Caught in a toxic mix

But glim­mers of hope re­main. The econ­omy is gripped by stagfla­tion,

Finweek English Edition - - Contents -

south African con­sumers face pre­car­i­ous times as the rand looks set for a pro­longed pe­riod of volatil­ity and the econ­omy sinks into what is known as stagfla­tion – a toxic mix of slow­ing growth, ris­ing in­fla­tion, and stub­bornly high unem­ploy­ment. The cur­rency is un­likely to claw back much of the hefty losses it has en­dured over the past few months, which an­a­lysts be­lieve will push in­fla­tion to the top of its tar­get range early in 2019 and force the Re­serve Bank to raise in­ter­est rates be­fore this year is over, de­spite an in­evitable pub­lic out­cry.

At the time of go­ing to print, the bank’s Septem­ber mon­e­tary pol­icy meet­ing had not ended, but a de­ci­sion to keep in­ter­est rates steady now, de­spite a sur­prise dip in in­fla­tion in Au­gust, would only have post­poned the in­evitable. This is de­spite the fact that the coun­try has sunk into its sec­ond re­ces­sion in a decade.

If the bank does not take this con­tro­ver­sial step, its in­fla­tion-fight­ing cre­den­tials will be called into ques­tion and the rand will be pun­ished by fi­nan­cial mar­kets, pil­ing more pres­sure on busi­ness and con­sumers as the cost of im­ports – par­tic­u­larly fuel – con­tin­ues to climb.

Pres­sure has al­ready built for a petrol price in­crease of more than R1/litre in Oc­to­ber, in re­sponse to the weaker cur­rency and higher oil prices, which at one stage in the past few weeks climbed to $80/bar­rel – well above the level seen Chief econ­o­mist at Rand Mer­chant Bank By Mariam Isa as healthy for the global econ­omy.

The rand de­pre­ci­ated to R15.70 against the dol­lar, tak­ing its losses against the US cur­rency to about 20% this year, af­ter news in early Septem­ber that the econ­omy shrank in the sec­ond quar­ter of this year, while the es­ti­mate of its con­trac­tion in the first quar­ter was re­vised lower.

“The cur­rency will re­main volatile, trad­ing in a new and wider range of R14 to R15.50 against the US dol­lar over the next 12 months,” said Et­ti­enne le Roux, chief econ­o­mist at Rand Mer­chant Bank. “We’ve re­vised our rand fore­casts weaker due to SA’s ma­te­ri­ally softer medium-term growth out­look, along­side a likely fur­ther fall in global in­dus­trial metal prices.”

There is grow­ing con­sen­sus that the deep­en­ing trade war be­tween the world’s two big­gest economies will take a toll on global growth, re­duc­ing de­mands for com­modi­ties ex­ported by emerg­ing economies like South Africa. At the same time oil prices are un­likely to re­cede in the face of what is de­scribed as “geopo­lit­i­cal un­cer­tainty”, which is be­ing ex­ac­er­bated by US Pres­i­dent Don­ald Trump’s de­ter­mi­na­tion to tighten the screws on Iran’s econ­omy.

Emerg­ing mar­kets bear the brunt of un­favourable de­vel­op­ments, and al­though SA’s econ­omy is in a bet­ter po­si­tion than many, it will also suf­fer. For­eign­ers sold a net R127bn of do­mes­tic bonds and eq­ui­ties be­tween May and mid-Septem­ber this year, com­pared with net pur­chases of R32.3bn be­tween Jan­uary and April.

Ris­ing US in­ter­est rates will con­tinue to mute

“We’ve re­vised our rand fore­casts weaker due to SA’s ma­te­ri­ally softer medium-term growth out­look, along­side a likely fur­ther fall in global in­dus­trial metal prices.”

Et­ti­enne le Roux

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.