The risk of a recession is strengthening in South Africa as business confidence deteriorated to 31 points in Q4, down from 34 in Q3 and 40 in Q2 (see also WERO 21 November 2018). Moreover, the policy space has weakened since the South African Central Bank (CB) decided to hike its policy rate by +25bp to 6.75%. This move was expected but appears quite hawkish as headline and core inflation (+5.1% and +4.2% y/y in October, respectively) are still within the CB’s inflation target range (the upper bound is 6.5%). We expect the fiscal balance to be the next bad news for South Africa. Last year’s fiscal slippage (a deficit of -4.6% of GDP was posted) is likely to continue since deceptive growth in 2018 should be detrimental for any improvement (we expect a deficit of -4.2% of GDP, below consensus). Overall, we now forecast growth to stay below +2% for a sixth consecutive year in 2019 (at +1%), an environment that may put some pressure on the dynamics of public debt (55.5% of GDP in 2018) and the country’s sovereign rating.
