South Africa’s economic growth could pick up faster than forecast if the right structural reforms are implemented, the Reserve Bank said.
That means the economy could expand faster than the 2% for 2020 the central bank projected last month, a rate it hasn’t exceeded since 2013. While 2017 growth at 1.3% beat predictions, this doesn’t mean the economy performed well, the Reserve Bank said in its six-monthly Monetary Policy Review released Tuesday in the capital, Pretoria.
Cyril Ramaphosa replacing Jacob Zuma as head of the ruling African National Congress in December and as president two months later boosted sentiment and the currency on hopes of structural reforms in Africa’s most-industrialised economy.
While Ramaphosa has since changed the cabinet to remove some Zuma appointees who were seen as compromised, overhauled the board of the state power utility and pledged to root out corruption, confidence indexes show business and investors now want to start seeing real reforms.
“The pickup in growth is not especially strong,” the central bank said. “This is mainly because, at this early stage, there is little clarity around the reform agenda and without specifics it is difficult to quantify growth responses.”
Moody’s Investors Service last month removed the threat of a junk credit rating, citing the impact of political changes. Downgrade concerns could re-emerge if narrowing the nation’s budget deficit prove harder than the markets anticipate, the Reserve Bank said. That, and a current-account deficit that may widen more than expected, could put pressure on the rand, the bank said.
The currency has gained 9% since Ramaphosa was elected ANC leader, helping to lower price pressures. Inflation slowed to an almost three-year low of 4% in February. The central bank forecast it will remain in the 3% to 6% target band until at least the end of 2020, stabilising at just more than 5%.
While current inflation is unusually low, recent developments in services prices and inflation expectations “provide some evidence that positive price shocks, if properly managed, can engender permanently lower inflation,” the central bank said.
The Reserve Bank assumes electricity prices will rise 7.3% in 2019 and 8% in 2020. The central bank’s approach is to wait for an announcement from the energy regulator before adjusting inflation projections, Governor Lesetja Kganyago told a forum on the Monetary Policy Review.
“We hope sanity will prevail in terms of the increases granted,” he said.
The Monetary Policy Committee cut its benchmark repurchase rate to 6.5% last month. The possibility of higher global interest rates, and its effect on inflation through the exchange rate, means the MPC is “not committing to a rate-cutting cycle.”