Political risks to rand dominate Bank’s meeting
• Currency eclipses inflation outlook
Political risks to the rand dominated the narrative on Thursday as the Reserve Bank’s monetary policy committee opted to keep interest rates unchanged, as expected, despite a better inflation outlook. This came after a week in which the rand dropped 5%.
Political risks to the rand dominated the narrative on Thursday as the Reserve Bank’s monetary policy committee opted to keep interest rates unchanged — as expected — despite a better inflation outlook.
After a week in which the rand dropped 5% at one stage on news that President Jacob Zuma had recalled Finance Minister Pravin Gordhan from an international investor road show, the committee made it clear that “the risk of further rand weakening overshadows the inflation outlook” and warned that the rand was likely to show further reaction to unfolding political developments “until a greater degree of certainty and confidence is restored”.
The Bank’s inflation forecast has improved since the committee’s last meeting in January, largely because of the way the rand has strengthened. And while food prices are coming down slower than expected, fuel prices are showing a more favourable trend.
The Bank now expects inflation to come down to within the target range in the second quarter of 2017, rather than the fourth quarter as expected at the time of the January committee meeting. It has reduced its forecast of the average inflation rate for 2017 and 2018.
Although the rand exchange rate poses upside risks to the inflation outlook, Reserve Bank governor Lesetja Kganyago said there were also downside risks to inflation if the international oil price or the energy regulator’s decision on electricity prices came in lower than expected.
The committee said again, as it did at its last two meetings, that “we may have reached the end of the tightening cycle”. But it warned that it would like to see a more sustained improvement in the inflation outlook before reducing rates and signalled that more hikes could be on the cards if the risks to the inflation outlook deteriorated.
The economic growth outlook is still weak, but the Bank has revised its growth forecasts slightly upwards, to 1.2% for 2017 and 1.7% in 2018, with growth of 2% forecast for 2019.
Though the market has been pricing in rate cuts later in 2017, Kganyago said it should not run ahead of itself and cautioned that the committee wanted to see inflation at a level that “should you be hit by a shock, it doesn’t throw you way out of target”.
Nomura economist Peter Attard Montalto said the market had shifted to price in interest rate cuts. Despite the one vote for a cut, the committee did not send a dovish signal at all. He still does not see rate cuts for the next year at least.
Investec economist Annabel Bishop said the bank maintained its forecast of an unchanged repo rate in 2017, saying the Bank’s forecasts for 2017-19 were still well above the 4.5% midpoint of the target range.
THE ECONOMIC GROWTH OUTLOOK IS STILL WEAK BUT THE BANK HAS REVISED ITS GROWTH FORECASTS SLIGHTLY UPWARDS, TO 1.2%
And so the endgame begins. As expected, President Jacob Zuma has taken the propitious step of reshuffling his cabinet, ousting trusted Finance Minister Pravin Gordhan, and thereby demonstrating a shameful disregard for the commonplace notion that government should treat the capital of its taxpayers with respect. There has been lots of vague speculation over why it would be necessary to dismiss a loyal and respected finance minister, laced with hints and suggestions, so let’s be clear on this topic: the president is dismissing Gordhan because he wants more control over the fiscus and Gordhan stands in his way. He wants more control because, like all unpopular leaders, he feels he can spend his way into people’s hearts — and particularly the hearts of his chosen recipients, his family, his friends and his supporters in the higher ranks of the party.
But by doing so, he will cause ructions within the party and chaos in the fiscus. Zuma’s legacy so far has been a catalogue of disasters for his own alliance and his own supporters. The once mighty Cosatu that bestrode the workplace in SA for years has now been reduced to essentially a union of state employees, the only group too afraid to disassociate itself from the party in power. The South African Communist Party, once an influential think-tank within the alliance, is now discarded and demeaned. The ANC Youth League, once a fertile training ground for party cadres, is overshadowed by its breakaway political movement, the Economic Freedom Fighters. Under his leadership, the ANC, which once commanded the support of more than two-thirds of voters, in the latest local government poll could barely muster a simple majority. He has been a disastrous and calamitous runaway train on a demolition derby.
For the state of government finances, he has been equally a calamity. His own personal gluttony has been reflected in a fiscal position that has slid from serious to parlous. Over his term, state debt has doubled; government has borrowed more than a trillion rand; the level of business confidence is miserable and consequently, the economy has slouched into a gravelly state of bare stasis. It seems almost inevitable now that SA’s government debt will be downgraded to junk status, but even if it is not, there is simply no conceivable way that Gordan’s successor can possibly regain the same level of trust of foreign lenders.
In response to all these setbacks, Zuma’s response has been to up the ante, trying to discover his inner Robert Mugabe. By adopting this gambit, Zuma has misjudged the country’s people, most of whom are urban dwellers who seek economic stability, not doubtful promises of grand redistribution.
Yet, in the midst of this dark time, there is one redeeming feature. The endgame has begun. Instead of being caught in a quasi-clandestine battle over the future of the party, the battle lines are clear. On one hand, stands Zumarism, with all its promise of corruption, dislocation and disfigurement. On the other, stands anti-Zumarism, with all its promise of pragmatism and a future of mutual respect.
As a result, the choice that stands before ANC members of leadership and parliament is now peculiarly stark. They need to decide on which side of history they stand. And the root question is equally stark: do they stand with the people of South African, or do they stand with Zuma and his faction.
For nobody in the party is the choice more wrenching than Deputy President Cyril Ramaphosa. If he remains in the cabinet now, his already battered credibility will be lost irretrievably. He will forever be associated with a president who plainly does not even want him to be his successor. What an ignominious end to such an illustrious career.
Still, Zuma may discover that this kind of zero-sum game thinking results in the most hollow of victories.
ZUMA’S LEGACY SO FAR HAS BEEN A CATALOGUE OF DISASTERS FOR HIS ALLIANCE AND HIS OWN SUPPORTERS