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Johannesburg – Political tensions and the recent sovereign downgrade have presented risks to growth and as such have led the SA Reserve Bank (SARB) to revise down growth forecasts.
SARB governor Lesetja Kganyago on Thursday announced that the repo rate will remain on hold at 7%. This was in line with market expectations.
READ: Rates unchanged - we stay prepared for a bumpy ride, says economist
Additionally the governor announced that the growth forecast for 2017 was revised down from 1.2% to 1%. The Monetary Policy Committee (MPC) also cut the growth projections for 2018 from 1.7% to 1.5% and for 2019, growth is now projected at 1.7%, down from 2%.
Among the reasons are that the output gap has widened and consumer demand has weakened, Kganyago said.
“Elevated political tensions are expected to weigh heavily on consumer and business sentiment in upcoming quarters. As such, growth risks, particularly to household consumption spend and gross fixed capital formation, remain titled to the downside,” said Sanisha Packirisamy, economist at Momentum Investments (MMI).
“Political tensions and an unclear outlook on the direction of economic policy continue to suppress consumer and business sentiment, holding back a firmer recovery in domestic demand.”
Due to lower domestic demand, a recovery in growth is likely to come from export growth due to better global growth prospects, she explained.
Ratings agencies have also warned about politically-motivated events detracting from the progress of growth reform, and negatively impacting the direction of government policy, Packirisamy pointed out.
Rate cuts
South Africa is still very reliant on foreign capital flows to cover its deficit, and this further limits the SARB's ability to lower interest rates aggressively, she added.
According to Johann Els, senior economist at Old Mutual Investment Group, South Africa could, however, still see one rate cut before the end of 2017 and two more cuts in 2018. Over the shorter term the SA economy is not looking as bad as people thought, in his view.
The consumer price inflation (CPI) fell to 5.3% and continues to be in line with Els and his team’s expectations for inflation. He foresees inflation dropping to below 5% by July 2017.
READ: Inflation drops in April
Els said his interest rate forecast is based on the belief that SA’s economic cycle is actually looking better than expected over the next two years.
“SA’s economy is being propped up by a more supportive global economic environment, as well as the better agricultural output following the sharply better summer crops expected. This backdrop makes it difficult for SA’s economy to slump. We are, therefore, likely to see a mild growth recovery locally, with consumers buoyed by lower inflation, interest rates and increasing wages,” he explained.
“We will continue to see falling food and headline inflation, with rising exports leading to the narrowing of the trade and current account deficits. The rand also continues to be stable, despite the hovering political risk, but we expect the tightening of fiscal policy to continue as the market watches Minster Gigaba’s movements closely.”
Over the longer term, Els pointed out ,some key risks that SA still faces, like stagflation. The trigger for this would be multiple sovereign rating downgrades based on intensified interventionist and populist policies from government and global economic trouble.
Rate cuts
FNB CEO Jacques Celliers also feels the possibility of rate cuts in future has improved markedly.
"Demand for credit and overall levels of business activity remain subdued and these trends add impetus to rate cuts in future,” said Celliers.
“Consumer and business confidence remain key drivers and both are now recovering slowly from low levels in 2016. Encouraging trends in agriculture and commodity prices will lift our economy in coming quarters and this can be amplified by lower rates.”
He agrees with the SARB governor that there is no currency or investment case to be made in support of higher rates.
"If we can lift economic activity and employment, SA will become an attractive destination for investors without higher rates. There are many ways we can still work together to lift growth to a level where we can reduce unemployment and address poverty,” said Celliers.
SARB errs on side of caution
Sizwe Nxedlana, chief economist at FNB, said SARB once again erred on the side of caution as the balance of risks to the inflation outlook remains tilted to the upside.
"While the notable deceleration in headline inflation and the moderation in core inflation suggest that inflation is becoming less of a concern, renewed exchange rate weakness and elevated inflation expectations threaten this outlook. We continue to believe that the bank has reached the peak of the hiking cycle, and will wait for risks to lean more towards the downside before reducing the policy rate,” said Nxedlana.
“While portfolio flows into emerging markets continue to bode well for the currency, the sustainability of these portfolio flows remains uncertain. Given that the fed is expected to continue gradually hiking rates, the pending balance sheet reduction could have negative implications for emerging markets. Furthermore, event risks locally remain as we head into the ANC elective conference and await S&P and Moody’s sovereign rating reviews.”
David Crosoer, executive of research and investments at PPS Investments, said, while short-term base effects are helping bring down inflation, "it’s clear that SA’s political putsch in late March structurally raises the prospect of higher inflation, as new Finance Minister Malusi Gigaba appears far more sympathetic to increased government expenditure than fiscal restraint".
