JOHANNESBURG - The time has arrived for the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) to show that it is a tactical genius.
The rest of the world has left the South African economy stranded. In normal times the acceleration of global economic growth would see our manufacturing sector accelerating, unemployment dropping, confidence increasing and budget shortfalls ease. The political impasse with its ramifications is causing the opposite and is putting Sarb and the country’s citizens under severe strain.
The popular narrative in South Africa is that business and consumer confidence must be restored to get the economy back on a growth trajectory. The weak confidence levels should be seen in context, though as the restrictive monetary policy pursued by the Sarb is partly to blame.
The hike in the repo rate - the rate at which the bank lends short-term money to banks - in July 2014 to 5.75percent from 5.5percent, while the inflation rate remained relatively in check dealt consumers a heavy blow as the lending rates adjusted for inflation hit their pockets.
The prime overdraft rate - the interest rate that banks charge their most creditworthy clients - adjusted for inflation jumped to 5.2percent at the end of the first quarter of 2015 from 3.3percent at the end of the third quarter of 2014.
Price stability
The efforts by the Sarb to ensure price stability and protect the external value of the rand during the volatile political environment probably led to the MPC’s decision of a meagre drop of 25 basis points in the repo rate in July this year and their subsequent decision to put rates on hold.
This did little to bolster confidence as the real lending rates remain high. Furthermore, the relatively high interest rates are attracting foreign capital flows due to extremely low interest rates in developed economies resulting in the rand being stronger than it should have been.
Exporters, and especially the platinum group metals producers, are bearing the brunt of the strong rand, resulting in thousands of mineworkers and contractors losing their jobs.
The battling economy right now needs stimulatory measures such as decreases in lending rates to make money cheaper for businesses and households to borrow. In normal times corresponding levels of consumer confidence would see the real prime overdraft rate at 3percent. That compares to a current level of 5.2percent, which means that there is scope for the Sarb’s repo rate and prime overdraft rate to be lowered by as much as 200 basis points.
Credit negative
While the rating agencies viewed the medium-term budget statement by finance minister Gigaba as credit negative, the minister and the treasury should be applauded for the transparency on the current state of the economy.
Any economist knows the state of the economy - surely the credit agencies should not have been surprised? Their main criticism is that Gigaba’s budget speech is shifting away from fiscal consolidation efforts.
However, IMF Africa director Abebe Selassie recently stated that the growth agenda is as important as the fiscal consolidation agenda. At this stage the growth agenda is non-negotiable.
The question is for how long will the economy and the Sarb remain backed down on to the ropes allowing punches from politicians and credit agencies?
Muhammad Ali’s tactic of “Defend, defend, defend. Attack!” in the 1974 boxing match between him and George Foreman comes to mind.
When will the MPC be bold enough to attack? Our new president will be elected at the ANC’s 54th National Conference in December while the credit rating agencies will also have their say this and next month.
Yes, timing is crucial, but the time has arrived for the MPC to show that it is a tactical genius and act in a fair way for all South Africans by cutting the bank rate aggressively.
Although the credit rating agencies and most economists will be peeved off, lower interest rates are likely to help restore consumer and business confidence.
Ryk de Klerk was co-founder of PlexCrown Fund Ratings and is currently a consultant for PlexCrown Fund Ratings.