Electricity shortages and the country’s precarious fiscal position are likely to be the biggest obstacles to SA’s recovery from the Covid-19 crisis, the SA Reserve Bank said on Tuesday.
Though monetary policy has provided substantial support to the economy — with the Bank cutting benchmark interest rates to a record low of 3.5% — the pace of the recovery will depend on factors outside the Bank’s control such as improved sovereign debt sustainability and structural reforms, the central bank said in its latest monetary policy review.
Load-shedding, which reached its worst levels in 2020 despite the collapse in activity under the lockdown, remained a binding constraint on the economy, said governor Lesetja Kganyago in a briefing after the review’s release.
"If we do not sort out the issues of energy security, then we will be choking investment in this economy," Kganyago said.
Alongside this the state’s dire debt levels, which could reach 140% of GDP by the end of the decade without steep spending cuts and reforms, are a second stand out risk to SA’s recovery, the Bank said.
The review’s release comes ahead of the much anticipated medium-term budget policy statement, which is due later this month. Finance minister Tito Mboweni will provide an update on the extent of the pandemic’s effects on the fiscus and will outline promised reforms to reboot growth.
The Bank expects the economy to contract 8.2% this year before averaging 3.9% and 2.6% in 2021 and 2022, respectively, but warned that growth will return to pre-crisis levels only by the second quarter of 2023.
Severe headwinds
The economy is, however, expected to rebound from the record 51% seasonally adjusted and annualised GDP contraction reported in the second quarter during the worst of the lockdown restrictions. The Bank is forecasting a 45.2% uptick in the third quarter off this low base.
"The most important question now is whether this recovery can be sustained," it said, warning that the headwinds to growth are severe.
Load-shedding is likely to interrupt activity for at least another year as Eskom’s ageing generation fleet produces less electricity while requiring more maintenance, and as new capacity remains behind schedule, said the Bank.
Meanwhile the state’s high debt levels are likely to affect the recovery through several channels, including "confidence effects and uncertainty" as well as crowding out private sector investment, a lower country credit rating and reduced access to foreign savings.
Though many sovereigns have seen debt climb to "uncomfortable levels" during the crisis, SA is an outlier "both for the scale of its borrowing and for its weak starting point", the Bank said.
SA’s debt levels are likely to reach 81.8% in 2020, well above the broad emerging-market average of 63.1%, according to the Bank.
Despite SA’s R500bn fiscal stimulus package being the sixth largest among fellow developing countries and policy rate cuts being the second highest among emerging-market countries, SA’s expected GDP outcomes were among the worst.
Though the Bank has faced criticism for not taking more dramatic policy action, Kganyago again underscored that the Bank has acted with "scale and speed", cutting the policy rate by 300 basis points this year to the lowest level implemented in about 47 years.
Low interest rates
At its last monetary policy committee meeting in September, the Bank put a pause on the aggressive cutting cycle maintained through the crisis, shifting to what it termed on Tuesday a wait-and-see strategy.
With domestic interest rates at record lows and inflation apparently having bottomed out, it is likely that the repo rate will move higher in future, the Bank said. But this normalisation "is likely to be gradual, with rates staying at low levels for an extended period", it said.
Though the MPC has not committed to any specific path for interest rates, its modelling suggest that rates will still not be back to pre-crisis levels by the end of 2022.
Alongside the steep cuts, it has reduced regulatory requirements on commercial banks to promote lending through the crisis and has purchased government bonds in the secondary market to help inject liquidity into the financial system. The Bank has since eased up its purchases — slowing them dramatically in August as conditions have continued to normalise.
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