Reserve Bank sees more room for stimulus

The coronavirus outbreak and SA’s 21-day lockdown could see SA’s economy contract by as much as 4% in 2020, the Reserve Bank said, as it also indicated that slowing inflation might give it space to offer more monetary support.

The figures, in its monetary policy review released on Monday, are steeply down from the growth forecasts given at its last monetary policy committee (MPC) meeting in March. At that meeting, the Bank cut the repo rate by 100 basis points, the most in more than a decade, in a pre-emptive strike to support the economy.

Its previous forecast of a 0.2% contraction was before President Cyril Ramaphosa imposed the three-week shutdown, which the Bank says will shave 2.6% off GDP. The central bank said SA’s budget deficit could exceed 10% as the economic shock cuts government revenue. That is in line with some of the most pessimistic forecasts in the market, and a level not seen since the two world wars.

“More recent work suggests 2020 growth will be in a range of -2% to -4%, with downside risks should the lockdown be extended, or if the global economy weakens more than currently projected,” the Bank said.

According to the Bank, the largest deficit in SA history is 11.6% of GDP in 1914, with the next largest of 10.4% in 1940, which invoked wartime parallels in some of the Covid-19 analysis,

The new estimates come at a time when “forecasting has become nightmarish” said Bank governor Lesetja Kganyago, given the dramatic changes seen in the global economy.  

The ballooning deficit in the wake of a sharply weaker economy was among the major reasons cited by Moody’s Investors Service and Fitch Ratings in their decisions to downgrade SA in the past two weeks, sparking a sell-off in the rand that has seen the rand collapse to new record lows of more than R19/$.

While such a currency collapse would normally see traders betting on higher interest rates to limit import costs and the collapse in demand, lower oil prices mean the Bank may have room to offer more stimulus to the economy as it sees inflation staying well within the 3%-6% target range.      

“Monetary policy space has certainly opened despite currency weakness,” said the Bank’s head of economic research, Chris Loewald.

At its last MPC meeting, the Bank revised its inflation projections to 3.8%, 4.6% and 4.4% for 2020, 2021 and 2022 respectively. These numbers will probably change but not to the same extent it had revised its growth outlook.

Loewald stressed that broader reforms are crucial for improving the long-term growth trajectory of SA’s economy.

The central bank has room to cut rates in the region of 100 basis points, said Kevin Lings, chief economist at Stanlib. The argument that SA has to maintain higher real interest rates to guard against capital outflows and currency weakness is being “superseded” by other factors.

As the pandemic has intensified both the global and local financial systems have shown signs of stress, with liquidity pressures, or increased demands for cash, emerging in financial markets during March.

In response, the Bank took steps to ease the pressures, including acting to stabilise the government bond market by announcing it would buy state bonds in the secondary market.

The Bank said this was not quantitative easing as it was not necessitated by near zero interest rates or the danger of deflation. The Bank also was not seeking to crowd investors out of government bonds into riskier assets.

Kganyago said that the quantity the Bank buys in the future depends on whether the bond market “depicts some form of dysfunctionality”.

He also welcomed the recent announcement by the Federal Reserve, which said it would extend foreign central banks the opportunity to temporarily exchange their US Treasury securities held with the Federal Reserve for dollars to ease dollar liquidity.

The Bank’s initial assessment is that it does qualify for this facility, said Kganyago. “We will start our conversations with the Fed and communicate at an appropriate time,” he said.