Policy uncertainty surges in second quarter
Downgrades, recession, Mining Charter and public protector’s report hurt the economy
NORTH West University’s School of Business and Governance yesterday said that downgrades, recession, the Mining Charter and Public Protector Busisiwe Mkhwebane’s report on the SA Reserve Bank pushed policy uncertainty up in the second quarter.
The school’s chief economist, Raymond Parsons, said that its Policy Uncertainty Index yesterday showed that uncertainty increased from 51 points in the first quarter to 53 in the second quarter.
Parsons said the index had increased by a whopping 15 points when compared to the last quarter of 2016.
He said that such high levels of uncertainty inhibited meaningful investment and consumption and contributed to sluggish growth.
Correlations
“Correlations have been found between the policy uncertainty index with economic outcomes,” Parsons said.
“Empirically it shows that when economic policy uncertainty is strongly present in the environment, it indeed lowers investment, employment and output,” he added.
The school’s observations followed those of the University of Stellenbosch’s Bureau of Economic Research which also indicated that politics was a constraint on doing business in South Africa, increasing from 76 points to 87.
Ratings agency Moody’s last month also highlighted reduced growth prospects caused by policy uncertainty, slower progress with structural reforms, the continued erosion of fiscal strength due to rising public debt, contingent liabilities and the weakening of South Africa’s institutional framework as concerns.
Parsons cited developments on the Brexit negotiations and the pace at which interest rates rise in the US, as well as the possible implications for South African capital flows as other factors that impacted on uncertainty.
He said the index further found that the business cycle had been in a downswing for about 44 months, making it the second longest in the country’s history, surpassed only by the one over the period 1989 – 1993.
Stagnation
Parsons said the index attributed the recent technical recession to poor exports, low government expenditure, higher unemployment, weak consumer spending and stagnating private sector investment.
He added that the real test of fiscal management would be reflected in the MediumTerm Budget Policy Statement in October to see whether any fiscal shocks emerge, especially from oversight issues on stateowned enterprises.
“Of importance to future levels of policy uncertainty will be how the previous commitment to fiscal consolidation fares with the new political team at the Treasury,” he pointed out.
“We must recall that fiscal policy has in recent years been highly certain and predictable, as well as transparent.”
Finance Minister Malusi Gigaba has previously said that he supported the independence of the Reserve Bank and joined its judicial review of the public protector’s report into an apartheid bailout given by the central bank to Bankorp/Absa, saying the constitution did not contemplate the protection of the currency for its own sake, but in the interest of balanced and sustainable economic growth.
Parsons said the proposal had thus opened up a Pandora’s box of additional risks for markets and rating agencies, at least over the longer term.
He said the index also noted that the impact of the final Mining Charter in mid-June on markets and the mining sector was highly negative.