Prof Raymond Parsons
By NWU Business School Economist, Professor Raymond Parsons.
The widely-expected and right decision today by the Monetary Policy Committee (MPC) of the SA Reserve Bank to leave interest rates unchanged will be welcomed by business and consumers. Interest rates should be kept stable in South Africa for as long as possible, given the weak economy.
The MPC understandably remains seized by its concern about rising inflation risks but correctly sees them as currently mainly supply-driven. But it is clear from the MPC’s latest analysis that overall the SA economy is still facing some important headwinds over the next few months.
The fact that the MPC has reduced its growth forecast for 2018 from 1.7% to 1.2% is troubling and confirms similar recent downward revisions of growth expectations by several private sector economists. Apart from anything else, weak economic growth now puts a strain on the original 2018 growth targets outlined in the February 2018 Budget Speech and on the fiscal commitments that have been made.
Together with what the MPC describes as higher-than-inflation public sector wage increases, if the Medium Term Budget Policy Statement in October reveals that SA has badly missed its fiscal targets, the economy would be placed at risk of further credit rating downgrades. It is nonetheless also clear from the MPC’s economic assessment that SA could improve its ratings and move back into investment grade territory if economic growth prospects improve and credible fiscal outcomes are attained.
A turnaround in the economy is necessary. While recent political changes and steps to tackle governance issues have elicited positive reactions, investors still need to see policy certainty and consistency – ranging from land reform to the restructuring of state-owned enterprises – in order to boost fixed capital formation.
SA simply must get on to a higher growth trajectory. President Cyril Ramaphosa’s investment drive to raise $100bn over the next five years therefore still largely depends on greater policy certainty and this must remain the highest priority if SA is to attain stronger job-rich growth.
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