April 6 (Reuters) – South Africa’s central bank slashed its growth forecasts on Monday, predicting the economy could shrink by as much as 4% in 2020 due to the novel coronavirus that has forced a national lockdown and triggered two credit ratings downgrades.
The bank also said growth was unlikely to exceed 1% the following year.
“Updated estimates show the economy contracting by around 2% to 4% in 2020, although these projections are tentative,” the South African Reserve Bank (SARB) said in its bi-annual Monetary Policy Review.
“There is limited scope for a rebound, but growth is now unlikely to exceed 1% in 2021,” the bank said, adding that the were downside risks to the dire forecasts should the lockdown be extended, or if the global economy weakened more than expected.
Africa’s most advanced economy was already on the ropes when pandemic hit local shores, recording its second recession in two years in the final quarter of 2019, with data from 2020 already showing slack industrial and financial activity.
On Friday ratings agency Fitch cut the country’s credit rating deeper into sub-investment territory, forecasting a 3.8% contraction to the economy in 2020 and a fiscal deficit of 11.5% of GDP. The week before Moody’s also cut the rating to junk
The country has reported 1,585 coronavirus cases, the highest on continent, with nine deaths, and is in the second week of a 21-day lockdown.
South Africa’s rand has since crashed to an all-time low while bond yield have spiked fuelling fears of a financial and fiscal crisis. In March the bank launched a bond-buying programme to plug a liquidity drought in credit markets and before that cut lending rates by 100 basis points.
“These measures have made it easier for banks to get cash … They have also created incentives for banks to lend money on, rather than holding it at the central bank. To date, these measures appear to have improved market functioning,” the bank said.
However calls for the bank and the National Treasury do more to support the economy have grown louder, especially with unemployment already at 30% and poverty set to soar due to the pandemic.
The bank repeated a concern about high borrowing costs and the widening spread between short and long term bond yields, the latter now around 500 basis points from an average gap of 360 bps previously.
It said a 100 basis point, or 1%, shock rise in lending rates had weakened growth by around 0.6 percentage points. (Reporting by Mfuneko Toyana Editing by Tim Cocks)