Last week’s unrest has “fully negated” prospects for better-than-expected GDP growth this year, South African Reserve Bank governor Lesetja Kganyago said on Thursday, after a meeting of the monetary policy committee (MPC) he chairs.
Because of the riots, which hurt the retail sector the most, the economic growth forecast for 2021 remains unchanged at 4.2%, Kganyago said in a statement he delivered after the MPC meeting, which decided to keep interest rates unchanged.
“Prior to the unrest, we were destined to revise our growth forecast for this year higher. In the aftermath of the unrest, we could not revise our growth any higher,” the central bank governor said.
The violence was initially sparked by supporters of Jacob Zuma, angered by the former president’s arrest the week before. In a national address on Sunday night, President Cyril Ramaphosa said the riots were an attempt at economic sabotage.
The unrest in KwaZulu-Natal and Gauteng, the Reserve Bank said on Thursday, could have lasting effects on investor confidence and job creation. It said the violence which took the form of indiscriminate looting and vandalism would likely slow the country’s recovery from the economy-knocking Covid-19 pandemic.
Kganyago said it was too early to tell what the full economic toll of the violence would be, but added that “there is no doubt” that it had negatively impacted business and investor confidence. A Mail & Guardian report last week illustrated the same sentiment.
On Monday, the Bureau for Economic Research (BER) forecast that the country’s GDP was set for a large contraction in the third quarter of 2021, as a result of the economic destruction wrought by last week’s carnage.
Early estimates by the South African Property Association suggest that the unprecedented attacks dealt a blow of more than R50-billion to GDP.
The BER noted that, considering the better-than-expected first quarter GDP outcome — as well as signs that some momentum was sustained in the second quarter — before the riots it was on track to upwardly adjust its 2021 growth forecast.
“This was even despite earlier identified risks of [more] load-shedding and a third wave accompanied with stricter lockdown restrictions materialising,” the BER said in its weekly release.
“However, the likely adverse confidence, spending and production effects of the riots meant that we held off on the upward revision for now, leaving the GDP forecast for 2021 unchanged at 3.9%.”
On Thursday, the MPC forecast that GDP would expand by 2.3% in 2022 and by 2.4% in 2023, unchanged since its previous meeting in May. The committee unanimously decided to keep the repo rate unchanged, at 3.5%.
The repo rate determines the interest rate at which the central bank lends money to commercial banks — which then affects the rate at which they lend to consumers, affecting the broader economy. The repo rate is used by central banks to control inflation.
Earlier this week, Statistic South Africa reported that annual consumer price inflation moderated to 4.9% in June from 5.2% the month before. May’s inflation spike was the highest in 30 months, climbing above the 4.5% midpoint of the Reserve Bank’s target range.
Kganyago said there was currently no way to tell what impact last week’s destruction would have on inflation.
The repo rate levels, the MPC statement said, “reflect a highly accommodative policy stance through the end of 2022, keeping financial conditions supportive of credit demand as the economy recovers from the pandemic and associated lockdowns”.
The current monetary policy decisions were appropriate, considering “the economic conditions we are facing as a country”, Kganyago said, adding: “There are risks to the economy and, if those risks were to materialise, the MPC will not hesitate to act on its mandate by utilising the tools at our disposal.”