Bank sees more room for stimulus
• Economy could contract as much as 4% this year • The budget deficit could exceed 10%
The coronavirus outbreak and SA’s 21-day lockdown could see the national economy contract by as much as 4% in 2020, the Reserve Bank said, as it indicated that slowing inflation might give it space to offer more policy support.
The figures, in its monetary policy review released on Monday, are steeply down from the growth forecasts given at its last monetary policy committee decision in March when the Bank cut the repo rate by 100 basis points, the most in more than a decade, in a pre-emptive strike against a sharp slowdown induced by the virus.
Its previous forecast of a 0.2% contraction was before President Cyril Ramaphosa imposed the three-week shutdown, which the Bank said will shave 2.6% off GDP. SA’s budget deficit could exceed 10% as the economic shock cuts government revenue, it said. That is in line with some of the most pessimistic forecasts in the market, and a level not seen since the two world wars.
“More recent work suggests 2020 growth will be in a range of -2% to -4%, with downside risks should the lockdown be extended, or if the global economy weakens more than currently projected,” it said.
The largest deficit in SA history is 11.6% of GDP in 1914, with the next largest in 10.4% in 1940.
The new estimates come at a time when “forecasting has become nightmarish”, said Bank governor Lesetja Kganyago, given the dramatic changes seen in the global economy.
The ballooning deficit in the wake of a sharply weaker economy was among the reasons cited by Moody’s Investors Service and Fitch Ratings in their decisions to downgrade SA in the past two weeks, sparking a selloff of the rand that has seen it collapse to lows of more than R19/$.
While such a currency collapse would normally see traders betting on higher interest rates to limit import costs and the collapse in demand, lower oil prices mean the Bank may have room to offer more stimulus as it sees inflation staying within the 3%-6% target range.
“Monetary policy space has certainly opened despite currency weakness,” said the Bank’s head of economic research, Chris Loewald.
At its last monetary policy committee meeting, the Bank revised its inflation projections to 3.8%, 4.6% and 4.4% for 2020, 2021 and 2022, respectively. These numbers will probably change but not to the extent it had revised its growth outlook.
Broader reforms are crucial for improving the long-term growth trajectory of SA’s economy, Loeweld said.
The central bank has room to cut rates in the region of 100 basis points, said Kevin Lings, chief economist at Stanlib. The argument that SA has to maintain higher real interest rates to guard against capital outflows and currency weakness is being “superseded” by other factors.
As the pandemic has intensified global and local financial systems have shown signs of stress, with liquidity pressures, or increased demands for cash, emerging in financial markets during March.
In response, the Bank took steps to ease the pressures including acting to stabilise the government bond market by announcing it would buy state bonds in the secondary market.
It said this was not quantitative easing as it was not necessitated by near-zero interest rates or the danger of deflation. It also was not seeking to crowd investors out of government bonds into riskier assets.
Kganyago said that how much the Bank buys depends on whether the bond market “depicts some form of disfunctionality.” He welcomed the announcement by the US Federal Reserve which said it would extend foreign central banks the opportunity to temporarily exchange US Treasury securities held with the Fed for US dollars to ease dollar liquidity.