Trouble is heaping up, sending the local economy into a nosedive.
Growth is down, jobs are reportedly vanishing and inflation is wheezing towards the target range of between 3% and 6%.
Given the effect the financial downturn and market turmoil are having on the country, economists argue that there is an ever-growing need to frontload interest rate cuts. This means opting for aggressive loosening of monetary policy early on in the year.
The depressing figures, particularly the news that GDP growth shrank by 1.8% in the last quarter of 2008, have fuelled speculation that an emergency monetary policy meeting will take place to cut interest rates.
But with the release of CPI inflation figures earlier this week, showing a less than expected decline to 8.1%, the market has had to rethink its hopes regarding what action Reserve Bank Governor Tito Mboweni will take.
Although many economists think an interim meeting could still happen, it is likely it will be scheduled only once additional economic data is released, giving the bank more to mull over.
The expectation, though, is that rates will be cut. It is just a case of when — most probably before the scheduled next meeting on April 15.
With an economy in distress, monetary policy, notoriously hawkish under Mboweni, is once again a hot topic of debate.
CPI remains high, with startling signs of continued price hikes in items such as food and financial services.
Food, in particular, is cause for concern. According to Stanlib economist Kevin Lings agricultural prices have been declining on an annual basis of -5.7%.
”Food producers and retailers have used falling agricultural prices to rebuild their profit margins,” says Lings. ”We should have seen the positive effect on consumers by now, but this hasn’t happened.”
Lings points out that two additional elements affect CPI — the exchange rate and financial services costs. The weak rand-dollar exchange rate is finally being felt.
”Most of the decline occurred in the second half of the year and is now reflecting in somewhat higher imported consumer inflation,” he says.
”While the rand has been extremely volatile in the past few months, it has not weakened that significantly in the past five months considering that in October 2008 the rand-dollar rate averaged R9.77. Hopefully this relative movement, coupled with increased global deflation, could help to moderate imported consumer goods prices in the coming months.”
Similarly, financial service costs, up a substantial 3.7% month on month and 17.1% year on year, have had an impact on CPI. But these costs are hopefully a ”once-off because of the start of a new year”, says Lings, and will level off as the year progresses.
Various economic sectors are showing severe signs of strain.
The motor industry has sought help from the department of trade and industry in the form of a task team, set to examine ways for it to survive the economic downturn. It has been identified as a ”distressed sector” by the presidential task team working to find ways for South African businesses to cope with the downturn.
Mining multinational Anglo American announced that it would not be issuing dividends to shareholders, whereas Moody’s downgraded Anglo’s debt rating.
”The real economy is suffering,” says economist Mike Schussler. ”We have to get growth going again.” This may require additional measures besides government’s plans to sink R787-billion into infrastructure, he says.
Schussler says that although inflation targeting has its place and the trend suggests inflation will continue to decline, in an economy with a 23% unemployment rate, boosting growth should be a more weighty consideration for the MPC than fighting inflation. ”We are expecting net job declines. With a decline in interest rates you can make it easier to help keep jobs,” says Schussler.
In the middle of last year Nedbank did a comparison of monetary policy among central banks across the globe. South Africa sat on the most hawkish end of the scale, implementing punishing interest rates against rising inflation.
Since then the outlook across the globe has changed so drastically that even the Reserve Bank has begun to decrease interest rates.
Nevertheless, by December 2008, following the first rate cuts in months South Africa still remained among the countries with the highest interest rates, both real and nominal.
According to data supplied by Global Insight and Nedbank, in December, across a grouping of 27 countries, South Africa had the fifth-highest real interest rate figures at 2%. It was beaten only by Brazil, with 7.8%, Hungary, with 6.5%, Turkey, 4.9%, and Thailand with 2.3%.
Sixteen of the countries, including India, Japan, the United Kingdom and the United States, have already receded to real interest rates of below 1%.
Other problems have helped muddy the waters, including reports that banks have started to freeze credit extension to consumers, further threatening the country with recession.
Azar Jammine, director of Econometrix, pointed to anecdotal evidence that local banks are refusing to lend to customers, even creditworthy ones, despite the fact that South Africa’s financial system has remained relatively insulated from the global financial crisis.
Jammine says that in a case like this hasty interest rate cuts will solve nothing. ”If the real reason we are not seeing business activity is because banks are reluctant to lend, then cutting interest rates will not give the economy the boost people are expecting,” says Jammine.
According to National Credit Regulator chief executive Gabriel Davel, South African consumer debt levels looked a lot better at the inception of this downturn than those of the US or the UK.
”Overall debt levels have in fact been coming down, from about 76.7% household debt to GDP to about 75.3%,” says Davel. ”However, the global economic downturn will also affect us and things may become a lot tougher over the next months.”
More than 40 000 people have already approached debt counsellors, says Davel, and applicants are increasing, with about 4 500 new applications for debt counselling a month.
Meeting may come
Reserve Bank Governor Tito Mboweni reiterated that no emergency monetary policy committee (MPC) meeting would take place this week following the release of disappointing growth and inflation data, reports I-Net Bridge.
But he did not rule out the possibility that one may be called prior to the scheduled meeting of April 15 and 16. He indicated that ”the MPC can meet at any time”, and that should it do so, the Reserve Bank would ensure that the public was informed about it.
Speaking at an annual investor conference in Sandton on Thursday Mboweni said that the bank is still awaiting additional and ”significant data” and should that data indicate a worsening economic outlook, a meeting of the MPC may be convened.
