In its latest monetary policy review, the Reserve Bank estimates that load-shedding will take two percentage points off GDP in 2023 and add 1.1 percentage points to inflation.
For the monetary policy committee (MPC), this has had the effect of more policy tightening than would have otherwise been the case, even as growth has stalled. We saw this with a continuing acceleration in domestic food inflation, even as food prices globally are providing a welcome disinflationary impulse to economies. In SA, food price inflation has continued to accelerate, coming in at 14% in March.
Companies have been passing on the escalating costs of backup power to consumers and will continue to. Pick n Pay reported that it spent R500m — half its aftertax profit — on diesel its latest financial year. Farmers, manufacturers and retailers across the economy will have similar tales of woe. Companies currently installing solar can spread the costs over multiple years and these will be passed on to consumers for years to come. They are inflationary and erode export competitiveness. They will have an adverse effect on the balance of payments, and thus the currency, in the period ahead.
Globally, investors are likely to remain underweight on SA assets, even if cyclical headwinds turn into tailwinds, on expectations that load-shedding will continue to undermine growth and the currency, and as investors discount less monetary policy easing relative to what is happening in the rest of the world. This goes for both resident and nonresident investors. SA has seen virtually no inflows into its equity market from locals or nonresidents, and little by way of inflows into bond markets, for some time. SA resident investors have also been allocating more cash to markets outside SA. This trend will not reverse if load-shedding is not curtailed — another net negative factor for the rand.
The rand has lost ground compared with other emerging market currencies since late 2022. It is now trading at historic lows and flagged as cheap on every metric. The currency will eventually gain ground, but this is likely only once we get past what is predicted to be a hellish winter of load-shedding. Power shortages have deepened domestic stagflation and look set to prolong it even as disinflation (low growth, low inflation) starts to emerge in other economies and asset prices adjust accordingly.
Expectations for policy rates in SA remain decidedly hawkish and could deteriorate further if the rand comes under renewed pressure. The market sees at least two more 25 basis point hikes into July and cuts only in 2024. This compares with the US, where markets are pricing in cuts by September.
I have personally never met a rate hike I like, but I understand the Bank’s predicament. It does not target the rand, but a weaker currency risks the long-term inflation outlook. An idiosyncratic shock to the currency — load-shedding is exactly that — could undermine inflation stability and warrants a monetary policy response. The MPC takes its inflation-fighting credentials seriously and should be responsive to threats to inflation stability and policy credibility.
Given that all this is happening in the context of vanishingly low economic growth, I expect the noise and debate around monetary policy will escalate, especially if the Bank remains defensive even as the US Federal Reserve (Fed) pivots, as the market expects. The 50 basis point hike in March already solicited much criticism. Standard Bank’s economists expect another 25 basis points at the MPC meeting this month, which would take the repo rate to 8%. This rate, while high in absolute terms, remains low in real terms, especially when compared with the higher real rates reflected in bond markets. I don’t like 8%, but I don’t begin to think it’s the highest the repo rate can go.
The repo rate was last at these levels in 2009. For many this feels like uncharted territory. I personally did not have a loan when rates were last at these levels, and I now have several. The middle class will be choking at these interest rates, but let’s please remember that Bank governor Lesetja Kganyago and his team are responding to a situation that was created elsewhere.
• Lijane is global markets strategist at Standard Bank CIB.
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