DM168

BUSINESS MAVERICK 168

Silver linings: South Africa’s economy more resilient than SA Reserve Bank expected

Silver linings: South Africa’s economy more resilient than SA Reserve Bank expected
South African Reserve Bank Deputy Governor Kuben Naidoo. (Photo: Gallo Images / Phill Magakoe)

The good news is that there are some silver linings in the South African economy’s Covid-19 storm clouds. But as SA Reserve Bank Deputy Governor Kuben Naidoo warns, it will take years for the economy to recover fully. Our record low interest rate won’t last.

First published in the Daily Maverick 168 weekly newspaper.

The Covid-19-triggered hit to South Africa’s economy, already in recession before the pandemic struck, could have been worse but for the country’s newfound resilience, the deputy governor of the South African Reserve Bank (Sarb), Kuben Naidoo, said this week, while also warning that the record low interest rate the bank has implemented to support growth could not remain in place indefinitely.

“If we look back today [at] what we expected was going to happen in March, April last year, the situation has certainly been better, and the economy has performed better. The economy has been more resilient; the downturn was less severe than we thought,” Naidoo said on 25 August at an online conference hosted by global investment manager Ninety One.

“It is still an absolutely massive downturn. I don’t think we should underestimate that. You know we had minus 7% last year … we probably thought we were going to get minus 12,” Naidoo said.

Statistics South Africa added to the good news. On 25 August it revised the 2020 contraction to -6.4% after performing a rebasing of the entire economy, which put the size of gross domestic product (GDP) 11% bigger at R5.5-trillion.

Analysts said the revision would further ease South Africa’s budget deficit and debt ratios, both of which have threatened to burst the levels acceptable to ratings agencies and investors, who use them to gauge the risk of lending money to the country. However, this does not materially alter the country’s growth prospects.

“I don’t think anybody should be saying oh, well, we survived Covid-19 intact. It’s going to take many years for the economy to fully recover,” Naidoo warned.

“One reason there’s been a degree of resilience is that, unlike previous crises, where the financial sector was the genesis of the crisis, in this case the financial sector has contributed positively towards stabilising household income and stabilising firms’ incomes,” he added.

At its last monetary policy meeting Sarb kept its GDP estimate unchanged at 4.2%, saying the riots and violent looting in July had prevented it from lifting the estimate.

South Africa has so far benefited tremendously from the global upswing in commodity prices, netting the National Treasury enough of a tax windfall to lower local bond issuance after flooding the local market in the immediate wake of the pandemic, and therefore lowering overall growth of debt while keeping yields, or interest payable on the bonds, from rising.

The commodity fillip, with 2020/21 tax receipts about R100-billion more than what the Treasury estimated in February, also allowed the government to fund the R38-billion relief package after the riots.

That has also allowed Sarb some room to delay an inevitable hiking of lending rates as it monitors the durability of the impact the commodity boom has had on economic growth.

Naidoo said subdued inflation, which dipped to 4.6% in July, nearer the midpoint of Sarb’s target of 3% to 6%, and lower pass-through into consumer prices from a weaker currency, would allow the bank to keep lending rates low.

“We’ve not had to tighten because we are pretty confident that inflation is likely to stay close to the midpoint over the next two to three years. Some countries are not in that position. Many emerging markets are seeing a rise in inflation,” Naidoo said.

“That doesn’t mean to say that we won’t hike interest rates,” he warned.

“We think we can keep the interest rate accommodative for another year or two. We’ve got an estimate of what we believe is the neutral interest rate, somewhere around 7% … we think as the economy normalises and we get back to a reasonable level of growth … we will see an increase to the 6% to 7% range,” said Naidoo.  

Simply put, the neutral interest rate is the benchmark repo rate minus the expected rate of inflation. Lending rates are considered accommodative, or easy, when the repo figure is below the neutral rate.

“People use the phrase lower for longer. I would say more accommodative for longer, said Naidoo. “I think we can be fairly slow and gradual with normalising rates.”

That will be good news for SA consumers faced with record high unemployment and a struggling economy. Sarb’s Monetary Policy Committee next decides on lending rates on 23 September. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.

Gallery

Comments - Please in order to comment.

Please peer review 3 community comments before your comment can be posted

X

This article is free to read.

Sign up for free or sign in to continue reading.

Unlike our competitors, we don’t force you to pay to read the news but we do need your email address to make your experience better.


Nearly there! Create a password to finish signing up with us:

Please enter your password or get a sign in link if you’ve forgotten

Open Sesame! Thanks for signing up.

home delivery

Say hello to DM168 home delivery

Get your favourite newspaper delivered to your doorstep every weekend.

Delivery is available in Gauteng, the Western Cape, KwaZulu-Natal, and the Eastern Cape.

Get DM168 delivered to your door

Subscribe to DM168 home delivery and get your favourite newspaper delivered every weekend.

Delivery is available in Gauteng, the Western Cape, KwaZulu-Natal, and the Eastern Cape.

Subscribe Now→

We would like our readers to start paying for Daily Maverick...

…but we are not going to force you to. Over 10 million users come to us each month for the news. We have not put it behind a paywall because the truth should not be a luxury.

Instead we ask our readers who can afford to contribute, even a small amount each month, to do so.

If you appreciate it and want to see us keep going then please consider contributing whatever you can.

Support Daily Maverick→
Payment options

Become a Maverick Insider

This could have been a paywall

On another site this would have been a paywall. Maverick Insider keeps our content free for all.

Become an Insider

Every seed of hope will one day sprout.

South African citizens throughout the country are standing up for our human rights. Stay informed, connected and inspired by our weekly FREE Maverick Citizen newsletter.