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Rand under pressure on the back of Moody's report

Jul 31 2017 12:24
Lameez Omarjee

Johannesburg – Although the recent rate cut will help short-term growth, it is not a solution for the structural problems weighing down the economy, according to rating agency Moody’s. The rand weakened following the release of a report by the ratings agency.

In the report on South African Reserve Bank’s (SARB's) decision to cut the repo rate 25 basis points to 6.75%, Zuzana Brixiova, Moody’s lead sovereign analyst for South Africa, said the rate cut coincides with political pressures on the central bank’s independence, as well as challenges to its mandate by the Public Protector.

Market analysts at TreasuryOne said that the latest report by Moody’s warning of political pressure on the bank saw the rand come under pressure. The local unit opened at R12.98/$ and weakened to R13.10/$. It was trading 0.71% weaker at R13.11 at 12:14.

“Though a state ownership of a central bank is not unusual, the timing (that is, after a major Cabinet reshuffle) of the proposal points to growing political pressure for less independent monetary policy, a key pillar in our assessment of South Africa’s institutional strength.

“It also sends another unclear signal about policy direction at a time of very low and falling business confidence, and coincides with governance issues at state-owned enterprises,” said Brixiova. 

Moody’s also warned that without structural reforms, long-term growth potential and the fiscal outlook remains pressured. This would continue to worsen the credit risk. Brixiova unpacked the rating agency’s expectations for the remainder of the year.

“We expect the central bank will ease monetary policy further during the rest of the year unless medium-term inflation projections rise and/or portfolio flows become more uncertain,” she said.

The rate cut could help lower the cost of investment. “It should also help further fiscal consolidation itself by reducing domestic borrowing costs and supporting revenue collection.”

Slow progress with structural reforms however will continue to “impede” potential growth, she said. “An infrastructure gap, skills shortages, relatively weak educational outcomes and risk of further industrial action continue to impede the smooth functioning of labour markets.

“Barriers to entry for firms in key sectors such as energy, transport and telecommunications as well as manufacturing and high value-adding services also constrain more rapid growth in output and employment.”

Additionally, weak governance and a deteriorating business environment will deter investments and start-ups, said Brixiova.

READ: Structural reforms needed to boost SA economy – OECD

The Organisation for Economic Cooperation and Development’s (OECD's) economic survey for South Africa also pointed out the need for structural reforms to boost growth. The OECD explained there is little room for monetary and fiscal policy to stimulate needed growth, and that the answer for South Africa’s growth problem lies in structural reform.

At the repo rate announcement and at the SARB’s annual general meeting last week, Reserve Bank governor Lesetja Kganyago reiterated that monetary policy should not be viewed as a solution for structural growth constraints.

ALSO READ: Kganyago strikes back at attacks on SARB

At the annual general meeting on Friday, Kganyago said the Reserve Bank’s court application against Public Protector Busisiwe Mkhwebane’s remedial action to have its constitutional mandate changed as well as the review of her report will be heard on Tuesday. The bank wants decisions to be confirmed by court.

At the rate announcement, he said that the bank was not pressured into introducing a rate cut.“No president, past or present, no minister of finance, past or present had ever attempted to tell the SARB how to execute its mandate,” he said.

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sarb  |  moody's  |  lesetja kganyago  |  sa economy


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