South Africa’s economic growth could pick up faster than forecast if the right structural reforms are implemented, the Reserve Bank said.
That means the economy could expand faster than the 2% for 2020 the central bank projected last month, a rate it hasn’t exceeded since 2013. While last year’s 1.3% advance beat predictions, this doesn’t equate to a good performance, the Reserve Bank said in its six-monthly Monetary Policy Review released on Tuesday in Pretoria.
Cyril Ramaphosa replacing Jacob Zuma as head of the ruling party and president boosted sentiment and the currency on hopes of structural reforms in the economy. While Ramaphosa has since changed the cabinet to remove some Zuma appointees who were seen as compromised, overhauled the board of the state power utility and pledged to root out corruption, confidence indexes show business and investors now want to start seeing real reforms.
“The pick-up in growth is not especially strong,” the central bank said. “This is mainly because, at this early stage, there is little clarity around the reform agenda and without specifics it is difficult to quantify growth responses.
Moody’s Investors Service last month removed the threat of a junk credit rating, citing the impact of political changes. Downgrade concerns could re-emerge if narrowing the nation’s budget deficit prove harder than the markets anticipate, the Reserve Bank said. That, and a current account deficit that may widen more than expected, could put pressure on the rand, the bank said.
The currency has gained 9% since the December election of Ramaphosa as the ANC’s leader, helping to lower price pressures. Inflation slowed to an almost three-year low of 4% in February. The central bank forecast it will remain in the target band of 3-6% until at least the end of 2020, stabilising at just more than 5%.
While current inflation is unusually low, recent developments in services prices and expectations “provide some evidence that positive price shocks, if properly managed, can engender permanently lower inflation”, the central bank said. The statistics agency will release data for March on 18 April.
The Reserve Bank assumes electricity prices will rise by 7.3% in 2019 and 8% in 2020. Its approach is to wait for an announcement from the energy regulator before adjusting inflation projections, governor Lesetja Kganyago told a forum on the review.
“We hope sanity will prevail in terms of the increases granted,” he said.
The Monetary Policy Committee cut its benchmark repurchase rate to 6.5% last month. The possibility of higher global interest rates, and their effect on inflation through the exchange rate, mean the MPC is “not committing to a rate-cutting cycle”. — Reported by Odwa Mjo and Ntando Thukwana, (c) 2018 Bloomberg LP