Reserve Bank governor Lesetja Kganyago Picture: Shannon Stapleton/Reuters
Reserve Bank governor Lesetja Kganyago Picture: Shannon Stapleton/Reuters

Bumpy ride ahead for economy, ratings downgrades loom

By African News Agency Time of article published Nov 25, 2017

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South Africa’s central bank kept interest rates unchanged this week despite pressure to lower them for the sake of the ailing economy, impeded by inflation risks from a weaker rand, possible looming credit rating downgrades and the policy implications of a ruling ANC party conference.

Disappointment over the failure to lower borrowing costs was however not enough of a deterrent for thousands of people who thronged malls on Friday, armed with credit cards, in South Africa’s version of the “Black Friday” annual shopping craze which originated in the United States but is now a global phenomenon.

The credit-driven buying spree belied the reality of an anaemic economy beset by unemployment of nearly 28 percent and business confidence at its lowest in decades amid corruption charges swirling around President Jacob Zuma’s government.

Keeping the benchmark repo rate at 6.75 percent on Thursday, Reserve Bank (Sarb) governor Lesetja Kganyago said the upside risks to inflation had increased, partly due to higher international oil prices and a weaker rand.

“The volatility of the rand and with a sizable increase in the petrol price on the way, inflation and the relative level of interest rates in the global landscape still needs to be carefully evaluated,” said Luigi Marinus, senior investment analyst at PPS Investments.

 

“The Sarb may continue to find it difficult to reduce interest rates."

The inflation risks offset the argument for a rate cut to boost the economy, whose lacklustre performance has kept both consumer and business confidence at near record lows. 

"Confidence was likely to be affected by developments around the ruling ANC party’s conference in December, Kganyago said.

South Africa’s economy, once the biggest in Africa but since overtaken by Nigeria, has waned since Zuma became president in 2009, with critics accusing him of using his political influence to pursue personal gain at the expense of sound management. Zuma denies being corrupt.

The National Treasury now expects growth of just 0.7 percent in 2017 from the 1.3 percent seen earlier, far below the 7 percent level floated in the past as necessary to make a meaningful dent in the unemployment rate.

Ratings agencies have cut South Africa’s credit ratings in recent months, citing doubt over the government’s commitment to sound fiscal policy.

The agencies and investors worry that political jostling as the ANC prepares to elect a successor to Zuma in December could further derail South Africa from a viable economic path.

The country dodged a credit rating downgrade on Thursday from Fitch, which kept both the local and foreign currency credit ratings unchanged at BB+, one notch below investment grade, with a stable outlook.

But it is not completely not out of the woods yet, with Fitch’s peers S&P Global and Moody’s due to give their own reviews later on Friday.

S&P has already cut South Africa’s foreign debt to sub-investment grade, but Moody’s still rates the country above "junk" status for debt denominated in both foreign and local currency.

“We welcome the decision by Fitch to leave the South African local and foreign currency credit ratings unchanged, albeit at sub-investment grade,” said managing director of the Banking Association of South Africa Cas Coovadia.

 

“It is critical that we recognise that this decision should not be seen as simply positive, rather as an indication that there is an overwhelming expectation for signs of action and leadership in our country.”

 

African News Agency

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