SA Reserve Bank governor Lesetja Kganyago has warned against locking in large spending commitments off the back of a commodities boom that has boosted the government’s financial position and aided the economic recovery, but that is by no means a lasting certainty.
Speaking at the release of the Bank’s latest monetary policy review on Tuesday, Kganyago said SA should “guard against complacency” that could see it committing to “expenditure outlays that we might not afford outside the rising commodity prices”.
“There is a danger that SA, like many other commodity producing countries, could mistake the current commodities price cycle as a sustained cycle, and might end up making commitments that end up with us being in more debt and raising the country’s risk premium,” he said.
His remarks come as SA looks to the medium-term budget policy statement (MTBPS) in November, where finance minister Enoch Godongwana is expected to deliver a healthier set of government financials, including a lower budget deficit and less precipitous, if still high, debt levels.
The government’s coffers have been granted a temporary reprieve, thanks in large part to tax overruns from robust commodity prices that have boosted mining firms’ profits.
In the review, the bank noted that “debt and fiscal balances have improved, benefiting from the higher commodity prices and surging terms of trade, as well as stronger GDP growth over the past year”.
But with the added breathing room has come mounting pressure to spend this windfall, including calls to institute a basic income grant, which critics have argued could put the fiscus on an unsustainable path and undermine the government’s commitment to fiscal consolidation.
The debate has gathered momentum in the run-up to the local elections, which is scheduled to take place days before the MTBPS is delivered on November 4.
The bank said in the review that “despite better-than-expected revenue prospects for the current fiscal year, the fiscal situation remains fragile as debt levels remain high”.
“Risks to the fiscal outlook include a sharp correction in commodity prices, much slower growth (and thus tax revenue) on the back of more severe waves of Covid-19, temporary spending becoming permanent and further fiscal support to state-owned enterprises,” the Bank warned.
The review also pointed to a need for SA’s deeply accommodative interest rates to begin normalising in the face of the better-than-expected economic recovery and rising risks to the inflation outlook.
At its most recent monetary policy committee meeting in September, the Bank kept interest rates at the record low of 3.5%, in line with its ongoing efforts to support the economy through the ravages of the Covid-19 pandemic and in the wake of more recent shocks such as the civil unrest and looting in late July.
But as the economy has bounced back, the question of when the Bank will begin reeling back some of this monetary policy support has loomed large. Though the Bank’s own internal model suggests a hike could come as soon as November — at its last monetary policy committee (MPC) meeting this year — many private sector economists still believe it is possible that rate normalisation will only begin in 2022.
While headline inflation remains relatively well contained, the Bank said in the review that “material upside risks” to inflation, including food prices, stubborn administered prices — particularly water, electricity and petrol — and rising global inflation and supply constraints “imply a need for interest rates to begin normalising”.
Though the Bank expects the headline inflation average to remain around the midpoint of its target range in the coming years, before settling at 4.5% by 2023, it said “the stronger-than-expected recovery in economic activity suggests that underlying price pressures may be stronger than initially thought”.
It warned that “delaying the lift-off could see the monetary policy authorities playing catch-up with inflation”.
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