EDITORIAL: Global rates outlook signals need for SA to stick to its debt plans
Inflation is on the way and the direction of travel is towards investors pricing in higher interest rates
In a busy week of central bank meetings, SA policymakers aren’t among those to keep a close eye on.
Instead, they will have a week to digest what others say in the next few days. On Wednesday, markets were on edge before what some analysts described as one of the most important meetings of the US Federal Reserve open market committee.
Ahead of the meeting, yields on 10-year US treasury notes climbed the most since February 2020, before the coronavirus outbreak spread rapidly from China to close down economies worldwide. Inflation was the furthest thing from policymakers’ minds as they responded with unprecedented stimulus in the form of asset purchases and record-low interest rates.
In some ways, whether Fed chair Jerome Powell appeases markets on Wednesday night — as the Fed has done before whenever they threw a tantrum — will be irrelevant by the end of the week. The bigger picture is that the mood is changing as investors also bet on the rollout of vaccines to accelerate economic activity.
S&P Global has estimated that the world economy will get trillions of dollars of stimulus, not from central banks and governments, but from households in the developed world. That’s because workers, many of whom were sheltered from unemployment by generous furlough schemes, haven’t been able to spend due to lockdowns.
When they are able to go to non-essential shops, eat and drink out, and go on holiday, these excess savings will be deployed and will act as a powerful force for GDP growth, and faster inflation.
The numbers are eye watering. S&P highlighted research from Oxford Economics, a UK-based consultancy, showing that, during the pandemic, US households saved $1.6-trillion (R24-trillion) more than they would have done. That’s almost the same as President Joe Biden’s $1.9-trillion stimulus package.
S&P also cited data from HSBC showing that households in the eurozone and UK saved €470bn (R8.3-trillion) and £170bn (R3.5-trillion), respectively, more in 2020 than they did in 2019. On Wednesday evening, Fitch Ratings released a report showing that it has upgraded its global growth forecast for 2021 to 6.1% from 5.3%, crediting a bigger than expected fiscal stimulus in the US.
“Help is on the way,” Biden said as he promoted his stimulus plan. Inflation is also on the way, and regardless of what happens this week, the direction of travel is towards investors pricing in higher interest rates. That will not be good news for SA and other emerging markets, especially ones saddled with unsustainable debt loads.
Higher interest rates in developed markets reduce the yields appeal of holding SA bonds, which are perceived to be riskier, putting pressure on the rand and increasing the cost of imports and staple foods priced in dollars — as they are already doing in markets such as Brazil and Turkey, where central banks were also due to meet this week, and which serves to put upside pressure on interest rates.
When he delivers the monetary policy committee’s decision next Thursday, Reserve Bank governor Lesetja Kganyago definitely won’t be announcing an increase in rates, having cut the official rate in 2020 to the lowest in about half a century. It will be interesting to see if there is an upgrade to its 2021 and 2022 inflation forecasts, which at 4% and 4.5%, respectively, are well within the 3% to 6% target range.
But it would be extremely complacent to assume that things will stay thus. Already, companies such as Libstar and Astral have expressed concern about food inflation. Right now, depressed demand means they can’t pass on the costs to consumers.
The government’s borrowing costs are already rising, highlighting the need for it to live up to its promises on fiscal consolidation. Yields on the country’s 10-year bonds have quietly increased by almost a percentage point from their 2021 lows reached in early February and are near their highest since October 2020.
Based on the Bank’s 3.5% repo rate, SA’s inflation forecasts imply a negative real interest rate; it’s hard to see the country being able to sustain that as capital becomes scarce.
Given the explosion in the government’s borrowing needs, never mind the pleasant revenue surprise late in 2020, things are beginning to look scary. The government might be under pressure to spend from all sides, but what is needed is a steadfast commitment to its consolidation plans.
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