Yes, there have been some major setbacks that are making everyone uneasy. But investors should also guard against overstating the risk.
South Africans’ wounded pride was dealt a double blow earlier this month with news of a technical recession and a further credit rating downgrade. The economy declined in real terms at an annualised rate of 0.7% quarter-on-quarter in the first quarter of 2017, pushing the country into a technical recession.
The GDP numbers emphasise that the weakness of the domestic economy should not be understated and there certainly is an urgent need for policymakers to step up with the right measures and reforms to get the economy back on track. An end to political and policy uncertainty will help tremendously.
At the same time, investors should guard against overstating domestic economic weakness. Compared to the first quarter of 2016, the economy grew by 1% in real terms, the fastest growth rate in seven quarters. The economy contracted on a year-on-year basis early last year for the first time since 2009.
Similarly, while the expected one-notch credit rating downgrade by Moody’s is unfortunate, SA’s local and foreign currency ratings remain investment grade. This means local government bonds remain part of key global indices and there is no risk of forced selling (for now).
Technical recession not that significant
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