Interest rate hikes in excess of a further 50 basis points would be too damaging to an already-shaky growth outlook and, as a result, no more than two hikes of 25 basis points each over the course of 2016, can probably be expected, according to economist Sanisha Packirisamy and Herman van Papendorp, head of macro research, at MMI Holdings.

This would take the repo rate to 6.50%.

They added that rand weakness remains a key source of upside risk to the inflation profile.

"Even with our currency projections estimating a further 10% weakening in the rand against the US dollar next year (relative to the average for 2015), the extent of currency pass-through in 2016 could ... surprise to the downside as weak consumer demand and further compression on retailer margins curb the increase in selling prices," they explained.

They forecast headline inflation to average 5.8% over 2016, peaking marginally above 6% in the first quarter of 2016, and declining to 5.2% in 2017.

"Though we expect some improvement in the current account deficit, narrowing to an average of 4% of GDP over the next two years from an average of 5.4% over the past three years, global capital flows into emerging markets (EM) are likely to come under pressure in an environment of lingering EM risks and a further move away from ultra-accommodative monetary policy in the US," said Packirisamy and Van Papendorp.  

"These international factors are likely to combine with poor domestic macro fundamentals to keep the rand under pressure."

Weaker commodity prices and continued electricity supply constraints are likely to prohibit a faster acceleration in SA's growth above 2% over the next three fiscal years, in their view.

"In the absence of specific revenue proposals, weak consumer confidence, tight credit conditions and anaemic employment growth point to downside risks to these figures, while lacklustre commodity prices and benign domestic demand are expected to weigh negatively on corporate revenue collections which government expects to increase by 4.3% in the financial year 2016/17," they said an a macro economic overview released on Wednesday.

They pointed out that government’s failure to curb the public sector wage bill and escalating debt-servicing costs imply that the level of expenditure will remain "stickier" for longer, posing a risk to government’s fiscal consolidation timeline.

An additional structural expense has also been considered following the #FeesMustFall student-led protest in response to an increase in university fees. Higher Education Minister Blade Nzimande suggested that an additional R19.7bn per year would be required above the current baseline to appropriately fund SA’s higher education sector.

Government attributes the deterioration in the expected debt-to-GDP ratio to a weaker currency and lower growth leading to revenue shortfalls. The gross debt-to-GDP ratio is expected to climb further to 49% of GDP by the financial year 2017/18.

Due to the increase in government borrowing, debt-servicing costs are expected to remain the fastest-growing expenditure item.

The rapid rise in debt-servicing costs is crowding out other (social and growth-enhancing) spending priorities and has been raised as a key concern by the rating agencies.

Although SA’s government debt ratio appears to be in line with its BBB peers, Fitch rating agency has warned against significant contingent liabilities.

"Given that they currently rank SA one notch lower than S&P and have maintained a negative outlook, we would not be surprised to see a long-term foreign currency rating downgrade to BBB- by Fitch as early as December 2015," said Packirisamy and Van Papendorp.  

Meanwhile, Moody’s has warned that, even though government has not faltered on its commitment to the expenditure ceiling, a higher wage bill erodes fiscal buffers.

Moody’s has kept SA’s rating stable at Baa2 (in line with Fitch) since the fourth quarter of 2014, but has maintained a stable outlook.

"A shift to a negative outlook could follow from recent fiscal disappointments," said Packirisamy and Van Papendorp.

Of the three large rating agencies, S&P ranks SA the lowest, at BBB- with a stable outlook.

"In our view, a stable outlook buys SA some time in the interim before potentially seeing a downgrade to junk status on a two to three year view," said Packirisamy and Van Papendorp.

"Broad political or institutional stability and policy continuity, as noted by S&P, together with robust fiscal year-to-date revenue trends should stave off a negative rating move for now. Nevertheless, the rating outlook could be shifted from stable to negative over the next year, given S&P’s trend growth concerns."

In the absence of significant reforms, S&P sees the low-growth/high-unemployment SA reality as the culprit behind fiscal challenges and rising social protests.
   
Rating agencies have further highlighted risks around a potential deterioration in the investment climate and the negative impact it could have on the funding of the external deficit.