SA policy trajectory considered major risk

Further downgrades possible

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.