Johannesburg - Most economists agreed that as far as South Africa’s economy was concerned, one immediate benefit was that the Brexit vote would almost certainly push out a hike by the monetary policy committee (MPC) of the Reserve Bank at its meeting next month.
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Nedbank said last Friday, for South Africa and other emerging economies the vote added to a long list of negative developments that could put currencies under additional pressure as well as keep borrowing costs higher for longer.
“However, we do not anticipate that the Reserve Bank will raise interest rates at its July MPC meeting, but rather wait for markets to settle before considering raising interest rates later in the year as consumer inflation rises further on a low base, rising food prices and the weak rand.”
Peter Attard Montalto, an emerging market analyst at Nomura International, said the country’s MPC faced probably the most fraught outlook.
Reforms
He said the large move in the rand offset growth contagion risk, and the MPC would still want to avoid being seen as “rescuing” a government that was not undertaking growth-boosting structural reforms.
“As such, we think cuts are still out of the question. Instead, the Reserve Bank would probably stay focused on ‘inflation fear’ and the need to hike rates to neutral as opposed to tight territory.”
He added: “In this environment… we think a pause in July is now more certain, and terminal rate risk is definitely to the downside on our 8 percent view. Difficult wage rounds and the rand’s idiosyncratic risks from politics could still drive us there though.“
However, Investec chief economist Annabel Bishop disagreed, saying Brexit was unlikely to stay the Reserve Bank’s hand if it decided to put inflation above economic growth, and so South Africa’s growth outlook and business confidence was at risk.
The Reserve Bank’s MPC left the benchmark repurchase rate unchanged at 7 percent last month after raising it four times since July, and is due to announce its next interest rate decision on July 21.
Deputy governor Daniel Mminele said last Friday the Reserve Bank would consider intervening in the foreign-exchange market if its orderly operation was threatened after the Brexit vote.
“If we get into a situation where the moves are of such a nature that the orderly functioning of our market is in jeopardy, then we would consider getting involved. We would not become involved in the foreign-exchange market with a view of driving or influencing the rand towards a particular range or level,” Mminele said.
“Should we think it may be necessary at whatever appropriate time to ensure the orderly function of our markets, in the interest of financial stability, we wouldn’t stay away from acting.”
Mminele added: “It’s a question of analysing the data and seeing what any currency movements suggest for the monetary policy outlook.”
Impact
Bishop said from an economic impact for South Africa, the effect of the Brexit vote was generally estimated to be relatively small, but then South Africa’s economic growth was likely to be so weak that the impact would be felt.
However, researchers from North West University said a British exit from the EU could shave about a 0.1 percentage point off economic growth.
Mark Appleton, the head of multi-asset and strategy at Ashburton Investments, said Brexit would be negative for growth in South Africa.
“Investment spending and exports are the obvious channels through which the growth weakness will transpire.”
Rian le Roux, the chief economist at Old Mutual Investment Group South Africa, said the economy would not escape the market or economic fallout of Brexit, although the full impact would likely only become clear over time.
“While our financial markets will pretty much echo global markets in the short term, the medium-term impact on South Africa will be determined by the extent to which commodity prices, the country’s export volumes and capital flows to South Africa are affected,” he said.
* Additional reporting by Bloomberg
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