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South African Reserve Bank keeps repo rate steady while lowering growth forecast
President Cyril Ramaphosa announced on September 16 in his televised address to the nation that South Africa would move to Level 1 (out of 5 levels) on September 21.
Although Ramaphosa had been praised for his swift action to contain the spread of the virus with his first address on March 15, a mere 10 days after the first coronavirus case had been reported, the government had been criticized for its slow response on the economic side. The national lockdown has seen a drastic reduction in economic activity and the South African Reserve Bank (SARB) lowered its economic growth forecast for 2020 to a contraction of 8.2 per cent from its July forecast contraction of 7.3 per cent after a worse-than-expected unprecedented slump in the second quarter.
Despite the lower economic growth forecast and the fact that only some (71 per cent) of the 300 basis points cut in the repo rate has been passed onto consumers, as the average overdraft rate has fallen by 213 basis points between December and July, the Monetary Policy Committee (MPC) decided in a 3 to 2 vote to keep the repo rate steady.
South Africa seems to have passed the peak in the number of cases with the daily Covid-19 case total falling to 772 on September 15 from a peak of 13 944 on July 24. The seven-day average is also easing from a peak of 12 584 in the seven days ending July 19 to 1 583 in the seven days ending September 25.
The government announced a R500 billion stimulus package in April to help alleviate some of the pain, but the key part of that, namely the R200 billion bank loan guarantee fund, has allocated less than 10 per cent of that amount in the past four months. Other income support measures have had similar operational shortfalls, while private sector support initiatives have seen their funds already exhausted in April.
This lack of policy support is starting to show up in the economic data, which is why the decision to keep the repo rate steady disappointed many economists. The consensus forecast of economists was for real retail sales for instance to continue an easing in the decline from a peak of 49.9 per cent year-on-year (y/y) contraction in April, when level 5 lockdown was in operation and only essential goods could be purchased, to a 5 per cent y/y decline in July. Instead of easing however from June’s 7.2 per cent y/y drop, the July decrease was 9.0 per cent y/y, almost double the consensus forecast.
The Nedbank economics team said the recovery is likely to be protracted.
“Pent up demand as COVID-19 linked restrictions have loosened has aided retail activity somewhat, however the recovery of this sector is expected to be protracted as many consumers have lost their jobs or endured salary cuts. According to BankservAfrica’s Take-home Pay Index, the number of monthly salaries paid in June 2020 showed an annual decline of 20.7 per cent,” the team said.
“Specifically, a lack of market demand underpinned by debt burdened consumers who face financial uncertainty, evinced by the still depressed consumer confidence levels recently released by the Bureau for Economic Research, risks seeing more businesses close their doors permanently or downscale their workforce. The recovery in household consumption expenditure, which accounts for around 60 per cent of GDP, is likely to be slow and arduous, thus weighing on overall growth,” they added.
Professor Raymond Parsons of the North West University Business School said the decision by the MPC to leave the repo rate unchanged in present economic circumstances was disappointing.
“Although the MPC has reduced interest rates substantially so far this year, as a result of the prolonged Covid-19 lockdown the economic outlook is now even bleaker than previous forecasts made by the Treasury, the SARB and many private sector economists about economic prospects in 2020. Not to cut interest rates further now at a time when, to quote President Cyril Ramaphosa this week, ‘the economy and society have suffered a great devastation’ is therefore not a helpful or responsive judgement call,” he said.
The move to lockdown level 1 means that restrictions will be eased in the following areas:
The government will gradually ease restrictions on international travel for business and leisure from 1 October – subject to containment measures. Travellers will need to provide a negative coronavirus certificate or will be put into quarantine at their own cost and all travellers will be required to install the Coivd-19 alert level app.
The evening curfew will be cut to between midnight and 4am from the current 10pm to 4am.
Gatherings will be allowed as long as the number of people do not exceed 50 per cent of the normal capacity of a venue up to a maximum of 250 people for indoor gatherings and 500 people for outdoor gatherings.
Maximum capacity at funerals has been increased to 100 people from 50 people.
South Africa’s Business for Ending Lockdown (B4EL) Campaign has welcomed the country’s move to a level 1 lockdown but has raised concerns around ‘unnecessary and harmful restrictions’ which continue to impact sectors of the economy.
“While Lockdown Level 1 is less economically restrictive than Level 2, we believe that remaining restrictions continue to damage key sectors of the economy and leave many businesses unable to operate at their full potential or create desperately needed employment. This has negative knock-on effects on other sectors whether or not they are permitted to operate fully,” B4EL said.
Helmo Preuss in Langebaan, South Africa for The BRICS Post
