The South African government on Wednesday welcomed Moody’s Investors Service’s decision to affirm South Africa’s sovereign ratings and maintain a stable outlook on the rating.

Moody’s affirmed the government bond ratings at ‘Baa2’, based on the expectation that the fiscal consolidation path outlined in budget documents would be maintained.

“Moody’s decision to affirm the rating is in recognition of South Africa’s commitment to sound macroeconomic policies and its strong institutions. Government is aware that the country’s economic growth performance needs to be improved in a sustainable manner and has, thus, made the resolution of the energy challenge an immediate priority,” the National Treasury said in a statement.

It further noted that government was taking steps to speed up the implementation of the structural policy reforms embedded in the National Development Plan to tackle the constraints that bound the economy.

“Maintaining a prudent fiscal position remains one of government’s top priorities. Government remains committed to adhering to the set expenditure ceiling, while reducing the growth of the debt portfolio as set out in the February 2015 Budget,” it added.

Moody's said it expects South Africa to avoid recession in 2015, but forecast growth of only 1.7% in 2015 and 1.9% in 2016, with 3% growth unlikely before 2017 or 2018 at the earliest, owing to electricity shortages, low commodity prices, a severe drought and weaker-than-expected global growth.

The ratings agency noted that this would constrain the local economy over the next 18 months.

It further highlighted that uncertainty surrounding the Chinese economy and the broader global outlook, as well as the timing of any tightening of US monetary policy, would make capital flows more volatile and could have a considerable impact on the country in the second half of this year.

"The South African economy is suffering from the steep fall in commodity prices, the negative impact of which outweighs the benefits of cheaper oil imports.

"We now expect the economy to pick up only modestly this year because the drought that took such a heavy toll on agricultural output in the second quarter will further weaken growth that has already been slowed by electricity shortage," said Moody’s senior VP and South Africa's sovereign rating lead analyst Kristin Lindow.

Energy constraints and weak business confidence had undermined investment in South Africa and hindered the country's growth performance relative to most other emerging markets.

Other challenges include a skills shortage in the labour market, economic inequality, low savings and investment rates, difficult industrial relations, over-dependence on natural resources and infrastructure bottlenecks.

In the mining sector, low prices for minerals have weakened companies' earnings at a time when they are having to absorb higher wage and labour costs, following a series of protracted strikes.

Several companies had already announced mine closures and lay-offs that would result in lower growth and export earnings.

Agriculture, which accounted for only around 2% of national output, had been badly hit by the effects of the El Nino weather pattern. “The impact on South African farming is expected to last for at least another year,” the agency said.

Along with subdued growth, the country had seen the unemployment rate persist at 25% or higher, as labour costs rose and productivity sputtered.

Consumer demand would also remain subdued owing to expectations of higher inflation and interest rates and relatively high household debt levels, while investment was going through a prolonged slump.

Moody’s stated, however, that, against this difficult background, fiscal planners appeared to be succeeding in stabilising the public finances through spending restraint and efficient tax collection in spite of pressures emanating from the public wage bill and significant investment needs.

The Reserve Bank was also keeping inflation broadly in check, despite the weakening of the rand.

Moody's added that government's favourable debt structure and spending discipline were likely to stabilise its debt-to-gross domestic product ratio at about 49% over the next year.

This estimate took the extra costs associated with the recent public sector wage settlement into account, which would force the authorities to consider economies in other areas, as well as potential tax increases or other revenue measures.