SA pol­icy tra­jec­tory con­sid­ered ma­jor risk

Fur­ther down­grades pos­si­ble

The Star Early Edition - - NEWS - Ka­belo Khu­malo

A COUNRTY Risk Re­port by BMI Re­search, a sub­sidiary of Fitch Rat­ings, said the pri­mary risks to South Africa’s econ­omy were ques­tions over the coun­try’s pol­icy tra­jec­tory and pos­si­ble down­grades of its lo­cal cur­rency debt.

The firm, how­ever, said it be­lieved the SA Re­serve Bank would still hike in­ter­est rates at least once be­fore the end of this year.

The or­gan­i­sa­tion said that the coun­try’s high un­em­ploy­ment rate was also weigh­ing down on the al­ready slug­gish econ­omy, while the risk of lo­cal cur­rency down­grades would deal a ma­jor blow to the econ­omy.

“Growth will re­bound only slightly in 2017, af­ter a sharp slow­down in 2016. El­e­vated un­em­ploy­ment and slug­gish credit growth will weigh on pri­vate con­sump­tion, while con­tin­ued fis­cal con­sol­i­da­tion lim­its gov­ern­ment spend­ing. El­e­vated pol­icy un­cer­tainty and a poor op­er­at­ing en­vi­ron­ment will act as a con­tin­ued head­wind to in­vest­ment.

“With more than 90 per­cent of all debt is­sued in rand, a down­grade to South Africa’s lo­cal cur­rency debt rat­ing would have sig­nif­i­cant knock-on ef­fects on the coun­try. It could prompt a sharp cur­rency sell-off, prompt fur­ther rand weak­ness, weigh on busi­ness con­fi­dence, and ramp up gov­ern­ment and pri­vate firms bor­row­ing costs,” the com­pany said.

The SA Re­serve Bank pre­vi­ously said lo­cal cur­rency bor­row­ing ac­counted for 90 per­cent of South Africa’s to­tal R2.2 tril­lion of debt.

Un­cer­tainty

Last week, North West Univer­sity’s School of Busi­ness and Gov­er­nance said down­grades, re­ces­sion, the re­vised Min­ing Char­ter and Pub­lic Pro­tec­tor Bu­sisiwe Mkhwe­bane’s re­port on the SA Re­serve Bank pushed pol­icy un­cer­tainty up in the sec­ond quar­ter of this year.

Its Pol­icy Un­cer­tainty Index went up from 51 points in the first quar­ter to 53 points in the sec­ond quar­ter.

BMI said that the Re­serve Bank’s more hawk­ish bias and re­cent po­lit­i­cal con­sid­er­a­tions, most no­tably a statement by the pub­lic pro­tec­tor call­ing into ques­tion the bank’s in­fla­tion targeting man­date, would tam­per the pace of mon­e­tary eas­ing.

“We now fore­cast a 25 ba­sis point cut to the repo rate in 2017 and an­other cut in 2018. Our ex­pec­ta­tions for stag­nat­ing eco­nomic growth and cool­ing in­fla­tion will give the bank room to shift to a pol­icy of mon­e­tary eas­ing. That said, cut­ting will hap­pen on an only grad­ual tra­jec­tory.”

The cen­tral bank is ex­pected to an­nounce its repo rate de­ci­sion on Wed­nes­day, but has kept its benchmark rate un­changed at 7per­cent since March last year, even as in­fla­tion ex­ceeded its 3per­cent to 6per­cent tar­get range for most of last year.

Macroe­co­nomics statis­tics web­site Trad­ing Eco­nom­ics said in­ter­est rates in the coun­try av­er­aged 12.27 per­cent from 1998 un­til this year, reach­ing an all time high of 23.99 per­cent in June of 1998 and a record low of 5per­cent in July 2012.

Mamello Matik­inca, a se­nior econ­o­mist at FNB, said the dis­ap­point­ing first quar­ter gross do­mes­tic prod­ucts num­bers, which saw the coun­try fall into a tech­ni­cal re­ces­sion, might lead to ad­just­ments to the Re­serve Bank’s growth fore­cast.

“We ex­pect a dovish statement from the gov­er­nor that will once again ce­ment the end of the hik­ing cy­cle. How­ever, the com­mit­tee will again err on the side of cau­tion given the el­e­vated risk to the ex­change rate and opt to keep the repo rate un­changed,” Matik­inca said.

Min­is­ter of Fi­nance Malusi Gi­gaba has moved to re­store con­fi­dence in the coun­try’s econ­omy through the 14-point plan he pre­sented last week which aims to ig­nite in­clu­sive eco­nomic growth. How­ever, the plan has been met with great scep­ti­cism by pun­dits.

Peter At­tard Mon­talto, a re­search an­a­lyst at No­mura, said the plan was likely to fall short of its goals as it failed to pri­ori­tise ed­u­ca­tion and the labour mar­ket.

“There were no real progrowth re­forms. Of­fered up in­stead were mea­sures that should help sta­bilise the econ­omy at this very weak place by pro­vid­ing a floor un­der sen­ti­ment, but not pro­vide up­side to per capita in­come growth in our view,” Mon­talto said.

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