/ 25 November 2010

Interest rate cuts ‘too little, too late’

Evidence that South Africa’s economic growth is slowing is raising fears the government has done too little and acted too late to boost growth in one of Africa’s biggest economies.

South Africa, seen as the gateway to other African markets, had enjoyed uninterrupted economic growth for the 15 years preceding the 2008 economic recession, growth that began when the country ended apartheid and embraced democracy.

Since late 2008, when the country plunged into a recession, the South African Reserve Bank has cut interest rates nine times in an attempt to spur economic growth.

In the latest effort to keep the economy humming, and also to rein in a strengthening currency, last week the Reserve Bank again cut its repurchase rate, the key rate for determining monetary policy. At 5,5%, it’s at the lowest level in more than three decades. But economists say this is far from enough — and warn that delayed interest rate cuts, coupled with government inaction, will not save the fragile economy.

New statistics showed on Tuesday that South Africa’s third-quarter economic growth slowed to 2,6% from 2,8% in the second quarter, undermining expectations that growth would accelerate.

South Africa’s mining sector grew 28,1% and the agricultural sector grew 16,3% in the third quarter, but these sectors don’t drive growth numbers as they constitute only 8,5% of the economy, said Cees Bruggemans, chief economist of First National Bank. Manufacturing, financial services and public-sector jobs together account for more than half of the economy.

“Too little, too late” monetary policy action is to blame for sluggish growth, said Iraj Abedian, an economist at Pan-African Capital Holdings. Despite recent cuts, he said, South Africa’s interest rates are out of sync with the rest of the world, and consequently the strengthened currency has led to plummeting manufacturing output, he said. South Africa’s lending rate of 5,5%is still relatively high compared to developed countries.

“Interest rates have to be cut far more aggressively,” Abedian said. “This situation is not going to self-correct, and it requires active policy intervention.”

But while cutting interest rates boosts the economy, it’s not a silver bullet, said Hugo Pienaar, the chief economist for the Bureau of Economic Research at Stellenbosch University in South Africa.

“It’s great we’re cutting interest rates to maintain growth, but we’re now at an over 30-year low for interest rates and still not seeing major increases in growth, which must be a little bit of a concern to the government at the moment,” said economist Mike Schussler of T-Sec, an investment holding company.

Chris Hart, chief economist at Investment Solutions, said restrictive regulations have bogged down the economy.

“If the economy cannot grow with interest rates at these levels, we have to start looking at the other areas that are creating the problems,” he said.

South Africa has also had to factor in the strength of the currency, the rand, which has been trading at an almost three-year high to the US dollar. A strengthened currency does hurt exporters, but in South Africa’s case, it has also helped to support the economy by cheapening imports and attracting skilled workers.

South Africa’s economic development minister said the country will push for “loose” monetary policy with lower interest rates to weaken the rand. Ebrahim Patel said in a speech on Tuesday that the country aims to create jobs in alternative energy, tourism, agriculture and mining to drive economic growth.

Schussler said this quarter’s growth isn’t enough to create a meaningful number of jobs in a country that has seen high unemployment — it now hovers around 25% — for the past decade.

“We should be bursting with commodity prices through the roof and tying in closer to China and India and other East Asian and Latin American countries that are bouncing back rapidly — but we’re not,” Schussler said, referencing third-quarter job losses.

“Something is not right in this picture,” Schussler said. – Sapa-AP