As business confidence languished near its weakest levels in two decades, the Reserve Bank insisted that cutting interest rates is not a remedy for the country’s economic woes that are threatening to cost it its remaining investment grade.
While the central bank could act and provide some stimulus if there was a slack in growth, the extent to which low levels of credit growth, investment and confidence in the economy could be explained by tighter monetary policy is debatable, deputy governor Rashad Cassim told journalists on Wednesday.
“It becomes a big problem when you are trying to use interest rates to compensate for other, for want of a term, rigidities in the economy,” said Cassim, the former head of the Bank’s research department who was promoted to be one of the deputy governors from August with Fundi Tshazibana.
The comments came almost a week after the Bank kept its repo rate unchanged at 6.5%, despite downgrading its 2019 growth forecast to 0.5% and inflation coming in well below the midpoint of its 3% to 6% inflation.
Slight increase
The Bank, which forecasts inflation to accelerate towards the upper end of the target, has come under political attack from elements who think it should do more for an economy struggling with an unemployment close to 30%. Subdued business consumer and business confidence and the Bank’s own business cycle indicator show little sign of a recovery soon.
The latest RMB/BER business confidence index (BCI), released on Wednesday, showed a slight increase to 26 points in the final quarter of 2019, up from a record low of 21 in the third quarter.
“It is up from an extremely low base in the third quarter,” said RMB chief economist Ettienne le Roux. “This is a case of one swallow does not a summer make.”
There needs to be a sustained increase in business sentiment, over several quarters, before “we can get excited about what this means for private sector fixed investment”, Le Roux said.
The BCI surveys 1,800 respondents across five sectors: manufacturers, building contractors, retailers, wholesalers and new-vehicle dealers. It measures respondents’ views on prevailing business conditions as a proxy for business confidence.
Policy uncertainty
The index’s neutral mark is 50, with a reading below that deemed to be negative.
The low reading suggests that there is still uncertainty about policy, particularly fiscal policy, said Arthur Kamp, chief economist at Sanlam Investments. February's budget would have to “show a path back to sustainable fiscal policy to improve confidence numbers”, he said.
The weak sentiment levels also follow a series of warnings from ratings agencies Moody’s Investors Services, and S&P Global — who have both changed their outlook on SA debt to negative.
Moody’s, the only major ratings company that has SA in investment grade, has warned that it may downgrade the country if the budget doesn’t come up with credible measures to boost the economy, fix state-owned enterprises and arrest increased borrowing that’s set to push debt as a percentage of GDP to about 80% within the next decade.
Such a step could see billions of rand leaving SA as its bonds fall out of global indices that investors use for benchmarking purposes, pushing the currency weaker and putting upward pressure on interest rates.
While it is hard to model the exact impact, which would also depend on overall sentiment towards emerging markets, as much as $8bn (R117bn) of bonds could be at risk, another deputy governor, Kuben Naidoo, said.
“We’ve got a rough sense of what the value of bonds [is] that pension funds hold, that can’t hold it if Moody’s downgrades us. That’s somewhere between $5bn and $8bn.
“It’s really hard to model the impact. The impact will be negative. How soon, how sharp, how long that persists — it’s not possible [to tell].”
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