South African interest rates to remain steady, forecasts Strategy&

21 January 2019 Consultancy.co.za

Following a long process of deliberation, the South African Reserve Bank (SARB) has made the decision not to introduce a hike in the benchmark repo rate. According to global management consulting firm Strategy&, interest rates are unlikely to increase over the coming months, in line with analyst expectations.

The question of interest rates has presented an interesting dilemma for policy-makers in South Africa. On the one hand, the country suffers from high tax default rates and requires additional funds in public coffers, although an increase in interest rates would go against other objectives of the current administration.

South Africa’s new President Cyril Ramaphosa has emphasised the desire to promote foreign direct investment (FDI) into the country, not least through his plans to add as much as $100 billion to the country’ overall FDI levels over a period of the next five years.South African interest rates to remain steady, forecasts Strategy&

Increasing interest rates creates a barrier for these objectives, which has been a cause for deliberation within the SARB. The bank already increased interest rates back in November, and was due to decide on a further increase over the last month. The SARB has now decided against such a hike.

The refusal to hike rates represents a balancing act of sorts, given that the SARB’s monetary policy committee has recommended as many as three increases by the end of next year, primarily in order to preserve the governments fiscal capacity. According to Strategy&, a strategy and economic subsidiary of PwC, however, the country will survive despite the refusal to hike interest rates.

“South Africa’s economy is expected to bounce back somewhat in 2019 and 2020, faciliated by an anticipated cyclical upswing and improvements in economic sentiment helped by recent initiatives like the economic stimulus plan, jobs summit and investment summit,” said Maura Feddersen, Economist at  Strategy&.

“However, the possibility of fiscal slippage and a lack of structural reforms can weigh on longer-term economic prospects. Poor economic growth outcomes and indications of a tentative recovery in 2019 and 2020 are likely to prevent the SARB from raising interest rates in January, especially in the absence of additional supply-side pressures that could cause inflation to move closer to the upper end of the target range,” Feddersen commented.

The economist added that several risks to the growth outlook remain, in particular, “concerns around electricity supply shortages. Weak business and consumer confidence furthermore weigh on fixed investment and curtail the potential for faster economic growth. International volatility also poses a threat to domestic economic growth, with ongoing trade tensions between the United States and China, Brexit uncertainty and the threat of emerging markets risk spill-over adding to domestic growth concerns.”

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Poor economic conditions might dent South Africa's investment profile

12 March 2019 Consultancy.co.za

Despite the words of promise delivered by Finance Minister Tito Mboweni in this year’s budget speech, South Africa’s profile as a destination for investment is likely to deteriorate on the back of public debt and deficits, according to PwC Strategy& Economists Lullu Krugel and Christie Viljoen. 

Much has been riding on South Africa’s budget speech this year. The country is emerging from a period of sustained economic stagnation, and the new government has vowed to make South Africa a hub for foreign investment through the development of a more transparent regulatory and business environment.

The country also suffers from a high rate of tax defaults, and the decision to hike tax rates in last year’s budgets did little to restore the levels of financing in public coffers. As a result, the government has decided to heavily tax wealthy South African expats earning in excess of R1 million, alongside other tax reforms.

The focus, however, was a restructuring of public agencies such as Eskom and regulatory bodies to make them more open and efficient. According to PwC Strategy& analysts, these measures might create an environment of optimism in the country, but the conditions are likely to prompt Moody’s Investor Service to demote South Africa to non-investment grade this year.Lullu Krugel, PwC South AfricaCommenting on Mboweni’s speech, Economist Lullu Krugel said, “His address was forthright about the challenges facing the country, and while there were many bitter pills to swallow in the detail, the minister provided some good news – for rating agencies – on key subjects like Eskom and the public sector wage bill.”

On the other hand, she added that “These sweet words, depending on whose ears it falls, can, however, not detract from the wide budget deficit and huge debt that the public sector is struggling with.” National Treasury figures place South Africa’s projected growth for this year at a dismal 1.5%.

Given the conditions, Bloomberg has predicted that Moody is likely to downgrade South Africa’s status, which, according to Mboweni, will only harm the country’s economic prospects. Krugel explained the precise nature of the struggle that South Africa would be faced with if downgraded.

“If rating agency Moody’s Investors Service were to also downgrade the debt to sub-investment level, South Africa would be removed from the Citi World Government Bond Index. This would prompt asset managers and pension funds to sell billions of rands worth of domestic bonds. This would sharply increase the cost of debt and pressure the exchange rate,” she said.