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Hard work now begins to ensure SA isn’t downgraded in December – Economists

Finance Minister Pravin Gordhan has echoed these sentiments, adding it’s time to implement economic reforms.

Picture: Craig Wynn/EWN.

JOHANNESBURG - Economists say the hard work now begins to ensure South Africa is not downgraded in December with Finance Minister Pravin Gordhan echoing these sentiments, adding it's time to implement economic reforms.

Yesterday, ratings agency Fitch announced that it's keeping its outlook unchanged at BBB- with a stable outlook.

It's the third agency to keep its rating unchanged, keeping the country above junk status.

Yesterday, just before Fitch's announcement and the news that the country's GDP contracted by 1.2 percent, Gordhan emphasised the need to start implementing ideas on how to improve the economy.

"People who have an interest in South Africa, including ourselves, don't want any more plans, what they want is action."

At the same time economist Goolim Balim says implementing economic reforms is now imperative.

"Over the last five months or so there have already been fairly significant endeavours, suggesting that there's momentum."

Gordhan has also reiterated that increasing the scale of investment is a key focus area for the foreseeable future.

'SA HAS THE BEST INFRASTRUCTURE FOR BUSINESS'

Meanwhile, the finance minister says South Africa has the best infrastructure for business and the focus should be on encouraging investment in the next few months.

He says government has been doing the right kind of work with labour and business to avoid downgrades.

At the same time, he believes business in South Africa should be encouraged.

His remarks came just a day after latest figures show a slump in business confidence.

Gordhan however believes South Africa needs the next few months of breathing space to implement changes to avoid a downgrade in December.

GDP SLOWS DOWN

Statistics South Africa said economic output fell by 1.2 percent in the first quarter of 2016 after rising by a revised 0.4 percent in the three months to December, mainly due to an 18-percent slide in the mining sector during the quarter.

Mining contributes nearly 8 percent to GDP but has been hit by weak commodity prices. Agriculture, which accounts for 2.2 percent of GDP, also fell 6.5 percent, reflecting the impact of a crippling drought across southern Africa.

The economy shrank by 0.2 percent on an unadjusted year-on-year basis in the first quarter, compared with 0.6 percent growth in the previous three months, the agency said.

Economists polled by Reuters had expected a quarter-on-quarter GDP contraction of 0.1 percent while the economy was seen expanding 0.1 percent year-on-year.

"Today's figures paint a very bleak picture of the health of Africa's most developed economy ... and there is little optimism that things will turn around anytime soon," Capital Economics analyst John Ashbourne said. "We expect that South Africa's credit rating will be cut eventually."

The central bank forecasts growth at 0.6 percent this year, which inhibits its scope to raise interests to tame rising inflation stoked by a weaker rand and rising food prices.

NKC African Economics analyst Hanns Spangenberg said the GDP contraction was much larger than expected, saying that it "looks like we are in danger of a possible recession this year".

The central bank has hiked rates by a cumulative 200 basis points since 2014 to bring inflation within its target band of 3 and 6 percent. Inflation stood at 6.2 percent in April.

Analysts however see little scope for further tightening as growth struggles. In addition, raising interest rates could alienate the ruling African National Congress's supporters before local governments elections in August, where the party is expected to face a stiff challenge by the opposition.

Critics blame President Jacob Zuma for the economic malaise, demanding that he resign for changing finance minister twice in one week in December, triggering market turmoil. Zuma has however held on with the backing of his ruling party.

Additional information by Reuters