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

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.