Reserve Bank governor Gill Marcus starts 2014 stuck between a rock and a hard place. In effect, this is where she was for most of last year. For months now she has been advocating for real and determined action to deal with some of South Africa’s very apparent socio-economic challenges, including tackling labour strife.
This Wednesday, Marcus will stand in front of the world to announce the outcome of her deliberations with the central bank’s monetary policy committee (MPC).
It is her first MPC meeting of the year and most probably the most critical of her tenure as governor. Not only is the bank confronted by a falling currency, it also faces menacing signs of dislocation in the local economy, particularly in mining and on the consumer front.
From strikes to rising consumer debt levels, to falling productivity, to stubbornly high unemployment, there are just too many balls in the air all at once for the bank to juggle. Add to this the spectre of contagion from abroad as currencies of other emerging markets like Turkey and Argentina continue to take a beating, and you soon realise that the current backdrop has taken on a more menacing tone.
And with a general election looming, the Reserve Bank also has to deal with expectations – justified or not – that it cannot be seen to be oblivious to what is unfolding on the socio-political front.
It is probably too soon to talk of a crisis. Even so, Marcus goes into this week’s deliberations knowing full well that at times like these, a crisis is never very far off. To cut? To hike? To stand still? These are the key questions which Marcus must weigh carefully.
But with the rand now having fallen through R11 against the dollar for the first time since October 2008, there is no wild expectation for an interest rate cut.
A cut will be a real surprise and could actually cause panic in the markets as it would suggest that the Reserve Bank is seeing red flags on the horizon, especially in terms of the growth outlook.
At best, our growth engine is in neutral, with a downward bias, and look for this to be confirmed in the Budget that Finance Minister Pravin Gordhan is scheduled to present next month.
For an economy already boasting the world’s worst unemployment rate, low or no growth is a real liability. Even this alone makes it obvious that sooner rather than later a lot of South Africans could consider the state of the economy the most pivotal issue in this election cycle and beyond.
The perennial question of the first 20 years of our democratic dispensation has been: how do we get this economy moving fast enough and working for all South Africans? The answer surely lies somewhere between reality and wishful thinking.
The reality is that South Africa competes with the rest of the world for capital. Investors do not buy our shares or invest in our assets as an act of charity. It is because they believe that they will be rewarded. So any whiff of potential trouble is enough to send investors scurrying for the exits.
An interest rate hike, though also not expected, would also spell trouble because it might well push consumers over the edge. The latest figures from the National Credit Regulator show that delinquencies are now running at 61.8 percent of credit-active consumers, up from 58.3 percent during the 2009 recession.
What that means is that “any interest rate hikes would likely raise this delinquency rate rapidly, whilst causing a further deterioration in employment on the private sector”, Annabel Bishop, the Investec economist, wrote in a note on Friday, adding that strike activity in the mining sector could be a harbinger of things to come if rates were to be hiked suddenly.
“It would also risk being seen as an attempt to protect the rand… resulting in speculative activity then driving the rand towards R13 per dollar.”
Last week consumer price data showed that inflationary pressures remained somewhat benign, which should give the Reserve Bank some leeway to keep interest rates unchanged – at 30-year lows.
But if the global financial crisis of 2008/09 taught us anything, it was that monetary policy has limits. Its application needs to be accompanied by clear policy to deal with structural challenges – and that really is the job of the government, working with the private sector.
Besides, monetary policy is also prone to errors, say whereby authorities find themselves stuck behind the curve – either cutting too soon, or too late or doing nothing when events on the ground dictate otherwise. This Wednesday, Marcus and her colleagues have to convince the world that they are fully conversant with the risks lurking all around us. And by the way, 2014 is just getting started.