News & analysis

The South African economy hasn’t shown signs of a vigorous rebound in activity following the largest economic contraction in a decade in the first quarter of 2019, with the latest data releases pointing to 0.5% GDP growth for the year.

Economic growth and high levels of unemployment are a major problem for the renewed Ramaphosa administration, which continues to battle with the progress of the proposed fiscal reforms.

This isn’t necessarily the SARB’s concern due to its sole mandate to control inflation, however, that was recently brought into question following comments from the ANC’s secretary-general Ace Magashule.

The cabinet member surprised markets when he called for the SARB’s mandate to include growth or unemployment rates, highlighting how severe the conditions in South Africa currently are.

The comments roiled markets as it showed potential political interference in monetary policy setting as the administration battled stimulating the economy, while also highlighting cracks in the South African cabinet as similar messages weren’t echoed by Ramaphosa and co.

Q1 GDP release prompts markets to expect rate cut


Current domestic conditions unequivocally favour the SARB cutting rates, especially with the global macro climate of monetary policy easing meaning any rate cut will likely have a muted impact on South African assets.

The bar is set low for the SARB to unwind the 25bp hike in 2018 as 2 out of the 5 voting members favoured lower rates in the last meeting already.

With the last meeting occurring prior to the Q1 GDP release that was heavily impacted by load shedding, the data supports a more accommodative stance.

This has been echoed in markets, with the downgrade of GDP projections prompting market participants to expect a 25 basis point cut.

24 out of 30 economists surveyed by Reuters anticipate lower borrowing costs next week, with forward curves also pointing in a similar direction.

The problem for the SARB isn’t in the lowering of the rate itself, but how this is translated to markets. With inflation sitting in the mid-point of the target range, many would believe the scope for a rate cut is narrow on a true basis without referencing the impact of a slowing economy on inflationary pressures.

For that reason, Governor Kganyago must highlight the dovish stance is due to a deteriorating inflation outlook and lean away from stoking market fears of a shift in the SARB’s mandate to include targeting a growth level.

This is increasingly relevant given the high profile occurrences of political interference in monetary policy setting seen in the US and Turkey.


Chart: Expectations of a rate-cut by the SARB increased following the Q1 GDP release in June, with many expecting a rate cut from 6.75% to 6.5% on Thursday with further cuts implied.


Fiscal policy credibility still crucial to medium term growth prospects


While the slight adjustment in policy will provide short-term relief to a flagging South African economy, substantial fiscal reforms are necessary.

Thus far Ramaphosa has under delivered on the proposals, with progress only noted in the Eskom debacle while labour reforms and improved access to South Africa’s economy for foreign investors is yet to materialise.

Further questions remain over the cleaning up of the cabinet too with the Minister of Labour and Employment, Thulas Nxesi, subject to a sketchy history while market friendly appointments in Tito Mboweni as Finance Minister and Pravin Gordhan to public enterprises are seen only as short-term appointments.

For now, only one source of economic stimulus is a near certainty and that is a rate cut by the SARB on Thursday.


Author: Simon Harvey, FX market analyst at Monex Europe.