Remove political and policy uncertainty to grow SA economy, warns Kganyago

Reserve Bank governor Lesetja Kganyago warned that if SA doesn’t get rid of political uncertainty – which has already spooked domestic and international investors – the country runs the risks of limited economic growth prospects.

“There is a very clear signal that political uncertainty is impacting on the confidence of investors… If we fail to act to restore confidence, we are going to get into all sorts of trouble,” said Kganyago.

Kganyago issued the warning on Tuesday at Parliament’s Standing Committee on Finance on the role of the Reserve Bank and the bank’s economic growth forecasts.

SA’s economy officially entered a technical recession – with gross domestic product (GDP) contracting by 0.7% in the first quarter of 2017 from a 0.3% contraction in the previous quarter.

SA and Venezuela are the only sizable economies currently in a recession while other global economies are showing growth, said Kganyago.

“The contraction in the real GDP in the first quarter of 2017 was broad-based. Confidence and sentiment in economic indicators weakened further in the second quarter of 2017, possibly exaggerated somewhat by the political environment.”

Underscoring this is that consumer and business confidence fell in the second quarter of 2017, with business confidence falling to the worst level since the 2009 recession, according to an RMB/Bureau for Economic Research survey.

At the same time, consumer confidence sunk to its worst level since 1982, according to the FNB/Bureau for Economic Research, with consumers concerned about their future financial wellbeing.

The Reserve Bank has painted a bleak picture in its economic growth forecasts, as it expects SA’s economy to accelerate by 0.5% in 2017, 1.2% in 2018 and 1.5% in 2019. To maintain this level of growth, Kganyago said SA would need to “get rid of political and policy uncertainty”. “Why would you change the mining policy of a country every time there is a change of minister or government? This becomes a long-term problem.”

Kganyago was referring to SA’s mining industry, which has been paralysed by uncertainty, given the multiple amendments to the Mining Charter, which have yet to be challenged in court by industry bodies and mining companies.

The Department of Mineral Resources has described the charter as necessary to fast-track transformation in the sector while the industry calls it draconian.

Part of curtailing policy uncertainty, Kganyago argued, was challenging the remedial action of Public Protector Busisiwe Mkhwebane, contained in her Absa/Bankorp lifeboat report, that called for changing the Reserve Bank’s constitutional mandate of protecting the currency and keeping inflation in check.

The High Court in Pretoria reserved its judgment on Tuesday in the matter that pits the bank against the Public Protector to set aside the report’s remedial action.

“The independence of the Reserve Bank was applauded by rating agencies. Institutions that are working well seem to be under attack and that creates a significant problem,” said Kganyago.

Another problem limiting growth prospects is corruption. “If nothing gets done to address corruption, people will ask if there is still a rule of law in SA. Why doesn’t the full might of the law take its course?”

Kganyago said as long as economic growth remains below 3%, SA runs the risk of unemployment persisting, if historical evidence is anything to go by. SA’s unemployment rate rose to 27.7% for the first quarter of 2017, according to Stats SA.

The bright spot in the economy is that consumer price inflation is low and the near-term inflation outlook has markedly improved. The bank expects inflation to average 5.3% in 2017, 4.9% in 2018 and 5.2% in 2019.

An improved inflation outlook spurred the Reserve Bank to cut interest rates for the first time in five years, with the bank’s Monetary Policy Committee cutting the key repo rate by 25 basis points to 6.75%.

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