S&P economists revise downward forecast for South African growth In 2016

A range of adverse global and domestic factors continue to weaken South Africa's macroeconomic outlook, Standard & Poor's economists said in a report published today.

Last year, economic growth slowed to 1.3%, below the estimated rate of population growth, implying a contraction of output per capita by 0.4%.

"The factors that weighed on the growth in 2015 are still in play: Prices for South Africa's export commodities slumped again between October 2015 and January 2016, with iron ore down by more than 20% and platinum by 12%," said Standard & Poor's senior economist Tatiana Lysenko in the report, "Weak External Conditions Plus Domestic Issues Dim South Africa's Growth Prospects."

Despite the recent recovery from January lows, we expect most commodity prices to remain depressed, largely due to weaker demand from China, which is South Africa's biggest export destination (see "Standard & Poor's Revises Its Price Assumptions For Metals On Continuing Price Weakness," published on Jan. 22, 2016, on RatingsDirect). Meanwhile, the prolonged drought is hitting agricultural output, while also lifting food prices.

"Although these factors are either external (low commodity prices) or temporary (the severe drought), growth is also constrained by ongoing structural issues, such as poor labor market outcomes and infrastructure bottlenecks," Ms. Lysenko said.

In fact, economic growth in South Africa has been on a downward trend since 2011.

Feeble economic prospects have weakened the sentiment of domestic and foreign investors. Already weak confidence took further blow when a respected finance minister, Nhlanhla Nene, was removed from his position in December.

As a result, foreign portfolio flows into South Africa slowed markedly in the third quarter, and turned negative in the fourth quarter. The related currency depreciation, accelerating inflation, and higher interest rates in turn are weakening short-term growth prospects.

"Taken together, these developments have prompted us to lower our growth expectations for this year to 0.8%, down from 1.6% in November; and to 1.8% in 2017, down from 2.1% (see table 1)," Ms. Lysenko said.

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