With all the political intrigue around Eskom, one would be forgiven for not noticing that there is a rather crucial meeting for the SA Reserve Bank coming up this week.
As always, three things may happen, though one should be ruled out. With an interest-rate increase not an option, the question is whether the Bank will stay put or decrease the repo rate and give a boost to the economy.
It’s been a miserable start to 2020 for SA. Almost two years after Cyril Ramaphosa became president with promises of an economic reboot, the optimism that characterised his early days in office, and the promise of a major acceleration of reforms after the 2019 elections, has evaporated.
The political infighting, which last week led to the departure of Eskom chair Jabu Mabuza after an extraordinary attack from the deputy president, David Mabuza, means there’s very little reason to be optimistic that any of the key reforms that business and analysts say are necessary will be forthcoming.
It says a lot that finance minister Tito Mboweni has to resort to Twitter to voice his frustrations. In comments that suggested he has resigned himself to SA losing its investment grade from Moody’s Investors Service this year, he said that if the country does not “effect deep structural reforms, then game over!”
Nobody who has observed the ANC infighting on the economy, a proxy war of some sort for the control of the party, will be optimistic that any of the “many steps at a time” that Mboweni called for will be forthcoming.
Structural flaws
In this context, it’s easy to see the Bank’s interest-rate decision as almost irrelevant. Considering the deep structural flaws that are unlikely to be addressed soon, does it really matter if the repo rate is 6.5% or 6.25%? Governor Lesetja Kganyago and his deputies have consistently stressed that monetary policy isn’t there to compensate for other policy failures.
The example of the European Central Bank (ECB) shows just that. Five years of negative interest rates and more than €2.6-trillion of bond purchases have failed to get the inflation rate for the euro economies to anywhere near its target of about 2%. Like her predecessor, ECB president Christine Lagarde has been calling on governments to play their part. Her calls on countries such as Germany to open the fiscal taps are likely to fall on deaf ears.
In SA, the fiscal space that existed before the outbreak of the global financial crisis just over a decade ago has been squandered. In fact, the most productive thing the government can do is to cut spending and debt. That has left some to argue that monetary policy is the only game in town, an argument that is unlikely to find favour with Kganyago.
Even if one rejects that, there’s probably a strong argument for a cut this week, based purely on the Bank’s objective of keeping inflation in the 3%-6% range.
The only difficulty is that one is not clear what the Bank is actually targeting within that range. It has consistently said it would like to see inflation anchored around the midpoint of 4.5%. Some have interpreted this as a de facto target, and if that is the case, an argument can probably be made for lower rates. That would be harder to sustain if the Bank wanted to get the rate closer to that of SA’s main trading partners, which is less than 2%.
The year started with a flurry of growth forecast revisions by major banks in the wake of the new round of load-shedding by Eskom. This most likely means the Bank’s own forecasts from November will be shredded. It said then that the economy would grow at 1.4% in 2020. The World Bank thinks the economy will expand by just under 1%, while Nedbank is pencilling in 0.7%.
In November, the Bank said it was expecting inflation to average 5.1% in 2020. That’s likely to be way off the mark, just as its 2019 forecast proved to be inaccurate, and will most likely be revised lower on Thursday.
Economist Elize Kruger argued in a report past week that a “more realistic” forecast around 4.5% might see the Bank’s model signalling an earlier cut, as opposed to the November indication that one would come in the third quarter.
A consensus emerged in 2019 that the only reason the Bank hadn’t cut already was the possibility of a ratings downgrade by Moody’s, which now looks almost inevitable. The Bank, the argument goes, will be concerned about the impact on the country’s risk premium and the possibility of large bond outflows that would weaken the rand and put upward pressure on rates.
While Bank deputy governor Kuben Naidoo said last year that as much as $8bn (R115bn) of bonds could be at risk, that came with a lot of caveats and the truth is that nobody knows what the impact would be on the day. Ten-year bond yields that are about five percentage points above the inflation rate might suggest that the downgrade is already in the price. Brazil, which is already junk and has a much higher inflation rate, pays about 2.2 percentage points less per year than SA to borrow over a decade.
So investors who are not bound by mandates that exclude non-investment grade debt might decide that SA yields are juicy enough.
Either way, a downgrade that may not come and whose impact is hard to judge doesn’t seem to be a good reason for the Bank not to move if its inflation forecasts signal that it should. Just as it won’t compromise its mandate by giving a sugar high for the economy, it shouldn’t base policy on outside factors that it can’t control or predict.
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