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NOMPU SIZIBA: In a surprise move the Reserve Bank cut interest rates today, January 16 2020. The repo rate will go down by 25 basis points to 6.25%, effective from Friday January 17, tomorrow. That means that the prime rate, the rate commercial banks charge their customers, will go down to 9.75%. Theoretically this should be good for consumers and businesses, as they’ll be able to borrow funds at a lower rate, hopefully to invest in productive investments like property, business and the like and, ideally, not on consumption. Unsurprisingly, the bank downwardly revised the growth expectation for 2019 as a whole, as well as for 2020.
Well, to unpack the latest decision for us I’m joined in the studio by Annabel Bishop, who is chief economist at Investec. Thanks very much, Annabel, for joining us.
ANNABEL BISHOP: Pleasure.
NOMPU SIZIBA: Before the Monetary Policy Committee’s announcement, you were quoted as saying that the rate cut was unlikely in the absence of structural reforms, and many of your peers were of the same view. But the bank clearly surprised us. When you look into the detail of the statement, what had changed to make them move, do you think?
ANNABEL BISHOP: Yes, what a lovely surprise! I think everyone was quite shocked – even people who were hoping for a cut. It’s probably the fact that the growth has just become so dire in South Africa. That’s probably what changed their view. If you have a look at where inflation is sitting at 3% and 3.6%, and GDP last year – well the Reserve Bank looks at 0.4%, maybe even 0.2% – there is not much between the two of them; and very much because of load shedding. I think the bottom line is confidence was still very depressed. It’s been depressed for a long time – not just business, but consumer confidence as well. It looks like the Reserve Bank is becoming more aware of economic growth as part of its policy-setting. Sure, the 3.5% inflation doesn’t matter, because they always say, apparently, that they look 18 months out, and of course this year inflation is about 4.5% and next year closer to 5%.
But they did some downward revisions in inflation, so I think is a very welcome turnaround in the Reserve Bank’s attitude. Why we said that it’s probably unlikely we are going to see cuts unless we see some structural reforms, is because that’s what they’ve always told us in the past. And now suddenly we have a new message.
NOMPU SIZIBA: So how much of an impact can we expect the latest downward interest-rate adjustment to have on consumers, especially as we hear that on average people’s debt levels did tick up during last year?
ANNABEL BISHOP: Well, every little bit helps. But the reality is 0.25% is not very much in the greater scheme of things. It helps when people use that saving – if you paid X amount each month and now you are paying slightly less, if you continue what you were paying before, it helps to reduce your debt quicker. That’s always helpful, because it’s cumulative, because it really adds up in the longer term it does make a material difference.
Perhaps, from a consumer confidence point of view, you might have a little bit of relaxation there, with consumers hoping for better times, particularly as the Reserve Bank signalled the possibility of further interest-rate cuts. But obviously it very much depends on the Moody’s credit rating decision and whether they deem our budget to be sufficient in terms of expenditure cuts.
That will tell us what’s likely to happen the rest of this year. It’s unlikely we’ll get an interest-rate cut in March anyway, because the Reserve Bank doesn’t tend to cut at every successive meeting or even hike at every successive meeting. But of course, let’s see what happens with Moody’s. Maybe it brings up the possibility of May or July if we don’t see any major negatives on the global front. The good news is the signing of the US-China trade deal.
NOMPU SIZIBA: Absolutely. In terms of their growth outlook, the bank downwardly adjusted 2019 growth to 0.4% as opposed to 0.5% before. But, quite interestingly, they’ve downwardly revised growth for this year, 2020, to 1.2%, which is still above the World Bank’s estimate of 0.9%. They still see us as a sub-1% growth economy, but the Reserve Bank does not. Do you think that’s optimism – a little bit of patriotic optimism playing a role there?
ANNABEL BISHOP: The World Bank has us at 0.9%. We put our 0.8 as well, so it’s very close to the World Bank. Perhaps the World and ourselves are very worried about what happens going forward this year and next year with Eskom. Eskom has signalled that it’s going to remain constrained from an electricity supply point of view, and that we will, therefore, have further load shedding, both this year and next year. And of course, the reality is our power stations in South Africa are aged, very old, and they are going to become less productive, not more productive. They are running beyond the age limit of what they should have actually run in many cases.
