Most of the economies in the BRICS group — Brazil, Russia, India, China and South Africa — are growing at paces that Pretoria can only dream about. In Q3, Brazil’s growth limped along at 0.6% — but at least it had growth during a period when SA’s economy shrank 0.6%. Russia’s economy got 1.7% bigger in that period, while Indian GDP growth has slowed — to 4.5%. Chinese growth is at three-decade lows, but at 6% it remains a turbo-charged sports car roaring past the broken-down bakkie that is the South African economy.
And the response, at least on the monetary policy front, could hardly be starker. Brazil on Wednesday was poised to cut its benchmark Selic to a record low of 4.5%, which would be its fourth consecutive cut of 50 basis points (bp). In October, Russia’s central bank made its biggest cut in two years, taking its key rate to 6.50% from 7%, and signalling more were on the cards in the face of subdued inflation. India has made five cuts in 2019, taking its repo rate to 5.15%, while even China’s was recently trimmed for the first time since 2016.
Meanwhile, in South Africa, which is probably in the throes of a recession now after Eskom took load shedding to new levels this week, the central bank has made one rate cut, in July, to its key lending or repo rate, bringing it to 6.5%. This comes at a time when its BRICS peers are cutting rates to stoke growth, which in India’s case is a mouth-watering 4.5%. Does this mean that the SARB needs to launch an aggressive cycle of loosening in 2020?
On the one hand, the situation would appear to be that if ever there was a time to cut, and cut heftily, it is now.
CPI inflation slowed to 3.6% in November, Statistics South Africa said on Wednesday, its lowest level in nine years, and near the bottom of the SARB’s 3% to 6% target range. Muted inflation is in part a product of the sordid state of the economy, with stunted demand, high unemployment and low levels of investment and confidence — the ingredients needed to put growth on a faster trajectory that hopefully creates jobs. (Hopefully is used here because while you cannot have meaningful job creation without economic growth, economic growth does not always automatically translate into job creation).
This is the kind of environment which a classical model of economics would suggest is ripe for cutting rates. Indeed, relatively high rates — and consumer rates are now around 10% versus inflation of just 3.6% — should at the very least encourage savings, which is not the case in South Africa, where low rates of savings are a key reason why the economy needs foreign investment so badly.
Economists do see room for the SARB’s hawkish Governor Lesetja Kganyago to retract his talons somewhat and begin cutting — but not to the extent of some of South Africa’s BRICS peers.
“We still think there is a strong case for easing, and this is reinforced by every CPI and every growth-related data release we see. The case is only building, but the SARB has made clear it would like to see a ‘reduction in uncertainty’ before acting,” Razia Khan, chief Africa economist at Standard Chartered Bank, told Business Maverick.
Uncertainty is certainly staying the SARB’s hand, not least because of its concerns about the rand exchange rate.
“A deep cut in the repo rate will increase the inflation differential between South Africa and its major trading partners. This is an important factor in exchange rate pricing. Foreign investors buy South African instruments because they yield so much more than you can get in North America and Europe. A smaller differential makes the rand-denominated assets less valuable. And in a time of rating downgrade risk, South Africa cannot afford making local bonds less attractive,” said Christie Viljoen, an economist at PwC.
And the SARB’s hands are tied by the government’s fiscal mess — hence the concerns with the bond market — at a time when debt levels are surging, with little to show for it.
“The cost of fiscal maladministration is higher rates. It’s the only way to attract foreign capital and protect the value of the rand. Low rates on top of all this would be recipe for disaster. This is a fiscal problem, not a monetary one,” George Glynos, head of research at ETM Analytics, told Business Maverick.
“A weakening currency, current account deficit and ballooning debt levels are signs that interest rates are perhaps too low. In SA’s case and judging by the resilience of the rand, the trade surplus or small current account deficit and low inflation, I would say that monetary policy looks more or less appropriate,” he said.
And cutting rates is not a panacea for growth. India has been cutting like crazy, yet its growth rate still slowed in Q3 to 4.5%, its worst performance since 2013, from 5% in the previous quarter. Brazil’s economy is barely growing despite its monumental easing.
Both countries, incidentally, are run by populists, and cutting rates is a very populist thing to do. And just look at the elements within the ANC who want to change the SARB’s mandate.
“From an economic growth perspective, a 25 bps cut can provide a maximum of only 0.1 percentage points of extra real GDP growth over a 12-month period, according to the SARB. Interest rates are not a problem nor the solution to our growth challenges,” Viljoen said.
So, there is a strong case for the SARB to cut, but not deeply, or at a pace that some — including populists — would like. The fiscal side also needs to come to the party. The problem is that it is mired in indecision because of the factionalism that has beset the ruling party. BM
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