Here’s what quantitative easing would mean for South Africa

The National Executive Committee of the African National Congress (NEC) met in its annual Lekgotla from 1- 3 June 2019, with the party deciding on a number of new economic policies.

In a statement published on Tuesday, it said it had agreed to expand the mandate of the South African Reserve Bank beyond price stability to include growth and employment.

It also directed the ANC Government to consider constituting a task team to explore quantity easing measures to address intergovernmental debts to make funds available for development purposes.

“These measures should consider inflationary impact on the currency and the poor and all must be done to cushion them,” the NEC said.

“This is consistent practice by developed countries to save their economies. This will go a long way in dealing decisively with the triple challenges of unemployment, poverty and inequality.”

Quantitative easing – also known as large-scale asset purchases – has historically been used by the US and a number of European countries.

It is a monetary policy whereby the central bank buys predetermined amounts of government bonds or other financial assets to inject money directly into the economy.


SARB under attack?

However, Reuters reported late on Tuesday that the ANC “has not decided to expand the central bank’s mandate”, citing the head of the party’s economic transformation committee.

Magashule’s statement that the ANC executive also wants to explore the possibility of quantitative easing was also inaccurate, Godongwana told the news agency.

These mixed messages will not help put investor’s minds at ease, as they struggle to find a silver lining in South Africa’s poor economic data.

Intellidex analyst Peter Attard Montalto said that moves towards quantitative easing and changing the Reserve Bank mandate would likely be blocked by the current SARB and National Treasury leadership, and indeed the president.

However, he cautioned that this may be a key ‘fallout risk’ issue. While nothing may happen in the short to medium term in terms of actual change, severe damage can be done as these issues are kicked further down the road.

“We see no movement on these policies whilst Tito Mboweni remains as finance minister,” Montalto said.

“The risk is that this starts a popular debate on QE and on a jobs mandate for the SARB and so parliament can take up the mantel and the debate can take hold amongst the commentariat. This we believe is the intended strategy of those on the NEC who want change here.”

Tito Mboweni took to social media on Tuesday to quash any such notions.


Rand pressure

South Africa’s dismal economic numbers added renewed pressure to the rand, which weakened as much as 1% in the seconds following the announcement.

“Further pressure came from the heightened potential for a rate cut by the SARB,” said Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions.

“And if that wasn’t enough, the rand’s woes increased with the news that the ANC NEC wants to extend the SARB’s mandate to include growth and employment and to use quantitative easing to achieve this.”

With local PMI and business confidence numbers expected on Wednesday (5 June), Botes said that the pressure on the rand remains – with a weakening bias – as local and fundamental elements contribute to a hostile environment.

“Without some good news from the global backdrop to ease risk aversion, the range for the day is expected to be between R14.55 and R14.70.”

Recession

The current economic numbers showed that South Africa is heading towards a recession, said Institute of Race Relations (IRR) chief executive officer Frans Cronje, and chief economist Ian Cruickshanks.

Cronje said that the weak growth performance is ultimately a function of hostile government policy.

He identified five key problems with the government’s current economic policies, including:

  • It seeks to place the state at the centre of the economy, crowding out private investment, and introducing all manner of inefficiencies, costs, and unintended consequences. It is an ideology that identifies investors and the private sector as a public enemy. The state of affairs at Eskom is a case study of the consequences of this ideology in operation.
  • The related policy of Expropriation without Compensation (EWC) is a major obstacle to South Africa’s economic recovery, job creation and raising the living standards of poor people. The threat of EWC extends far beyond land and no asset classes are safe from seizures. Unless the policy is taken off the table in its entirety, South Africa will not stage an economic recovery.
  • A race-based empowerment policy is a tax on investment, an inhibitor of job creation and contributes to the country’s high skills outflow. There is a need to turn to a non-racial policy of Economic Empowerment for the Disadvantaged (EED), as proposed by the IRR.
  • Hostile labour market regulation, including the National Minimum Wage, prices poor people out of jobs and deters investment.
  • The very weak performance of South Africa’s schools. Even today, less than half of people over the age of twenty have a matric qualification.

“All five areas will have to see wholesale policy reversals if South Africa is to stage an economic recovery,” said Cronje.

“However, president Cyril Ramaphosa’s new Cabinet appointments offer no apparent prospects for such a reverse in policy. The likelihood is rather that the Cabinet announced last week will shepherd South Africa into a recession amidst significant job losses and declining standards of living.

“Should that occur, further credit rating downgrades are inevitable, which will increase the cost of capital as South Africa slips further down the economic spiral.”


Read: South Africa is facing an economic ‘horror show’ – but we could still avert recession

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Here’s what quantitative easing would mean for South Africa