‘Fis­cal con­sol­i­da­tion is at risk if the econ­omy does not re­cover’

The Star Early Edition - - NEWS - Di­neo Faku

SOUTH Africa’s fis­cal con­sol­i­da­tion faces sig­nif­i­cant risk if the econ­omy fails to re­cover, Rian le Roux, Old Mu­tual Group’s eco­nomic strate­gist, said yes­ter­day.

“Our fis­cal con­sol­i­da­tion path faces sig­nif­i­cant risk should the econ­omy in­deed fail to re­cover ma­te­ri­ally over the next few years and, added to this, is the risk of los­ing our in­vest­ment grade on lo­cal bonds, which could cause a sharp weak­en­ing of the rand and force in­ter­est rates higher,” Le Roux said.

The econ­omy had grap­pled with sev­eral set­backs, and Le Roux said gross do­mes­tic prod­uct had been cut to a “sickly” 0.8 per­cent.

“As such, the econ­omy is at risk of an ex­tended pe­riod of sub-po­ten­tial growth, with slow growth in re­cent years al­ready to blame for ris­ing macro-eco­nomic vul­ner­a­bil­i­ties and rat­ings down­grades,” he said.

Le Roux also raised con­cerns about the in­crease in pop­ulist rhetoric, the di­rec­tion pol­icy was tak­ing and gov­er­nance, and said that the weak eco­nomic out­look had re­sulted in an in­vest­ment strike.

“The gazetting of the Min­ing Char­ter is a case in point. Peo­ple are ask­ing, what sec­tor is next? The Min­ing Char­ter has hurt a strug­gling in­dus­try,” he said.

How­ever, Le Roux said it was not all bad news. The cur­rent ac­count deficit had nar­rowed more than ex­pected in the first quar­ter of this year and was likely to re­main small this year, while in­fla­tion was on the down­side with an in­fla­tion fore­cast of 5 per­cent, pro­vided the rand did not weaken fur­ther.

“An in­ter­est rate cut be­fore year-end is also still pos­si­ble, again pro­vided that the rand doesn’t slump sig­nif­i­cantly be­fore then,” he said. “Lower in­fla­tion and mod­er­ate in­ter­est rate re­lief will lend some wel­come sup­port to fi­nan­cially con­strained con­sumers.

“In ad­di­tion, high-fre­quency data on the real econ­omy sug­gests that the econ­omy has al­ready re­turned to pos­i­tive growth in the sec­ond quar­ter,” he said.

Man­u­fac­tur­ing data was pos­i­tive. On Tues­day, Sta­tis­tics South Africa said man­u­fac­tur­ing con­tracted 0.8 per­cent yearon-year in May, an im­prove­ment from the 4.5 per­cent con­trac­tion in April. It said re­tail fig­ures had in­creased 1.5 per­cent to R60.6 bil­lion year-on-year.

The global en­vi­ron­ment has been broadly sup­port­ive of South Africa’s econ­omy over the past year via firmer com­mod­ity prices and, un­til re­cently, fairly strong in­flows into the lo­cal bond mar­ket.

“Th­ese have been in­stru­men­tal in the un­ex­pected firm­ness of the rand, al­though re­cent more hawk­ish com­ments by a num­ber of global cen­tral banks have neg­a­tively af­fected a num­ber of emerg­ing-mar­ket cur­ren­cies, prime of which was the rand,” he said.

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