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Lower interest rates won’t cut it

Jun 27 2019 10:02
Mariam Isa

An interest rate cut looks like a forgone conclusion at the Reserve Bank’s monetary policy meeting in mid-July, but it will do little to spur the flagging economy in the face of evidence that President Cyril Ramaphosa is battling to introduce the reforms needed to boost investment and confidence.

Analysts slashed their forecasts for growth this year after news that the economy shrank by 3.2% in the first quarter – its sharpest contraction since the global recession a decade ago. 

Growth is now expected to slow to 0.5% in 2019 from 0.8% last year, with some risk of an outright recession if power cuts, which hit output early in the year, are implemented again.  

Even if there are no further disruptions to electricity supply, prospects for a strong recovery in growth are dim in the absence of a credible plan to restructure Eskom, which appears to have been delayed or even thwarted as a result of internal divisions within the ANC.

“It’s still early days for the Ramaphosa administration but at the political level its quite clear right now that the president is facing a lot of resistance within the ANC,” said Nedbank economist Isaac Matshego. 

“We need to tackle the policy uncertainty which has dampened private sector investment for a decade.” 

So far the signs are not encouraging. 

In his State of the Nation Address on 20 June, Ramaphosa confirmed that the struggling power utility will get another bailout from government, but made no mention of conditions for the support or plans to split Eskom into three separate divisions, which have been fiercely opposed by labour unions.

Ramaphosa also gave no new details on the controversial topic of land reform, apart from acknowledging that the Presidential Advisory Panel set up last year to examine the issue had submitted its report. 

Although he took a strong stand on the independence of the Reserve Bank and defended its inflation-targeting mandate, many analysts believe that opposition to the policy cornerstone within the ANC has not been quashed.

NKC economist Jacques Nel said so far there had been no sign of the structural reforms which the private sector had hoped would materialise after the ANC’s May election victory. 

Fierce and public disputes within the party since then have – if anything – further undermined confidence, with ANC secretary general Ace Magashule declaring a month later that the party had decided to expand the Reserve Bank’s mandate and had proposed “quantitative easing” to boost the economy. 

His comments were quickly dismissed as “inaccurate” in a statement from the party’s economic transformation committee chairman Enoch Godongwana, but the damage had already been done.       

Two weeks later, Magashule unveiled a list of parliamentary committee heads which read like a who’s who of senior officials implicated in the state capture saga. 

They included former minister of mineral resources Mosebenzi Zwane, former minister of energy Tina Joemat-Pettersson, and former communications minister Faith Muthambi.

“We think there is still no clarity on policy, which means we are not going to see a dramatic pickup in investment or a change in sentiment from business,” Nel said. 

“We don’t think the rest of the year is going to be much better than the first quarter and we are expecting a 0.2% contraction in gross domestic product (GDP) this year.”

Few others expect the economy to tip into a recession over the whole year, but the latest GDP figures show that fixed investment has contracted for five quarters in a row. 

Monthly data for the second quarter is being closely watched, and so far the signals have been mixed.Manufacturing output and retail sales bounced in April, while mining production fell. 

The Purchasing Manager’s Index dived to 45.4 in May from 47.2 in April, which, according to Intellidex analyst Peter Attard Montalto, is “consistent” with a 5% decline in manufacturing output.

Against the backdrop of inflation hovering in the middle of its target range and the rand clawing back most of the losses it saw in June, the scene looks set for the Reserve Bank to trim its repo rate by 25 basis points to 6.5% when its monetary policy committee meets between 16 and 18 July.

Bank officials have prepared markets for the decision, with Reserve Bank governor Lesetja Kganyago saying in a speech on 13 June that, given the weak economy and the level of inflation, “our model suggests we might have room to cut rates over the next year or so”.  

Money markets are pricing in two rate cuts for a cumulative fall of 50 basis points in the coming months, but Standard Bank economist Elna Moolman thinks this is overly optimistic.

“One interest rate cut is unlikely to materially boost economic growth, but it should at least provide some relief to consumers, and might marginally lift sentiment,” she said. 

Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

This article originally appeared in the 4 July edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

reserve bank  |  ramaphosa  |  inflation rate
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