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.