No good economic news at SARB Monetary Policy Review event in PE - see videos

APRIL 7, 2016

The South African economy will grow by less 1% in 2016 and recover slightly (by about 2% at most) in 2018. This was revealed during a Reserve Bank of South Africa Monetary Policy Review event held at the Protea Hotel in Port Elizabeth for local businessmen on Thursday morning.

According to the Reserve Bank, in its report, the period since the last Monetary Policy Review in November 2015 has been “characterised by volatility and uncertainty in financial markets alongside generally disappointing real economy news”.

The bank said the South African economy grew for two years after the 2009 Global Recession but decelerated markedly since 2011.

“Output increased by just 1.3% in 2015 and forecasts suggest that growth will be less than 1% this year – the slowest pace on expansion since the Great Recession, and before that, the emerging-market crisis year of 1998,” the bank said.

“In the recent past, disappointing growth outcomes have been traceable to specific shocks, including strikes, electricity shortages and drought. But the outlook now indicates more diffuse sources of weakness. Consumer and business confidence is low in historical perspective.”

The Reserve Bank said that growth is expected to be low despite a highly competitive exchange rate, significant public borrowing and a low real policy rate.   

“Net exports face headwinds from declining commodity prices and slowing world trade growth. Government is entering a period of intensified fiscal consolidation. Households remain under pressure, burdened by debt and high levels of unemployment, among other factors. Businesses continue to see limited opportunities for expansion.”

The bank said that despite a slowing GDP growth, inflation has begun to accelerate again, after a year of relatively moderate price increases.

Inflation in 2015 averaged 4.6%, thanks to low oil prices, however it rebounded to 6.2% in January 2016 and reached 7% in February – the highest rate in the post-crisis period.

“It is expected to average well over 6% in 2016 and 2017.”

The Reserve Bank also noted that “the Rand exchange rate, equity markets and bond yields all moved abruptly following the removal of Nhlanhla Nene as Finance Minister”.

On its policy stance, the bank said that the weak Rand has had a significant influence on its monetary policy.

“Over the past five years, the currency has depreciated quite steadily, but the change in 2015 was the largest yet experienced in this period. The currency began the year at R11.56 to the US dollar and ended at R15.04, a depreciation of 23%. The trade weighted exchange rate also weakened substantially, by nearly 20%. In real terms, both the trade-weighted exchange rate and the bilateral Rand/Dollar exchange rate are close to record lows.”  

Looking at the exchange rate and food prices, the bank expects inflation to end the year at 7.8%.

There, however, appears to be some welcome “shorter-run” benefits from recent monetary tightening.

“In response to all three recent hikes, in November 2015 as well as in January and March 2016, borrowing costs as reflected in government debt shifted lower across most of the yield curve and the Rand also strengthened somewhat,” the bank said.

The Reserve Bank also noted the slow recovery in the global economy – in particular in China, whose industrial drive had fuelled demand for South African raw materials, as partly to blame for the economy’s current challenges. Russia and Brazil, which are also part of BRICS, are currently in recession.

“Weaker world growth diminishes prospects for South Africa to expand off foreign demand. Meanwhile, the sense that emerging markets are vulnerable, and that more middle-income countries are likely to join Brazil and Russia in recession, make it more difficult for South Africa to go on being a large net borrower in world financial markets,” the bank said.

On the domestic economy, the bank said that output growth has been slowing steading with the most recent forecast suggesting a GDP growth of 0.8% in 2016, down from 1.5% projected in November 2015, and 2.9% a year before that.

“Forecasts for 2017 have also declined, with the latest number indicating 1.4% growth next year and 1.8% in 2018.”

The bank blamed household debt, electricity shortages as well as slowdown in China and the general world economy for the continued deterioration in economic forecasts. Strikes and labour unrest; unemployment; poor commodity prices for South Africa’s coal, iron ore, gold and platinum; low business confidence,  as well as the current drought that has reduced agricultural output have also contributed to the deterioration.

The drought, the worst in over 20 years, has also been blamed for rising food prices, which have pushed inflation higher.

While oil prices fell by 10% in January, the economy did not benefit owing to a weaker Rand, the bank said.

At the event, local businessmen had an opportunity to ask questions. The first questions came from businessman and Edge Financial Group founder, Ed Gutsche, who wanted to know why other African countries and their currencies were performing better than South Africa if it is true that the country’s economic challenges can be explained by a volatile global market situation. He asked if some of these challenges were not also necessitated by the current political circumstances the nation finds itself in.

Watch video below for the response from the Reserve Bank:

 Watch the videos below for more questions and answers  at the event.