Wed, 05 Aug 2020

Moody's expects SA's economic activity to pick up in the second half of the year, but it will still remain weak.

Furthermore, Covid-19 is expected to push public debt to nearly 100% of GDP by March 2022.

The ratings agency on Friday issued an update on its forecast for the country's economic performance this year. It highlighted that the Covid-19 pandemic would add to the country's economic challenges but stuck to its projection of a 6.5% contraction in GDP this year.

It expects the SA economy to contract by 3% in the second half of the year, compared to the 10.1% contraction in the first half of the year.

"We expect economic activity to deteriorate further in the second quarter of the year, as strict lockdown measures implemented in late March but gradually eased between early May and mid-June dampen economic activity," the note read.

READ | Moody's: Stabilisation of of SA budget by 2023 'unlikely'

In its emergency budget, Treasury had indicated that the debt-to-GDP ratio would be 81.8% this year or R4 trillion.

Similarly, Business For South Africa has pencilled in debt at 82% of GDP this year and only breaching the 100% mark by 2023/24. Moody's pegs debt-to-GDP at 89.9%, mainly due to the Covid-19 stimulus package which sees government increasing spending.

Moody's projects the budget deficit would hit 15.7%, compared to Treasury's projection of 14.6%.

Weak growth and low revenue collections would weigh on "already vulnerable" public finances, Moody's said. "A contraction in the tax base disproportionate to the contraction in GDP due to lockdown measures, job losses and lower confidence drive the fall in revenue," the report read. It noted that the R70 billion in tax relief measures in response to Covid-19 only accounted for a "small share" of revenue.

State-owned enterprises will also take a knock due to the pandemic, which will also add to fiscal drains, Moody's warned. "For instance, reduced electricity demand will lower cash flows and increase Eskom's funding needs," it said.

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