor growth prospects and rising debt.

Analysts had largely anticipated the move, particularly after Standard & Poor’s downgraded SA in June while Fitch changed its outlook to negative from stable. It was nevertheless a setback for Finance Minister Nhlanhla Nene, who had vowed to bring the budget deficit down from 4.1% of gross domestic product (GDP) in an October 22 medium-term budget statement seen partly aimed at appeasing ratings agencies.

 

Financialtribune.com