Sarb warns fiscal policy hindering economy

South Africa’s strained public finances are hindering economic growth and a return to lower inflation, the country’s central bank cautioned on Tuesday.

“Reducing public debt to sustainable levels can deliver a triple dividend, namely lower cost of capital, reduced debt-service costs and lower inflation,” the South African Reserve Bank said in its six-monthly Monetary Policy Review.

The comments come ahead of a November 1 update on the nation’s budget outlook by Finance Minister Enoch Godongwana. He is expected to announce a large revenue shortfall and wider-than-expected budget deficit, aggravated by slower growth and weaker earnings from commodity exports.

Godongwana is being pressed by other cabinet ministers in the ruling African National Congress to climb down from proposed austerity measures designed to rein in debt and meet stabilisation targets in the wake of drastically lower-than-expected revenue.

Bond yields

South African government bond yields have climbed above 12 percent in recent months even as the country’s inflation rate has declined to 4,8 percent from above 7 percent, as investors weigh threats to the public purse. The central bank aims for inflation at the midpoint of its 3 percent to 6 percent target range.

Consumer prices in September, scheduled for release on Wednesday, are expected to increase 5,4 percent on an annual basis according to economists surveyed by Bloomberg.

The review confirmed the central bank’s forecast for 0,7 percent economic growth this year, aided by stronger-than-expected investment and continued spending.

Even so, the central bank flagged additional spending pressures, citing a swelling public sector compensation bill, while debt-service costs have risen sharply.

“With reduced tax revenue, higher public sector compensation and stateowned enterprise, financial needs will put additional pressure on financing conditions,” the bank said.

El Nino

While inflation has softened, the central bank made clear that it was premature to declare victory, stressing the risks to elevated price pressures remain.

These include the impact of the El Nino weather pattern, which the central bank said “puts South Africa at a high risk of a drought later this year, jeopardising the expected food price disinflation”.

Overall, the central bank took a conservative view on how quickly inflation will slow toward its preferred goal, noting that due to the stickiness of so-called core prices, which strip out food and energy, “headline inflation’s sustained return to the midpoint of the target range is projected to take some time.” — Bloomberg