The South African Reserve Bank’s Monetary Policy Committee will again vote next week on whether to cut, or hold interest rates, following the country’s worst quarterly GDP slump in memory.
In July, the committee cut the country’s rates by a further 25 basis points, taking the total cut in 2020 to 300 points, lowering the repo rate to 3.5% and the prime lending rate to 7%.
Stats SA on Tuesday (08 September), said that GDP in the second quarter of the year declined by 51% on a seasonally adjusted annualised basis, while Dr Adrian Saville, chief executive, Cannon Asset Managers noted that South Africa’s economy has grown in only three of the ten quarters that Cyril Ramaphosa has been president.
He said that the country’s economic stresses and structural constraints have been laid bare by the Covid-19 pandemic, and the second quarter’s collapse in GDP has added to the pressure on president Ramaphosa and government to push ahead with long-awaited reforms.
“To this end, the horrific GDP figures prompted Ramaphosa to issue a statement on Tuesday afternoon outlining the work being done by the State to promote economic growth, including its much-promised economic recovery strategy.
“However, while government announced a R500 billion stimulus package during the second quarter of 2020 to help sustain individuals and businesses through the crisis, some of the programmes making up the package have been caught up in delays, technical difficulties and widespread allegations of corruption.
“To boot, the R500 billion carried elements of ‘double counting’, such as the R130 billion in spending that was not stimulus, but rather reprioritised expenditure, and R70 billion in tax relief that is deferral of obligations and not elimination.”
The stimulus thus makes for impressive policy pronouncements but poor impact, Saville said.
Other constraints remain deep-rooted, including electricity supply challenges; persistent policy uncertainty surrounding the South African Reserve Bank (SARB) and land ownership; and the slow implementation of crucial reforms which hold back investor confidence and choke growth prospects.
Consequently, Cannon Asset Managers has kept its forecast unchanged of a 9.1% contraction in GDP for 2020.
“In some good news, high frequency data releases in the third quarter – particularly the BETI index, domestic VAT receipts and Google activity data – point to recovery, even as electricity cuts push confidence even lower,” said Saville.
The early data points to a third-quarter bounce in GDP of at least 50.0%, which is a long way ahead of the SARB’s 18.0% forecast, he said.
“We anticipate a budget deficit of 13.9% of GDP for 2020/21, and we look to the MTBPS for indications on how government plans to consolidate expenditure, narrow the budget deficit, contain debt and fix ailing state-owned enterprises, especially Eskom,” said Saville.
Tough call for the SARB
Policy direction also comes from the SARB, and the Monetary Policy Committee (MPC) meets next week to deliberate on interest rate action, said Saville.
On this score, the forward rate agreements (FRAs) fell by as much as 16.5 basis points (bps) across the curve over the past week, with the probability of a 25bp rate cut increasing to 44.8%, making for a “fifty-fifty” call.
“These aspects make for a tough interest rate call given that consumer price inflation has started to lift, while recovery – even if anaemic – is underway. Moreover, the MPC has regularly pointed to interest rates as being a blunt instrument in the war on structural economic constraints,” said Saville.
Economists on Finder’s repo rate panel are calling for a rate cut; however, the consensus is for a rate hold next week.
Nine of the eleven panellists (82%) are forecasting a hold and just two (18%) – economist at Rand Merchant Bank, Mpho Molopyane, and professor of economics at the University of Western Cape, Matthew Ocran – a decrease.
Both panelists are forecasting a rate decrease of 25bps given the weak 2Q20 GDP economic data. Molopyane expects the bank to revise its -7.3% GDP growth outlook for 2020 to reflect a deeper contraction and as a result believes it will cut the rate.
Meanwhile Ocran said the figures showed an “economy in a self-induced coma with little prospect of recovery in the next 12 months, at least”.
Both Chief economist at BER, Hugo Pienaar, and director and head of Capital Markets Research at Intellidex, Peter Attard Montalto, are in favour of a rate cut, despite forecasting a hold. Pienaar thinks the Bank should drop the rate by 25bps and Montalto 50bps.
Montalto said the MPC should provide as much stimulus as possible given that the R500 billion stimulus package has largely failed to live up to its headline size.
“…as such the MPC should provide as much stimulus as it can get away with in a least regret policy move that would see rates more negative for slightly longer and also see a crystallisation of the skew in risks from here of inflation to the downside,” he said.
“That said the MPC is viewing things as needing more stability for longer and a more balanced profile in inflation risks and hence is likely to keep rates unchanged albeit it will be a close call.”
The panel suggested that the interest rate may increase in little over a year. 64% of the panel think the repo rate will increase in the second half of 2021, 9% the first half of 2022 and 27% the second half of 2022.