High unemployment a challenge for government's plan to raise growth
Economy / 22 November 2019, 11:00am / Siphelele Dludla
JOHANNESBURG - The South African Reserve Bank (Sarb) yesterday held back on cutting interest rates, citing macroeconomic headwinds that could trigger an upswing in credit conditions as ratings agency Moody’s warned that the country’s sluggish economic growth continued to weigh on credit metrics.
Sarb revised down the country’s growth forecast by 0.1percent for 2019, as a result of slowing global economic growth.
The bank yesterday said the forecast was due to lower economic growth than previously expected in the third and fourth quarters, and downward revision to global growth.
The Sarb lowered South Africa’s growth for 2019 from 0.6percent to 0.5percent, and said the forecast for 2020 and 2021 had decreased to 1.4percent from 1.5percent, and to 1.5percent from 1.7percent, respectively.
Moody’s said in a note to investors yesterday that the country’s high unemployment, income inequality, and social and political challenges had proved to be strong obstacles to the government’s plans to raise growth and contain fiscal deficits.
“Persistent socioeconomic challenges weaken revenue collection and exert pressures on spending for basic services and infrastructure,” Moody’s said.
The Sarb cited upside risks on inflation, such as wage growth, and fuel, water and electricity prices, as the key drivers of weak growth.
Governor Lesetja Kganyago said despite the assessment of the overall risks to the inflation outlook being balanced, uncertainty about inflation risks was unusually high.
Kganyago said the risk of further capital flow volatility had increased, and could put pressure on interest rates.
“The MPC (Monetary Policy Committee) assesses the risks to the growth forecast to be downside. Escalation in global trade tensions, geo-political trade risks, further domestic supply constraints and/or sustained higher oil prices could generate headwinds to growth,” Kganyago said.
“Monetary policy actions will continue to focus on anchoring inflation expectations near the midpoint of the inflation target range in the interest of balanced and sustainable growth.
“Implementation of macroeconomic policies and structural reforms that lower costs and increase investment, potential growth and job creation, remain urgent.”
Reza Hendrickse, a portfolio manager at PPS Investments, said some might view the MPC’s decision to not cut rates as overly cautious.
Hendrickse said the MPC had to factor in Moody’s credit rating announcement next year when making its decision.
“The potential negative effect on inflation that a downgrade might have via a weaker currency is likely to be in the back of the committee’s mind as something to pre-emptively manage,” Hendrickse said.
“Should inflation continue to surprise on the downside going forward, it would provide decisive room for lower rates locally, without negatively affecting South Africa’s relatively attractive real interest rate level compared to the rest of the world, which the MPC has sought to preserve.”
But North-West University Business School economist professor Raymond Parsons said the Sarb missed an opportunity to reignite the economy.
Parsons said recent evidence showed that inflation declined despite past shocks that sapped the rand.
“With inflation now falling well within the official target range, this visible success should therefore be reflected in lower borrowing costs in the economy,” Parsons said.
“Monetary policy can and should now play a useful, if modest, role in helping to strengthen business and consumer confidence at a critical stage in South Africa’s business cycle.”