Market decries state’s lack of urgency on economy The window for a rate cut … has now closed
Reserve Bank holds rates amid budget delay and absence of key policy decisions
● The Reserve Bank kept interest rates on hold this week on a day it emerged the cabinet had held back from making key policy decisions and that the medium-term budget would be delayed — moves read by the market as illustrative of a complete lack of urgency on the part of the government about moving the economy forward.
Economists believe the monetary policy committee (MPC), which flagged “this persistently uncertain environment” as a risk to inflation and dashed hopes of a rate cut anytime soon, will wait and see how and whether the government tackles the Eskom and fiscal/budget crises over the next couple of months and how ratings agencies and bond and currency markets react.
The cabinet had been widely expected to approve the long-awaited policy paper on Eskom’s restructuring and proposals to consolidate the state-owned airlines when it met this week, as well as to approve the updated Integrated Resource Plan (IRP) on SA’s future energy mix. However, neither the Eskom restructuring nor SAA were mentioned in the post-cabinet statement on Thursday. While the IRP was reported to have been discussed by the cabinet, it was not approved.
The National Treasury also announced on Thursday that finance minister Tito Mboweni would present his medium-term budget policy statement (MTBPS) in parliament only on October 30, rather than the originally scheduled October 23, after parliament agreed to the delay to accommodate President Cyril Ramaphosa’s schedule. Ramaphosa is due to attend the RussiaAfrica Summit in Sochi on October 23, along with Russian President Vladimir Putin.
Stanlib chief economist Kevin Lings said: “My concern is that we do not appear to be exhibiting the level of urgency regarding key policy initiatives and decisions that would help the country move forward, at a time when the fiscal environment has deteriorated and the social environment is under strain.
“There is a lack of decisionmaking on a whole range of issues, and if you are sitting at the Reserve Bank it seems best to be prudent.”
The budget date delay means the MTBPS will be tabled just a day before the scheduled November 1 review by ratings agency Moody’s, which many economists expect to put SA on watch for a downgrade after the budget.
Absa economist Peter Worthington said the surprise change of date of so critical a budget raised concerns, but Intellidex’s Peter Attard Montalto thinks the delay could suit the risk-averse Moody’s, which could just release nothing on November 1.
Attard Montalto said the cabinet’s Thursday decision to view the Eskom paper as a package with the deeply contested economic plan that Mboweni released recently is “a bad move”, and though the government still aimed to publish the paper before the MTBPS, there was increasingly a risk that Eskom’s creditors would start losing patience.
“Not having plans [for Eskom] by the MTBPS will lead to a serious loss of credibility and confidence,” he said.
The MPC said SA urgently needed structural reforms to lower costs and raise investment and potential growth, and alluded to the risks posed by the country’s severe budgetary challenges, saying: “Public sector financing needs remain high, exerting pressure on the currency and pushing local bond yields higher relative to country peers.”
The unanimity of the committee’s decision to keep interest rates unchanged surprised many in the market who had expected at least one or two members to vote for a cut, in response to a weak economy and benign inflation outlook.
Though the Bank kept its economic growth forecast for the current year unchanged at 0.6%, it has cut its forecast for 2020 and 2021 to 1.5% (from 1.8%) and 1.8% (from 2%). And though it reduced its average inflation forecast for this year from 4.4% to 4.2%, the outlook for the next two years is largely unchanged. The MPC cited electricity, food and fuel prices as risks to the inflation outlook in the short to medium term.
Governor Lesetja Kganyago said the Bank’s forecast did not include the potential inflationary risks posed by an attack on oil facilities in Saudi Arabia.
“Our approach when these kinds of events happen is to assess if this is a once-off shock … If we find that it’s a once-off shock, we look through it and see whether it changes the outlook. If it does, then there might be a need to adjust the policy to deal with those kind of shocks, whether they are positive or negative.”
Nedbank economists said: “Domestically there is still a chance for a further cut when the MPC meets in November, but this could depend on favourable developments in the rand and energy markets.”
However, John Ashbourne, senior emerging-markets economist at Capital Economics, said: “Policymakers’ decision not to cut [this week] suggests to us that rates will be kept at 6.5% over the duration of 2020. We’ve long argued that the window for a rate cut would be brief, and it has now closed.”
John Ashbourne Economist at Capital Economics