South African Economy: Weekly Review and Outlook

SOUTH AFRICA - In Brief 19 Jul 2013 by Iraj Abedian

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The South African Reserve Bank’s decision to leave the repo rate unchanged yesterday highlights the fact that monetary policy in South Africa has become largely dormant. With economic growth forecasts revised downwards – due to electricity supply constraints as well as other domestic and global factors – and inflationary pressures on the upside – mainly due to a weak rand – we should expect a protracted period of monetary policy stagnation. Given this backdrop, we expect the repo rate to remain at the current level well into the first half of 2014. Furthermore, low and declining gross domestic product growth forecasts also imply that tax revenues will be under strain going forward. Consequently, the South African government will be required to increase borrowing in order to finance its socioeconomic programs. Income tax increases are also increasingly a real possibility. In this regard, Moody’s maintenance of South Africa’s investment grade credit ratings is a welcome development albeit neutral. The fact that the outlook on South Africa’s credit ratings remains negative is a quiet but serious concern. Furthermore, the extent to which the South African government will be able to maintain fiscal discipline remains a key concern ahead of next year’s May general elections. Meanwhile, industrial relations remain volatile and characterized by labor union militancy and rivalry. In general, the weaker the labor unions get, the more militant they are likely to get. This could complicate the South African government’s efforts to restore calm and stability in the macroeconomic sphere. The key challenge for the government is to lure the much-needed investment, a key issue delibera...