Ratings agency delivers inflation warning for South Africa

Credit rating agency Moody’s forecasts South Africa’s interest rate will hit 8% in 2022 – well above the South African Reserve Bank’s target band.

“South Africa’s most direct exposure to the Russia-Ukraine military conflict is through higher inflation and related fiscal pressure stemming from social demands,” the group said in a note on Wednesday (4 May).

“We project inflation to rise to around 8% this year, above the South African Reserve Bank (SARB) target band of 3% – 6%, and then to recede in 2023-24. While the economy’s oligopolistic structure and the practice of wage indexation point to second-round effects, the SARB benefits from strong credibility and effective monetary policy transmission channels.”

Moody’s projects the Reserve Bank will continue to hike rates, raising the repurchase rate by 25 basis points to 4.25% on 24 March 2022, marking 75 basis points of cumulative tightening since August 2021.

It added that the commodity price surge is unlikely to deteriorate South Africa’s terms of trade as the country has benefited from significant price increases in key mining exports such as iron ore and coal.

“South Africa’s large and diversified economy, effective monetary – and more recently fiscal–policy framework and deep financial sector are its principal buffers against shocks. During the coronavirus pandemic, government and central bank policy measures mitigated the impact of the shock on economic activity while committing to fiscal sustainability, although the country came out of the shock with record-high unemployment rate,” it said.

The group added that it expects the country’s fiscal position to continue to strengthen gradually, primarily because of the government’s fiscal measures. This was the main driver behind the decision to change the outlook on South Africa’s rating to stable from negative earlier in 2022, it said.

“For the first time in many years, we project government debt to remain broadly stable at around 70% of GDP for at least the next two fiscal years, or almost 80% inclusive of SOE debt guarantees granted by the government. This marks an improvement from our previous projections of continuously rising debt to GDP.”

Read: New pensioner rule changes planned for South Africa

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Ratings agency delivers inflation warning for South Africa