Picture: SUPPLIED
Picture: SUPPLIED

SA’s economic growth will shrink further this year, and there seem to be few plans on how to get it out of its quagmire — putting the country at risk of a costly credit rating downgrade.

The Treasury’s budget review acknowledges that a strong platform for growth is necessary. Weak growth is one of the reasons rating agencies have downgraded SA.

Providing a strong platform for economic growth requires supporting private investment; addressing infrastructure bottlenecks; improving policy co-ordination, certainty and implementation; improving labour relations and the ease of doing business, the Treasury said.

It again stressed the need for the public and private sectors to implement the National Development Plan. The Treasury has lowered its economic growth forecasts to 0.9% this year, 1.7% next year and 2.4% in 2018.

"The lower GDP (gross domestic product) forecasts do not bode well for stock market valuations and capital inflows in the medium-term," said Thebe Stockbroking head of research Henry Flint.

Despite the downward revision of its growth outlook, the Treasury remained optimistic when compared to projections from the likes of Moody’s, which predicts growth of 0.5% this year. It noted that the risks to its growth forecasts were to the downside. This implied that growth could be lower than forecast. "Further currency weakness could raise inflation and induce higher interest rates, leading to lower growth.

"Weaker than forecast improvements in electricity availability could further reduce growth, while higher than anticipated electricity prices remain a risk," the Treasury said.

Lower economic growth has implications, including a slower pace of job creation, lower revenue collection and wider budget deficits.

However, the Treasury is addressing these by reducing spending and raising taxes. "Improved global conditions and rising confidence are expected to result in a moderate improvement in economic growth by 2018," the Treasury said in its budget review document.

A senior Treasury official said growth would accelerate in the next two years, supported by progress with power generation, fewer strikes, and a weaker rand boosting exports.

The risks included disruptions from strikes, commodity prices sinking even lower, and a reversal in the growth of developed economies.

Inflation is seen breaching the upper end of the 3%-6% target band this year and next due to the weak rand, a moderate rise in global oil prices and higher electricity and food prices.

Inflation is forecast to average 6.8% this year and 6.3% next year. It is then seen declining slightly to 5.9% in 2018.

Food prices are forecast to rise almost 10% this year due to higher maize imports and the weak rand.

The current account shortfall is expected at 4% of GDP this year, and to narrow slightly to 3.9% next year and in 2018.

The Treasury expects a "more muted" growth in exports, of 3% this year, compared with a stronger 10.6% increase in physical export volumes in the first three quarters of last year.

Growth in imports is projected to slow this year on sluggish domestic demand and the weak rand.

Weak demand and limited electricity availability was expected to weigh on manufacturing performance until next year, Treasury said.

Moderate household consumption growth, weaker disposable income growth and high indebtedness are expected to reduce growth in services. Spending by households is under pressure from rising inflation, food prices and interest rates.