A boost to South Africa's economy from rising investor confidence after a leadership change and new policy announcements will not be enough to reduce very high unemployment and the ability of reforms to quickly ease structural challenges to the country's growth remains to be seen, S&P Global Ratings said in a report.
"GDP growth of just above 2%, or 0.5% in per capita terms, is very low for a country at South Africa's income levels, and not sufficient to sustainably reduce its very high unemployment levels," said Tatiana Lysenko, senior economist at S&P.
S&P raised its GDP growth forecast for the country to 2% for 2018 from 1% and to 2.1% for 2019 from 1.7%.
The election of Cyril Ramaphosa as president, a sizable fiscal adjustment and measures to improve governance of large state-owned enterprises have strengthened domestic and foreign investor confidence. Demand for commodities and manufactured goods is being boosted by the ongoing global upturn, the rating agency said.
The rand has strengthened and bond yields come down due to improving investor sentiment and the country's central bank now has more room to ease monetary policy because of a more favorable inflation outlook, it said.
"A revival in confidence and lower funding costs should support business investment, while a boost to real income from lower inflation bodes well for household spending. This should more than offset any drag on growth from the announced fiscal tightening," Lysenko said.
Labor and product market efficiencies, poor education outcomes and skills shortages are some of the structural challenges to the country's economic growth. S&P said South Africa is no longer among its "fragile five" emerging markets that would be highly vulnerable to monetary policy normalization in advanced economies.
S&P downgraded South Africa to junk in November 2017 on deteriorating economic outlook and public finances. Moody's changed South Africa's outlook to stable and confirmed the long-term issuer and senior unsecured ratings at Baa3 last week after placing them on review for downgrade in November 2017.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.