Despite the rand appreciating against the dollar, and the low electricity tariff increase granted to Eskom last year, the South Africa Reserve Bank kept the interest rates unchanged on Thursday.
The decision was mainly due to prospects of a credit rating downgrade, following the February budget, and an upsurge in oil prices, which featured as the two main risks in central bank monetary policy committee’s discussions.
The response of government to the intensifying fiscal challenges in the upcoming budget will be key to avoiding a downgrade reserve bank governor Lesetja Kganyago, said in a statement
“A further downgrade remains a risk… and will depend on government’s response to the deteriorating fiscal position and commitment to credible growth-enhancing policies,” said reserve bank governor Lesetja Kganyago, in a statement.
The pressures on the budget are now even more intense, he sad, as several state-owned enterprises are facing financial trouble.
“The challenge for government will be to find ways to finance the deficit in a growth-positive manner, and at the same time convey a credible commitment to structural reforms that can raise the potential growth of the economy,” he said.
Ratings agency S&P Global recently downgraded South Africa’s local currency rating to sub-investment grade. Its counterpart Moody’s has placed the country on review for a downgrade but indicated it will wait until the February budget to make its decision.
The prospect of a credit ratings downgrade by Moody’s continues to weigh on the longer-term outlook for the rand, he said. “Such an event would trigger the exclusion of South African government bonds from the World Government Bond Index, and is likely to precipitate significant capital outflows.”
The impact on the rand and on long-bond yields could be significant, but to the extent to which a universal downgrade is already priced in remains unclear said Kganyago.
He added that although the rand had appreciated and traded at R12,25 from a R14,47 low after announcement of the new ANC president Cyril Ramaphosa, it remained sensitive to the political environment.
The reserve bank’s inflation forecast has improved despite the increase seen in international oil prices, and it expected it to remain close to the mid-point of its 3% to 6% target range.
It warned however that international oil price developments could still pose a risk to the inflation outlook and further upward adjustment may be required in the future.
Meanwhile, it has revised its GDP forecast growth from 0,7% to 0,9% of 2017 and 1,4% and 1,6% for 2018 and 2019 respectively. This will likely to be positively adjusted should the recent political developments lead to a sustained boost for businesses and consumers.
Responding to the announcement Mamello Matikinca, chief economist at FNB said that reserve bank would likely wait until key risks had subsided before pronouncing on any rate moves.
Despite inflation being well contained and a meaningfully stronger currency, the Reserve Bank remained concerned about amongst other things, the pressures on the February budget and the possibility of a Moody’s downgrade.
“Should event risk dissipate, we see scope for a rate cut this year,” she said.