With the Mon­e­tary Pol­icy Com­mit­tee ver­dict due this week, econ­o­mists pre­dict rates will be put on hold – an­other Moody’s down­grade is pos­si­ble af­ter elec­tions, writes Philippa Larkin

Weekend Argus (Sunday Edition) - - BUSINESS -

SOUTH African mar­ket play­ers will be keep­ing a close eye on SA Re­serve Bank (Sarb) gov­er­nor Le­setja Kganyago this week as he an­nounces the in­ter­est rate de­ci­sion of the Mon­e­tary Pol­icy Com­mit­tee (MPC), with econ­o­mists ex­pect­ing rates on hold un­til later this year.

The rand gained ground against the dol­lar in in­tra­day trade on Fri­day at R13.82, still gain­ing trac­tion on a dovish US Fed­eral Re­serve.

Fed chairman Jerome Pow­ell said this week that the cen­tral bank could be pa­tient on mon­e­tary pol­icy given that in­fla­tion re­mained stable, which led to the dol­lar slid­ing on ex­pec­ta­tions that US in­ter­est rates may be raised only once or not at all in 2019.

Chief econ­o­mist at In­vestec Annabel Bishop said this week that South Africa was not ex­pected to hike in­ter­est rates at the MPC meet­ing next week, nor in the first half of this year.

“Con­trary to the tim­ing of the last MPC meet­ing in South Africa (in Novem­ber), the start of 2019 has seen risk-aver­sion abate some­what in global mar­kets as com­men­tary from US mon­e­tary au­thor­i­ties has be­come less hawk­ish.”

She said con­cerns over global growth had come to the fore, as had the re­cent weak­ness of global mar­kets.

“Do­mes­ti­cally, risks for South

Africa abound, rang­ing from fis­cal per­for­mance, and par­tic­u­larly the threat of credit rat­ing down­grades, to the up­com­ing na­tional elec­tion, which is likely to see am­pli­fied po­lit­i­cal uncer­tainty and pop­ulist rhetoric.”

She said the out­look for con­sumer price in­dex in­fla­tion in 2020 was key to the MPC’s cur­rent in­fla­tion­tar­get­ing process, with CPI in­fla­tion ex­pected at around 5.6 per­cent year-on year for 2020, close to the up­per limit of the 3-6 per­cent range of the in­fla­tion tar­get.

Absa’s Cor­po­rate and In­vest­ment Bank­ing unit said in its South Africa Quar­terly Per­spec­tive that with scant in­fla­tion and low oil prices, it be­lieved the Sarb would leave rates on hold un­til de­mand re­cov­ers – un­less the rand weak­ened sharply.

“The mar­ket re­cently shifted to price in much less tight­en­ing this year. We fore­cast the next 25bp (ba­sis points) rate hike in Septem­ber.”

The MPC meet­ing comes af­ter a gloomy World Bank re­port was re­leased this week, fore­cast­ing lower South African and global growth.

The World Bank re­vised down its June 2018 es­ti­mate of 1.8 per­cent growth for the South African econ­omy this year to a lack­lus­tre

1.3 per­cent and a sub­se­quent re­cov­ery to 1.7 per­cent in 2020-21, cit­ing high un­em­ploy­ment, slow growth in house­hold credit ex­ten­sion, and fis­cal con­sol­i­da­tion which lim­its gov­ern­ment spend­ing.

The global econ­omy was ex­pected to slow to 2.9 per­cent this year, com­pared with 3 per­cent last year.

Growth in the US is ex­pected to slow to 2.5 per­cent this year from

2.9 per­cent in 2018, while China is ex­pected to grow at 6.2 per­cent this year com­pared, with 6.5 per­cent last year, the World Bank said.

“The out­look for the global econ­omy has dark­ened. Fi­nanc­ing con­di­tions have tight­ened, in­dus­trial pro­duc­tion has mod­er­ated, trade ten­sions have in­ten­si­fied, and some large emerg­ing mar­ket and de­vel­op­ing economies have ex­pe­ri­enced sig­nif­i­cant fi­nan­cial mar­ket stress,” the bank said.

“Faced with these head­winds, the re­cov­ery in emerg­ing mar­ket and de­vel­op­ing economies has lost mo­men­tum.”

It also comes at a time when South Africa has been bat­tling to stave off a credit-rat­ing down­grade from Moody’s In­vestors Ser­vice that could see a sell­off in lo­cal-cur­rency bonds.

Absa said a fur­ther down­grade from Moody’s could not be ruled out af­ter elec­tions

Lo­cal econ­o­mists re­act­ing to the World Bank fore­cast said this week that they ex­pected a grim­mer out­come this year, with a sov­er­eign rat­ings down­grade in a few months due to elec­tric­ity sup­ply scares, pro­tracted labour dis­putes and pol­icy uncer­tainty ahead of the 2019 elec­tions.

Moody’s has South Africa’s rat­ing at Baa3, one notch above subin­vest­ment grade. The agency has a stable out­look for South Africa and out of the three main agen­cies, it is the only one to have the coun­try above junk sta­tus.

“How­ever, with stable out­looks on their rat­ings, all three rat­ing agen­cies will likely give warn­ing of any po­ten­tial move by cy­cling through a di­rec­tional out­look change first. Moody’s is due to opine next on March 29,” it said.

Bank of Amer­ica Mer­rill Lynch in a note is­sued this week pre­dicted South Africa’s pub­lic debt to rise above 56 per­cent of gross do­mes­tic prod­uct this year and the fis­cal deficit to reach 4.3 per­cent.


LE­SETJA KGANYAGO, the gov­er­nor of South Africa’s cen­tral bank is ex­pected to keep rates on hold next week. Lo­cal econ­o­mists pre­dict that rates will only in­crease later this year.|

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