Reserve Bank Governer Lesetja Kganyago.
JOHANNESBURG - The South African Reserve Bank (Sarb) yesterday flagged speculation of free higher education as one of the issues that have weighed on the rand and elevated the risk of sovereign rating downgrades.

Lesetja Kganyago, the governor of the central bank, said the less favourable path of fiscal consolidation could potentially reduce scope for further monetary policy accommodation.

“Factors that impacted on the rand during the period included the ongoing uncertainty with regard to the outcome of the ANC electoral conference in December; concerns about a faster pace of monetary tightening in the US; the negative reaction to the MTBPS (medium-term budget policy statement ); and speculations regarding the introduction of free higher education in South Africa.

“These latter two factors have raised the risk of sovereign ratings downgrades, a risk that has been hanging over the rand for some time,” Kganyago said.

The rand, which is bracing itself for the S&P Global Ratings and Moody’s Investor Services ratings reviews later today, hardly blinked as the Sarb monetary policy committee (MPC) kept the repo rate unchanged at 6.75percent in line with market expectations. The unanimous decision was in sharp contrast with the last MPC meeting split down the middle on the rate.

In a slightly hawkish outlook on the country's downside risk, Sarb said it was also worried about the poor outlook for infrastructure expenditure and a sizeable electricity tariff increase.

Kganyago said the inflation forecast had deteriorated since the previous meeting of the MPC as a result of the weaker currency path, international oil prices and higher wage growth.

William Jackson, a senior emerging markets economist at Capital Economics, said the government's loose fiscal stance seems to have prompted the Sarb to adopt a more hawkish tone.

“Recall that the government is now planning to run slightly larger budget deficits than before, which may mitigate the need for more accommodative monetary policy,” Jackson said.

Finding

Speculation has been rife in the past weeks that President Zuma would forge ahead with the introduction of free university education despite the Heher Commission's finding that the state had no capacity to provide it.

FNB chief economist Mamello Matikinca said the country was unlikely to see further interest rate cuts but gradual policy normalisation in the second half of next year.

“A disappointing MTBPS pointed to ongoing fiscal slippage and rising debt. In the absence of a credible plan to rein-in government indebtedness, it's difficult to see how South Africa can avoid a downgrade,” Matikinca said. Kganyago said the potential downgrades of the country’s domestic currency debt to sub-investment grade could precipitate a significant sell-off of domestic government bonds by non-residents.

Annabel Bishop, the chief economist at Investec, said South Africa's bond yields could close up to 50 basis points higher if the country was downgraded and that the rand could weaken by as much as 5percent.

“South Africa, however, is facing a severe downgrade from investment to sub-investment grade, and together with the fact that it risks debt portfolio outflows estimated between R40bn to up to R200bn there is still likely to be a negative impact on its financial markets,” Bishop said.

-BUSINESS REPORT