South Africa’s Economic Future Remains Uncertain Ahead Of Two Key Economic Decisions
By Musa Mdunge
The SARB and the Moody's are expected to make decisions that may alter South Africa economic path.
The country faces mounting challenges as it battle weak economic growth and exposure to the negative impact of external factors such as the Sino-US trade conflict, that have all impacted the Rand's performance.
The bottom-line is that South African consumers and the Southern African region at large will be worst impacted by South Africa's continued economic woes.
Eyes are on two big economic events this week in South Africa, with the South African Reserve Bank’s Monetary Policy Committee (MPC) set to meet over rates, followed by a review from rating agency Moody’s on Friday.
The MPC will meet on 26 to 28 March, with expectations that repo and prime lending rates will be held at 6.75% and 10.25%, respectively. This comes after the Federal Reserve of America decided to also hold rates unchanged in the face of fears that the global economy is on a slowdown, including uncertainty over other events such as the Sino-China trade conflict and uncertainty around Brexit.
As a result, it is expected that Africa’s most advanced economy will also move in kind, as South Africa faces its own economic woes. Chief among these challenges is the recent Eskom load shedding drama, that is expected to shave off 0.3% off first-quarter economic growth. In fact, some economists argue that South Africa is set to enter a technical recession by the end of the second quarter, as both global and local demand remain weak, coupled with the impact of load shedding on productivity.
The SARB must balance its objective of maintaining the integrity of the Rand and ensuring that monetary policy aides’ economic growth. However, this is a tough feat, as the Rand continues to find itself at the back-foot against the US Dollar, trading at ZAR14.50/USD1.00. This came as Eskom challenges have weakened investor sentiment. Furthermore, weaker global growth and a 5% loss in the Turkish Lira, saw all emerging market currencies depreciate against all major currencies.
While a weakened Rand places inflationary pressure, as the higher oil prices, coupled by the weaker Rand, may push the cost of goods up. As a result, a rate hike would further squeeze an already pressed consumer base, that has had to contend with paying more at the petrol pumps. For now, we can expect rates to remain unchanged until post the national elections in May.
Moreover, the MPC’s interest rate predicament is further fueled by uncertainty over how credit rating agency, Moody is likely to rule in determining whether South Africa will keep its investment-grade rating or will lose it and thus lead to the eventual reality of having all three major rating agencies rate our foreign held debt at junk status.
The consequence of junk status would make it harder for the South African government to borrow from the financial markets through the selling of government bonds, by increasing the cost of borrowing.
Moreover, South Africa’s sovereign risk would increase, leading to further weakened investment sentiment. The results of which would see the Rand depreciate against all major currencies and the cost of crucial imports such as machinery and oil go up. You can just imagine the impact on inflation and how consumers will feel the pinch!
Now, South Africa is not the only country that will be impacted by the Moody’s decision and the decision taken by the SARB but other Southern African states that are part of the Rand union and whose economies are integrated with South Africa. South Africa’s economic challenges have cast a shadow on the region, as low South African demand for goods has impacted economic growth in countries such as Namibia, Zimbabwe, Lesotho, and Swaziland.
Moreover, countries that have pegged their local currencies to the Rand are set to continue their exposure to the volatility of the Rand and its threat to these countries’ terms of trade and currency risk.
The question than arises, shouldn’t these countries drop the Rand and diversify their trade relations in order to reduce their exposure to South Africa’s economic drama?