EDITORIAL: Fed rate cut puts focus on Bank, but long-term solution lies with government
State needs to take urgent steps to unlock growth and boost SA’s economy rather than look to a sugar rush of lower interest rates
In the end, the performance of SA’s economy was even worse than the most pessimistic analysts had predicted.
After data showed GDP contracted 0.6% in the third quarter — even that proved optimistic as the revised number came in at minus 0.8% — and Eskom followed up with fresh power cuts in the fourth quarter, it was almost a foregone conclusion that Cyril Ramaphosa would be handed the second recession of his presidency.
Regarding comparisons of economic performance and presidential terms, it’s beginning to look very bad for Ramaphosa.
After winning the leadership of the ANC in December 2017, he took over as president of the country in February 2018. That quarter he was greeted by a contraction of 3.2% in GDP, which has since averaged minus 0.2%.
While we have been an underperformer for a while, what arrived on Tuesday was even grimmer than what economists and policymakers had expected.
The 1.4% contraction with which SA closed out 2019 meant that at 0.2%, full-year GDP growth was just half what the SA Reserve Bank was predicting in January. That itself was a far cry from the 1.9% it was forecasting at the end of 2018.
Among 12 economists polled by Bloomberg, the most pessimistic expected a 0.6% drop in GDP for the last quarter of 2019. Curiously, there were two analysts who predicted a positive number, with one looking for a rather optimistic 2% rise.
The reaction in the currency market was swift, with the rand, already down at near four-year lows in the wake of the flight to safe havens caused by the coronavirus outbreak, dropping as much as 1.6% against the dollar in the afternoon. It only recovered those gains after the US Federal Reserve cut its main interest rates, supporting rand-denominated assets.
Bonds, which benefit from lower interest rates, had already moved in the opposite direction as some traders started to price in the possibility of the Bank cutting interest rates, perhaps as early as its next meeting in two weeks. That rally picked up steam after the Fed move.
Expecting a cut from SA's central bank is not an illogical response, though it’s hard to see what lasting difference a rate cut will make to a growth crisis that’s caused by supply-side constraints such as the lack of reliable electricity supply and policies that restrain competition in key sectors of the economy.
With others set to follow the Fed’s cut, there is possibly room for the Bank to do likewise without risking a drop in the rand.
While such a move could give the economy a “sugar rush” and support consumer spending that is showing some resilience, in the longer term this won’t be a sufficient substitute for reforms.
It’s not hard to think of the reasons why the GDP number is a disaster for SA. The lack of growth means companies will continue to shy away from investing and the numbers of unemployed will keep growing. The 10% drop in gross fixed capital formation (GFCF) is a reflection of other data that has shown a lack of business confidence, and that won’t be fixed by a cut in the repo rate of 25 or 50 basis points.
An immediate concern is what the lack of economic growth will do to the country’s already fragile fiscal position, with Moody’s Investors Service’s next review due later in March. A shrinking economy means that debt as a percentage of GDP moves in the opposite direction as revenue collection continues to disappoint.
Some will argue that this data makes a downgrading by Moody’s into subinvestment grade inevitable and it’s hard to argue against that.
Noises for deep interest rate cuts and for the government to open the fiscal taps despite its already weak fiscal position will probably grow louder.
Unfortunately, it’s not that easy: if borrowing and slashing interest rates was all that it took to create prosperity, there wouldn’t be a poor country on the planet.
These numbers emphasise the need for our government to stop dilly-dallying and take the tough decisions needed to get SA going. For some ideas, it should revisit its own growth strategy released by the Treasury in 2019 and get on with the implementation.