Virus could push SA further into the red
The central bank said in its Monetary Policy Review yesterday that the Covid-19 pandemic would cause much deeper problems than anticipated.
SARB governor Lesetja Kganyago said even this forecast was probably too optimistic, as it predated the government’s decision to lock down the economy.
“More recent work suggests 2020 growth will be in a range of -2 to -4percent, with downside risks should the lockdown be extended, or if the global economy weakens more than currently projected,” Kganyago said.
“Further out, there is limited scope for a rebound, but growth is now unlikely to exceed 1percent in 2021. South Africa was already in a recession prior to the Covid-19 shock, and the situation has become more challenging since.”
Last month, the SARB revised the country’s growth forecast downwards for the current year to -0.2percent from 1.2percent in January, with output declining in the first and second quarters.
Kganyago described the Covid-19 pandemic as the biggest disruption to the global economy since the bankruptcy of Lehman Brothers in 2008.
He said the upside risk to this forecast was that a deeper contraction this year would permit a stronger rebound in 2021.
The bank projected that the 21-day national lockdown could result in about 370000 job losses and about 1600 businesses going insolvent due to a 2.6percent contraction of gross domestic product from the production side of the economy.
However, the SARB said it had space to respond, because inflation was projected to remain under 4.5percent this year and was likely to stay well within the bank’s target range over the medium term.
All the major central banks have loosened their monetary policy as a response to the economic impact of Covid-19 - including the SARB, which lowered the repurchase rate by 100 basis points to a six-year low.
The SARB said that inflation did not appear to be falling much further, and thus it expected no further interest rate cuts this year.
The bank said that gaining more space for interest rate cuts meant the country would need to reduce the impact of sovereign risk premium.
“South Africa borrows heavily from the world. Almost all our peer countries borrow less,” it said. “If we try to cut rates too far, despite the country risk, investors won’t have enough reason to be in South Africa. They would be better off investing in less risky places. So we need to become less risky, to enjoy more of the benefits of low global rates.”
Investec chief economist Annabel Bishop said the credit rating downgrades by Moody’s and Fitch had raised South Africa’s country risk and reduced the likelihood of further interest rate cuts.
“Global financial markets have seen some improvement in risk appetite as investor confidence has increased,” she said. “The rand gained from this improvement in global risk sentiment, and in particular from the South African Reserve Bank’s strong signals today of no further cuts in interest rates, gaining by more than the majority of Bloomberg’s basket of 24 emerging market currencies versus Friday.”