JOHANNESBURG - Last month’s surprise interest cut by the SA Reserve Bank (Sarb) will support short-term growth recovery, but the government’s slow progress in implementing structural reforms will impede the country’s medium-term economic growth.

This is according to a research report released yesterday by ratings agency, Moody’s.

Zuzana Brixiova, a leading sovereign analyst for South Africa at Moody’s, said SARB’s decision should support near-term growth by lowering the cost of investment and mitigating the demand-dampening impact of fiscal consolidation.

“The accommodative monetary policy will also partly offset the drag of fiscal consolidation on growth and help achieve fiscal consolidation itself by reducing domestic borrowing costs and supporting revenue collection.

“In the context of very high unemployment, the more accommodative stance will ease pressures on South Africa’s relatively highly indebted households,” Brixiova said.

Sarb’s monetary policy committee took the market by surprise when it lowered its benchmark report rate by 25 basis points two weeks ago - its first rate cut since 2012.

The central bank said the decision to cut the rates was supported by an improved inflation outlook since its last meeting, but cautioned that risks to the inflation outlook still remain.

Brixiova said SARB’s efforts to revive business confidence and investment were likely to have a material impact only on medium-term growth, if accompanied by credible fiscal adjustment and structural reforms to raise investment.

“We concur with SARB’s view that monetary policy alone cannot provide a solution to the structural growth constraints that the economy has been experiencing for a number of years.”

Among the structural reforms flagged by Moody’s were barriers to entry for firms in key sectors such as energy, transport and telecommunications as well as manufacturing and high value-adding services, also constraining more rapid growth in output and employment.

Weak governance and a deteriorating business environment also impeded investment and start-ups, Brixiova said.

The rating agency also said the country would need to attend to infrastructure gaps, skills shortages, relatively weak educational outcomes and the risk of industrial action that impede the smooth functioning of labour markets if the country wanted to achieve economic growth in the long run.

Last week, the Organisation for Economic Co-operation and Development released its economic survey and advised the country to embark on wide-ranging structural reforms to put the economy on a new growth trajectory, boost job-creation and improve inclusivity.

The survey encouraged the country to open key sectors including telecommunications, energy, transport and services to more competition and for the country to consider establishing a universal student loan scheme contingent on future earnings, with the participation of banks and backed by government guarantees.

Moody’s also weighed in on the independence and mandate of the Reserve Bank, saying its decision to cut interest rates “coincides with political pressure on SARB’s independence and mandate”.


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