JOHANNESBURG – The SA Reserve Bank (Sarb) governor Lesetja Kganyago on Thursday came out in support of Finance Minister Tito Mboweni’s growth plan, warning that the implementation of prudent macroeconomic policies had become urgent to lower costs, raise investment and potential growth.
Kganyago painted a dire picture of the country’s growth prospects, revising the forecast down to 1.5 percent for 2020 from 1.8 percent in July.
“We have been raising these things (reforms) for a long time that we needed structural reforms to lift the potential growth rate of the economy, and we are glad that finally the government is talking about structural reforms.”
Kganyago said while growth for this year remained projected at 0.6 percent, the next few years would see a downward revision, with 2021 now projected at 1.8 percent down from 2 percent.
On Thursday, the Cabinet met to discuss Mboweni’s plan, with Minister in the Presidency Jackson Mthembu confirming that the government had received more than 700 responses.
“We are discussing it, so that it can be turned into an economic strategy for the country,” Mthembu said.
Kganyago said the public sector financing needs in South Africa remained high, exerting pressure on the currency and pushing local bond yields higher, relative to South Africa’s peers.
“Escalation in global trade tensions, further domestic supply constraints and/or sustained higher oil prices could generate headwinds to growth,” Kganyago warned.
“In a trade war, there can’t be winners. We can only all be losers, and in this case the loser is the global economy. South Africa is part of that economy; we are small, and what we have seen is that the trade tensions dampen global demand and lead to slower world growth.”
But Sarb revised its inflation forecast lower for 2019 to 4.2 percent from 4.4 percent previously, but kept 2020’s forecast unchanged at 5.1 percent.
The bank decided to keep the repo rate unchanged at 6.5 percent.
Kganyago said Sarb expected global growth to slow to 3.2 percent this year and to rise to 3.5 percent in 2020, as trade tensions weighed on market confidence and lowering investment.
He said Sarb evaluated the risks to the growth forecast to be balanced in the near term, but remained concerned about medium-term growth and employment prospects.
“Implementation of prudent macroeconomic policies and structural reforms that lower costs, and raise investment and potential growth, remains urgent,” he said.
“Persistent global trade concerns and escalating geopolitical tensions remain downside risks.”
North West University Business School economist Professor Raymond Parsons said that the real remedies for South Africa’s economic malaise mainly lie beyond monetary policy.
Parsons said that basic solutions need to be found in pro-growth economic structural reforms.
“It is wrong to think that monetary policy can do more for structural growth and employment than it can in reality, although it can play a helpful supportive role.”
However, FNB economist Mamello Matikinca-Ngwenya said Sarb lost an opportunity to send a more positive message to the market.
“In the US the Federal Reserve reduced interest rates on Wednesday, and expectations are for further easing. European central banks, among others, have reduced rates below the zero bound into negative to boost economic growth and inflation.“This has provided room for other emerging market central banks to ease their policy rates,” Matikinca-Ngwenya pointed out.