South Africa’s economy is likely to grow by only 1.7% this year and accelerate modestly to 1.9% next year, held back by persistent electricity shortages, low commodity prices, a severe drought, and weaker than expected global growth, Moody's said in a market update. This is below the government’s forecast of 2.0% and 2.4% for 2015 and 2016, respectively, and also below the central bank’s outlook of 2.0% and 2.1%.

“Uncertainty surrounding the Chinese economy and the broader global outlook, as well as the timing of any tightening of US monetary policy, will make capital flows more volatile and may have a considerable impact on South Africa in the second half of this year,” the agency said in a statement, presenting its annual credit analysis report on South Africa.

It noted that the country’s large mining sector is suffering from the drop in global commodity prices which coincided with a rise in labour costs following a series of protracted strikes. In addition, electricity constraints weigh both on mining and other bigger energy consumers like manufacturers. Coupled with weak business confidence, this has undermined investment in South Africa and hindered the country's growth performance relative to most other emerging markets, Moody's said.

The latest available official data shows that South Africa’s manufacturing sector contracted 6.3% q/q in the second quarter, and the mining industry shrank 6.8% q/q, contributing to a surprising 1.3% q/q GDP decline.

In addition, the agriculture sector, which accounts for only around 2% of GDP, contracted 17.4% in Q2, hit by severe drought. Moody’s expects the impact on South African farming to last for at least another year.

Among other major drawbacks, the rating agency pointed at the high unemployment rate of more than 25% coupled with a skills shortage in the labour market, difficult industrial relations, rising labour costs and deteriorating productivity, as well as over-dependence on natural resources and infrastructure bottlenecks.

However, Moody’s believes that the government will be able to stabilise public finances through spending restraint and efficient tax collection. It sees the government's debt-to-GDP ratio stabilising at about 49% over the next year, as extra costs associated with the recent public sector wage deal will be probably offset by economies in other areas and/or potential tax increases or other revenue measures.

Moody's rates South Africa at Baa2 with a stable outlook.