Rate hikes will be 'path to damnation' | Fin24

Rate hikes will be 'path to damnation'

Feb 17 2014 13:14
Carin Smith
Stellenbosch – More interest rate hikes by the South African Reserve Bank (Sarb) will put South Africa on a path to damnation, according to Prof. Brian Kantor, chief economist and investment strategist of Investec.

“We have made this mistake before. There is no justification for further interest rate increases in South Africa,” he said at an event hosted at the Spier Wine Estate by the Gordon Institute of Business Science (Gibs).

 “Yet there is expectation in the money market of more interest rate increases by Sarb over the next 12 to 18 months,” said Kantor.

“It would be a bad idea in my opinion. SA’s history shows no predictable relationship between the value of the rand and interest rates.”

The speed of economic growth in SA is slowing down. To think of higher interest rates in these circumstances is ludicrous, in his view.

“Raising interest rates can damage the domestic demand – 60% of SA’s economy - which is just too weak at the moment,” he warned.

He said SA is part of “the emerging market universe” and depends on investors’ risk tolerance towards emerging markets.

“SA must, therefore, become more impressive and attract global investors. We need them,” said Kantor.

“In my view economic development happens when people are left to get on with it and enjoy the fruits of their labour to a large degree. That is economic freedom as we have in the developed world.”

Foreign investors look at the fiscal deficit when they look at risk and SA needs a large influx of capital to balance the deficit.

Export opportunity

The solution for SA must be to take advantage of export opportunities and convince Sarb not to try and fight currency changes by increasing interest rates, said Kantor.

“Should SA not rather look at becoming a tax haven?” he asked.
Due to the weak rand South African exporters have an opportunity to have an extra margin for their exports.

“The question is whether they will take the gap and if the labour unions will permit this,” said Kantor.

The weaker rand is also having a positive impact on the tourism industry in SA.

“Successful businesses attract capital and growing economies attract capital. If you want capital, you must grow the economy. If you slow the economy, you undermine the case for investment.”

Labour market

To him the essential weakness of the South African economy is its dysfunctional labour market.

“Let supply and demand for labour talk,” he said.

Kantor foresees that the reliance on workers in the mining industry will become less and less. Robotics will replace workers.

“Yet, the apparently short-sighted union leadership are rather competing with each other,” he said.

“The biggest stumbling block to improving consumer spending is the state of the labour market. Yet the rate of dismissals from formal jobs has reached a ten year high.”

National budget

SA must control the growth in employment benefits of those working for the government, Kantor warned.

“Transformation of the middle class in SA was really boosted by government employment to a large degree. Between 20% and 30% of the new middle class works for the government,” he said.

SA needs a smaller deficit by means of a slowdown in government spending.

“South Africans do not save enough. The only savers are businesses. Therefore, businesses should be taxed less if you want to grow the economy,” he said.

sarb  |  interest rate  |  economy  |  budget 2014


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