Electricity shortages, low commodity prices, a severe drought and weaker than expected global growth will constrain South Africa's economy over the next 18 months and are reflected in the government's Baa2 rating, stable outlook, Moody's Investors Service said in a report published today. Uncertainty surrounding the Chinese economy and the broader global outlook, as well as the timing of any tightening of US monetary policy, will make capital flows more volatile and may have a considerable impact on South Africa in the second half of this year.



While Moody's expects South Africa to avoid recession in 2015, the rating agency forecasts growth of only 1.7% in 2015 and 1.9% in 2016, with 3% growth unlikely before 2017 or 2018 at the earliest. Moody's annual South Africa Credit Analysis is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action.



"The South African economy is suffering from the steep fall in commodity prices, the negative impact of which outweighs the benefits of cheaper oil imports," says Kristin Lindow, Senior Vice President and Moody's lead analyst for South Africa's sovereign rating. "We now expect the economy to pick up only modestly this year because the drought that took such a heavy toll on agricultural output in the second quarter will further weaken growth that has already been slowed by electricity shortages."



Energy constraints and weak business confidence have undermined investment in South Africa and hindered the country's growth performance relative to most other emerging markets. Other challenges include a skills shortage in the labor market, economic inequality, low savings and investment rates, difficult industrial relations, over-dependence on natural resources and infrastructure bottlenecks.



In the mining sector, low prices for minerals have weakened companies' earnings at a time when they are having to absorb higher wage and labor costs following a series of protracted strikes. Several companies have already announced mine closures and lay-offs that will result in lower growth and export earnings.



Agriculture -- which accounts for only around 2% of national output -- has been badly hit in 2015 by the effects of the El Nino weather pattern. The impact on South African farming is expected to last for at least another year.



Along with subdued growth, South Africa has seen the unemployment rate persist at 25% or even higher, as labor costs rise and productivity sputters. Consumer demand remains subdued due to expectations of higher inflation and interest rates and relatively high household debt levels, while investment is going through a prolonged slump.



Against this difficult background, however, fiscal planners appear to be succeeding in stabilizing the public finances through spending restraint and efficient tax collection in spite of pressures emanating from the public wage bill and significant investment needs. The Reserve Bank is also keeping inflation broadly in check, despite the weakening of the rand.

Moody's says the government's favorable debt structure and spending discipline are likely to stabilize the government's debt-to-GDP ratio at about 49% over the next year. This estimate takes into account the extra costs associated with the recent public sector wage settlement, which will force the authorities to consider economies in other areas as well as potential tax increases or other revenue measures.