Reserve Bank’s new target on the table for South Africa
The South African Reserve Bank could receive its wish later this month, with Finance Minister Enoch Godongwana potentially lowering the inflation target.
On October 30th, Godongwana will deliver the Medium-Term Budget Policy Statement (MTBPS), which will likely not see a weakening in fiscal metrics.
Investec’s Chief Economist said revenue collections are meaningfully higher than a year ago to August and, at 42.4% of the budget estimate, near expenditure of 43.1% for the same ratio.
She said that the drop in global commodities prices and South Africa’s freight crisis saw revenue collections drop to 37.5% of the budget estimate by August 2023, with expenditure at 43.1%, widening the budget deficit.
The government, however, used the profits of the Gold and Foreign Exchange Contingency Reserves Account (GFECRA) to counteract the shortfall in revenue and limit borrowings.
South Africa’s current deficit is R151 billion, far below the R237 billion seen last year.
“Updated gross loan debt ratios will have room to be projected lower than in February if expenditure is contained, which would be a positive outcome for markets,” said Bishop.
“The gross loan debt for the current fiscal year (2024/25) was projected at 74.2% of GDP in February, peaking at 75.3% in 2025/26, with the ratio declining thereafter towards 67% of GDP by 2030/31.”
The budget deficit for 2024/25 is likely to be reduced from the projected 4.5% of GDP to 4.3%.
The 2025/26 estimate will likely drop from a 3.7% deficit to 3.6%, while 2026/27 will drop from 3.3% to 3.2%.
“Moody’s said last month that for South Africa to get a credit rating upgrade it would need to see a significant lowering of its government debt profile and signs of rehabilitation of its network (freight) infrastructure for robust growth,” said Bishop.
“Godongwana has also said that cost-cutting measures are planned.”
She added that the South African Reserve Bank (SARB) has often indicated the need to lower the inflation target in the country, with the MTBPS expected to give some details about the issue.
The SARB has repeatedly highlighted the need to lower the inflation target to bring it closer to the inflation targets of major economies, with the USA, EU, and UK having targets of near 2%.
South Africa’s inflation target range is between 3% and 6%, with 4.5% as the target midpoint.
This relatively high inflation target affects South Africa’s competitiveness and means that businesses must adjust wages, prices, and investments to avoid losing buying power.
“A lowering of the inflation target, likely from an annual average of 4.5% to 4.0%, would be a change that the National Treasury would make, as it is responsible for setting the inflation target, while the Reserve Bank is responsible for achieving it,” said Bishop.
When the current inflation target was introduced in 2000, it was supposed to be gradually lowered, going from 3% to 5% and 2% to 4%.
In 2023, South Africa had the fourth-highest level of inflation among the G20 countries, only beaten by Argentina, Türkiye, and Russia, which experienced either hyperinflation or war.
FNB previously said that lowering the inflation target would have some short-term costs to economic activity, but it would offer longer-term gains for borrowers, savers and those with fewer financial buffers to protect themselves from high inflation.
Good news around the corner
However, inflation is reducing, with SARB Governor Lesetja Kganyago saying that inflation could fall below 4% in the coming months.
“We expect the next two or three prints that they could have a three handle on them, and that provides policy space for us,” said Kganyago.
“The headline disinflation is mainly supported by petering global supply shocks.”
The SARB’s forecasts see inflation at 3.6% in the last quarter of this year and averaging 4% in 2025.
The improved inflation outlook will likely see further interest rate cuts in South Africa after the SARB cut rates by 25 basis points in November.
Loading ...
