Tale of two economies: World Bank nearly halves S. Africa forecast, Tanzania bumps up projections to 7.2%

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South Africa 'is flirting with recession' after a year of major shocks, but in Tanzania, the future seemingly has never been so rosy

SOUTH Africa’s economy is at risk of falling into recession, the World Bank said, as it cut the nation’s growth forecast for this year to 0.8%.

The economy is “flirting with stagnation, if not recession,” the lender said in a report released on Tuesday in the capital, Pretoria. This year’s growth estimate was cut from 1.4%, while next year’s projection was lowered to 1.1% from 1.6%.

The World Bank’s outlook is in line with that of the International Monetary Fund (IMF), which estimates expansion of 0.7% in South Africa this year. South Africa’s central bank last week cut its forecast to 0.9%.

Growth in Africa’s second-largest economy is under pressure following a slump in commodity prices, weakening demand from China and the worst drought in more than a century. 

Read: 10 things you need to know about Africa’s economy in 2016, from new flagship study

The rand has plunged 14% against the dollar in the past three months as sentiment worsened and credit-rating companies downgraded the nation’s debt because of growth risks.

“We said that we see risks to our forecasts to the downside, so there is a risk of slipping to recession and it’s not insignificant,” Catriona Purfield, World Bank program leader for South Africa, told reporters. The deterioration in the growth outlook is due to a “sharper than expected” slowdown in China, the reversal of capital inflows, a surprisingly severe drought and policy uncertainty, she said.

Restore confidence

Finance Minister Pravin Gordhan is seeking to restore confidence in government policy after President Jacob Zuma unexpectedly replaced Nhlanhla Nene as finance minister with a little-known lawmaker and then reappointed Gordhan four days later to the post he held from 2009 to 2014. 

Ratings firm Standard & Poor’s in December put South Africa’s BBB- rating on a negative outlook, indicating it may downgrade the nation’s debt to below investment grade.

“A foreign rating downgrade to sub-investment grade would trigger higher borrowing costs, capital outflows, and risk a recession with knock-on implications for poverty reduction and possibly social stability in the longer term,” the report said.

The slow growth in recent years means South Africa’s economy needs to expand by an average of 7.2% a year from 2018 to achieve the National Development Plan’s goals, which include cutting the jobless rate to 6% by 2030 from 25%, the World Bank said. 

Budget coming up

The economic slowdown may lead to a wider budget deficit and delay the government’s plans to stabilise its debt as a ratio of gross domestic product, it said. Gordhan will present his budget to lawmakers on February 24.

But in fellow Southern African Development Community (SADC) member Tanzania, which is similarly reliant on exports of minerals and has strong ties with China, the government is seeing brisk growth, with expectations that the economy will expand 7.2% this year, rising from 7% in 2015.

Finance minister Philip Mpango said this would be due to boosted government revenue collection and cuts in spending.

Tanzania buoyant

East Africa’s second-biggest economy after Kenya sees growth averaging 8% over the medium term, Mpango said in a statement posted on the Treasury’s website. 

The government says it will keep inflation between 5% and 8% in the medium-term.

The government of President John Magufuli is seeking to diversify the nation’s mostly agrarian economy by exporting its natural gas, whose reserves are estimated at 55 trillion cubic feet, the second-largest find along the East African coastline after Mozambique.

The country plans to spend $10.5 billion this fiscal year, as it seeks to build an industrial economy. The finance minister forecast the budget deficit will average 3% over the medium-term from 4.2% in 2015-16.

—Bloomberg

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