Johannesburg — SA's economy was unlikely to show "vigorous growth" until the global recovery was more entrenched, which would probably happen in the second half of next year, Moody's Investors Service said yesterday.

In its first comment on SA since the Treasury's medium-term budget policy statement last week, Moody's said SA could handle a leap in official borrowing now because current debt levels were low.

But it also warned the trend could not be stretched indefinitely, and that pressure for more "unaffordable" fiscal and monetary policies should be resisted.

Moody's senior vice-president, Kristin Lindow, told Business Day she was "comfortable" with the stable outlook on SA's sovereign credit rating, which the agency upgraded to A3 from Baa1 in July.

Moody's also lowered its local currency rating for SA, which it sees as more important, to A3 from A2.

But investors attach more weight to foreign currency ratings, which determine the cost of a country's borrowing in global markets. Moody's said yesterday it expected a 2% fall in SA's output this year -- the first since 1992 -- in line with consensus and official forecasts.

It also predicted that the economy would expand 2% next year, which is above the official forecast of 1,5% growth. "The ongoing easing of monetary policy and fiscal spending, especially on infrastructure, should help restore growth to modestly positive territory towards the end of 2009 and into 2010," Lindow said.

There would be another boost to the economy next year from the Soccer World Cup. "On the other hand, vigorous growth is unlikely to recur until the global economy shows more stamina, perhaps in the latter half of 2010," she said.

Lending rates have been lowered by five percentage points since last December and the government plans to borrow R640bn over the next four years to sustain spending on jobs, welfare and infrastructure.

"Moody's expects the country's growth potential to shrink in a less supportive global environment, which ... means that reversing the upward debt trajectory over the medium term will prove difficult."

The Treasury sees official debt swelling to 41% of gross domestic product (GDP) in 2013 from 24% in March this year. It also projects that the budget deficit will rise to 7,6% of GDP in the fiscal year ending next March -- its highest since the 1960s -- from 1% last year.

Moody's sees the budget deficit at 7,2% of GDP this year and 6,1% next year, just below official forecasts.

SA's public investment programme would provide scope for higher and sustained growth, as long as it stayed within a well-constructed macroeconomic framework. "This would mean that pressure from within the government alliance for unaffordable and distortive fiscal and monetary policies will need to be resisted, despite frustration with the slow pace of progress on the jobs front," it said.

The economy shed nearly 1- million jobs in the first three quarters of the year, with unemployment at 24,5% in the third quarter from 23,6% in the second, official data showed last week. Most of the losses were in retail and manufacturing.

isam@bdfm.co.za