The South African Reserve Bank (Sarb) yesterday laid bare the fiscal challenges facing President Ramaphosa’s administration in a low-growth environment, slashing its growth forecast to a pedestrian 0.6 percent, down from 1.7 percent the central bank had forecast in January.
Sarb cut the benchmark repo rate from 6.75 percent to 6.50 in a move that was largely seen as a boost to sluggish demand in the economy. The rand welcomed the move, strengthening to R13.90 against the dollar by 5pm, from R13.97 before the announcement was made. It was the first time since March last year that the central bank cut interest rates. Sarb said the impact of the rate cut would be short-lived if not accompanied by structural reforms that aid growth.
“The Monetary Policy Committee (MPC) assesses the risks to the growth forecast to be balanced in the near term but remains concerned about longer term risks. Investment prospects will continue to be limited in the absence of structural reforms,” central bank governor Lesetja Kganyago said. Sarb also warned that the financing needs of State-Owned Enterprises (SOE) could place further upward pressure on the currency and long-term market interest rates for all borrowers.
The government is currently drafting an urgent appropriation bill to release the R230 billion it earlier pledged in the February budget. Sarb kept its forecast for 2020 and 2021 unchanged at 1.8 percent and 2 percent respectively. Maarten Ackerman, chief economist at Citadel, said by cutting growth assumption that much meant fiscal targets were going to flash red in both fiscal deficit or debt-to-GDP ratio.
“Right now it’s no longer ‘if’ but ‘when’ will we be downgraded. How long Moody’s will wait and how much time they will give the government to actually implement reforms to address this remains to be seen, but at this point in time unfortunately the fiscal situation is deteriorating rapidly,” Ackerman said. The global Debt Monitor issued by the Institute of International Finance this week showed that South Africa’s debt to gross domestic product (GDP) was fast approaching 60 percent after reaching 59.3 percent in the first quarter from 54.7 percent a year earlier.
South Africa’s economy has not grown above 2 percent since 2013. North-West University business school economist Raymond Parsons said reduced growth expectations for her year was bad news for the National Treasury. “It reinforces the warning which Finance Minister Tito Mboweni gave to Parliament last week that weak growth was having a very negative impact on tax revenues, given that the projections in the Budget earlier this year were based on a forecast of 1.5 percent growth this year,” Parsons said.
The economy plunged 3.2 percent in the first quarter – the steepest decline in 10 years. Simon Harvey, FX Market Analyst at Monex Europe, said while the slight adjustment in monetary policy would provide short-term relief to a flagging South African economy, substantial fiscal reforms were necessary for a sustained economic recovery.
“Thus far Ramaphosa has under-delivered on the proposals, with progress only noted in the Eskom debacle while labour reforms and improved access to the economy for foreign investors is yet to materialise,” Harvey said. “Going forward, fiscal reforms are necessary to reboot a slumbered economy and must come to the fore in a quick fashion as the SARB’s latest decision can only paint over the cracks for a limited amount of time.”