Can SA avoid a recession?
Reserve Bank boss warns against motion on nationalisation
● South Africa is likely to avert a recession, says Reserve Bank governor Lesetja Kganyago. Instead, he forecasts a “modest improvement” in growth in the second quarter of the year.
Africa’s second-biggest economy contracted by 2.2% in the first three months of the year, its biggest contraction since 2009. Two consecutive quarters of contraction is a textbook definition of a recession.
Earlier this month the bank lowered its growth outlook for this year to 1.2% from 1.7% and expects GDP to rise to 1.9% next year and 2% in 2020.
“At these growth rates we cannot expect to make appreciable inroads into the unemployment problem in the country,” Kganyago said at the bank’s AGM in Pretoria.
Kganyago warned about the rise of the global trade war that has been stoked by US President Donald Trump and its possible effect on the local economy, further depressing the growth outlook.
“No one is going to be a winner if there is a full-blown trade war.
“Let’s be clear, the countries that are going to suffer the most are going to be small, emerging-market economies because they rely on producing things to sell in those advanced economies,” he told Business Times.
The trade war sparked by Trump’s “America First” policy has already led to a decline in global trade, which in April contracted at its fastest pace since May 2015. At the Brics Business Forum this week Chinese President Xi Jinping urged Brics countries to reject a global trade war.
The anaemic growth environment is expected to convince the Reserve Bank to keep interest rates unchanged, at least until the middle of next year, when cost pressures and wage agreements may lead to inflation rising, economists said.
Emerging-market currencies have come under severe pressure over the past few months as investors fret about the health of these economies in light of the “trade war” and a normalisation of monetary policy by the US Federal Reserve and the European Central Bank.
The rand has weakened 6.5% against the US dollar, which has raised inflationary fears as the price of oil has risen.
The Argentinian peso has plunged more than 18% and the Turkish lira 12% against the greenback.
Despite the vulnerable rand, Kganyago said inflation was expected to remain within the central bank’s 3% to 6% target range over the next two years.
Recent forecasts suggest that inflation would average 4.8% this year but rise to 5.6% next year and 5.4% in 2020.
“This upward drift will not help in our quest to get inflation and inflation expectations anchored closer to the midpoint of the target range,” Kganyago said.
Nedbank forecasts a “very mild hiking cycle” in the coming year, but on the assumption that the rand remained below the R14 to the dollar mark.
Lumkile Mondi, a senior Wits economist, noted that the central bank had increased its expectation of rate hikes from four to five up to 2020.
“The timing of that is going to be very, very important,” he said.
“We must not forget that one of the biggest drivers coming through is not only from inflation due to the weak rand and imports of oil but also domestic cost pressures driven by high wage demand.
“I’m not foreseeing any increase [in rates this year], there’s no cut. But I think by mid next year we should see an interest rate hike of about 25 basis points.”
Kganyago warned that implementation of the ANC’s resolution at its December conference to nationalise the central bank would be a costly and protracted process.
“Getting rid of private shareholders would not necessarily improve governance,” he said.
“Experience has taught us that boards appointed by government are no guarantee of good governance, nor are they a guarantee that decisions will be taken in the interest of the broader economy.”
State-owned enterprises such as Eskom and Transnet have been embroiled in governance failures over the past decade that have resulted in billions of rands being lost to corruption and misspend.
Kganyago said the bank has a group of shareholders that are agitating for the nationalisation of the bank as they see it as an opportunity to make enormous profits at the expense of taxpayers.
“This for what would, at best, be a cosmetic gain,” he said.