OPINION: What are the chances of a rate cut next year?
JOHANNESBURG - I think that in normal circumstances a rate cut would be on the cards.
In a previous article two months ago I argued that if the Medium- Term Budget Speech and Eskom’s much awaited road map were such that it would give foreign investors and credit rating agencies some comfort and assurance that South Africa is on the right track and stave off further rating cuts the stage would also be set for the SA Reserve Bank (Sarb) to cut the bank rate. I also warned that if they send the wrong message the writing would be on the wall. Well, the latter has happened.
Finance Minister Tito Mboweni and Public Enterprises Minister Pravin Gordhan stuffed it up. There is no plan.
The lending rate on overdrafts by banks to prime customers, also known as the Primed Lending Overdraft Rate, adjusted for inflation is at its highest level since October 2010. In October 2010 the yield gap between South African 10-year government bonds and US government bonds was 5.3 percent. The cuts in credit ratings as a result of the rapidly deterioration and wrongdoings at state-owned enterprises resulted in the yield gap increasing to 7.3 percent, thereby approaching the highs of February 2016.
The drama around Eskom just fuelled the concerns of the credit rating agencies and a cut to junk by Moody’s in February/March next year has a probability of more than 50 percent at this stage. South Africa has run out of money and drastic steps will be needed in the near future. The country may be able to raise funds but it will need to be at such an interest rate where foreign investors find acceptable given their perceived risk of investing in South Africa. Therefore. the risk of potential defaulting on interest and capital payments in terms of hard currencies.
The likelihood of more stringent austerity measures facing South African business, consumers and government, especially as a result of the implosion of the state-owned entreprises, are likely to lead to further unemployment and financial strain on business and the country’s citizens. The Sarb will probably argue that a cut in the bank rate could lead to increased borrowing to spend on non-essential items at a time when the consumer can least afford it. At the same time businesses will have to pay more for borrowings from abroad.
South Africa, yes, all South Africans, need a bold plan to ensure that Eskom’s future is safeguarded for generations to come. They should not inherit a broken and pariah country. Investment through much needed capital expenditure and acceleration of maintenance and replacement of plants and equipment will be the drivers of the economy, not the other way around as most of the decision makers believe. Now is not the time to throw in the towel and break Eskom up. Eskom’s procurement and accelerated expenditure will put the economy on a new growth path – lack of it for the sake of cost cutting will sink the economy further and will certainly not find favour from foreign investors.
The way that things are unfolding could see our 30 percent unemployment rate higher and things can get more uncomfortable for all.
Therefore, a drop in the bank rate soon? Unlikely, unless the government and Eskom come up with a credible plan to get the buy-in from foreign investors and avoid junk status that will lower borrowing costs.
Ryk de Klerk is analyst-at-large. Contact [email protected] His views expressed above are his own. He has no direct exposure to the companies mentioned. You should consult your broker and/or investment advisor for advice.