S. Africa cenbank gov says shocks to inflation, growth cause uncertainty

Recent shocks to growth and inflation in South Africa have created much uncertainty, the central bank governor said on Wednesday, adding he could not predict the outcome of a rating review due on Friday.

South Africa’s economy has been hit by a ravaging drought and its economic prospects do not look promising, South African Reserve Bank head Lesetja Kganyago said ahead of Standard and Poor’s release of its ratings decision on Friday.

S&P’s has already warned that dismal growth and policy upheavals are a concern for the ratings agency, while analysts fear the economy could be downgraded to “junk” as major sectors of the economy slipped into sharp decline.

The governor, speaking at an agricultural business meeting near Cape Town, said it was not clear whether this would be enough to avoid a credit rating downgrade from S&P.

“We told them the South African credit story. We basically told them the South African credit metrics had improved since the last time they had issued their statement,” Kganyago told Reuters when asked about his discussions with S&P.

Hanns Spangenberg, senior economist at NKC African Economics, said the low growth rate was a concern for S&P.

“If I was a betting man I would lean towards them downgrading us, simply because I think a downgrade in 2016 is going to happen, either by S&P and Fitch, and S&P has historically been the more negative of the two,” he said.

The Treasury says Fitch will release its decision on June 8.

A severe drought has helped trigger higher inflation while battering consumer and business confidence, which hovers around quarter-century lows, forcing the central bank to raise interest rates despite the lack of growth.

“The South African Reserve Bank is certain that an environment of consistently low and stable inflation is the best contribution it can make to a balanced and sustainable growth (outlook),” Kganyago said.

Recent shocks to growth and inflation had created “a great deal of uncertainty”, he said, adding that “in this context, at least, you can be certain that the South African Reserve Bank is committed to containing inflation.”

Kganyago said the current monetary policy tightening cycle was one of the most gradual on record.

The South African Reserve Bank has gradually raised interest rates by a cumulative 200 basis points since January 2014 to fight price pressures while at the same time protecting the ailing economy that it expects to grow by 0.6 percent this year.

The bank left the benchmark repo rate unchanged at 7 percent this month. Inflation stood at 6.2 percent in April.

Inflation is expected to persist above the top end of a 3-6 percent target band until late next year, Kganyago said.

South Africa’s economic performance is in focus before local government elections in August, expected to be a tough test for the ruling African National Congress blamed for unemployment, which rose to its highest ever in the first quarter.

–

Credit: CNBC Africa