So the reality is we might not see that growth rate of above 1% this year – and that’s the real risk for us. Yes, the global economy is now likely to see 0.3% more growth that it was expected to see before this first phase trade deal signing off between the United States and China. But of course, looking forward for ourselves, the best of global growth does assist us, but it would really help us if we didn’t cut off our productive capacity with electricity supply.
NOMPU SIZIBA: But now you are reminding me that electricity is a big factor – not just about its supply but its cost. And of course, if Eskom is to win its recent urgent application that it had yesterday in court, asking Nersa to allow it to have the R60 billion that was deducted, that means that we are going to be paying increases of 16% come the end of March, as opposed to 8%. Of course that will then impact on inflation.
ANNABEL BISHOP: Absolutely. And maybe the Reserve Bank will squeeze in an interest-rate cut before that. [Chuckles.] The reality is we have incredibly low electricity costs on a global comparison. It’s so low, indeed, that obviously it’s part of the reason why we are in this financial mess, but not the whole reason.
We’ve heard about state capture, we’ve heard about all the problems will the bills, and of course many other issues. But the big problem for us is that the world is migrating to renewable energy, as we well know in the face of climate change, with the terrible things in Australia, all of these issues. We are a big coal-fired electricity producing nation, so the big concern for us moving into the renewable energy space is it does cost a bit more, and we need to get up to global costs and obviously what’s happening in terms of global issues of climate change.
Not moving in that direction is very problematic for us. We are already seeing the climate change impact in the Cape in terms of drought. So we probably are going to have high electricity costs. Sadly, people see it as having to pay for corruption. They say the corruption happened at Eskom, and now we are paying the cost through higher electricity prices. That’s the real worry. The moneys that have leached out of the system could have been used so productively. We could have a much faster economic growth rate now. So yes, I think higher electricity costs are on the cards.
NOMPU SIZIBA: The question some may be asking is: might the Reserve Bank possibly have to reverse today’s decision if the rand flares up – implying inflation in the event that Moody’s does the worst, and downgrades the country’s sovereign credit rating to junk.
ANNABEL BISHOP: If the rand really does flare up, with substantial depreciation, moving to R16/17 to the US dollar, and it persists, and if we get higher oil prices and we start getting those big over-R1 increases in the petrol price, and that does push through higher inflation, it rolls us forward into a higher base going into next year, the year they are targeting. That type of scenario probably would see interest-rate hikes. The Reserve Bank themselves a couple of years ago estimated that a downgrade from Moody’s could see even a 100 basis point elevation in money-market interest rates, with the repo obviously tending to follow what occurs to the money market rate. This is a big concern for us.
Of course, that also brings in financial market volatility. When things are grave, you get a lot more volatility in the indicators. That doesn’t just mean they move around a lot more; it also means bigger swings. R17/dollar would probably not be the worst ever – we might go even R18, R19/dollar and well into the twenties for the pound. These are the problems you face in terms of credit rating downgrades.
NOMPU SIZIBA: Of course, monetary policy is not the only policy game in town, and many have been advocating those structural reforms – you included. Just remind the listeners of what some of those reforms should be which you feel would put South African in a better position to win economically.
ANNABEL BISHOP: Well, a lot of them have been very well encapsulated in National Treasury’s growth plan, and the sooner we implement that the better. The war cry for South Africa is implement, implement, implement. These reform are not just fixing the productive capacity of electricity, and indeed water as well – something we haven’t talked about, water scarcity in South Africa.
They obviously look at other areas, bringing in fast-spectrum for our data usage, which we’ve seen as really good one. And changes happening to the travel visas. I think recently the president said allowing skilled workers into the country, that’s something they are going to increase. All of these are part of structural changes and reforms. If you have a look at shopping centres, for example, large anchor tenants getting very preferential rates, as they do, to draw customers to the shopping centres. But obviously smaller businesses want to get a foot in there as well. There are so many different reforms mentioned in that report.
Of course, what you don’t want to do is change things like the independence of the Reserve Bank. Sure, the nationalisation debate is different from independence. But a lot of issues and reforms in South Africa that have been lagging and haven’t occurred need to occur. One big one is of course the minerals and petroleum bill. We need to attract investment to extract our minerals and petroleum, not put such a high free carry, such high problems.
But the biggest reform for me is reducing red tape, regulations in South Africa. We’ve been advised to cut about at least 25%. We cannot take another year where our ease of doing business just deteriorates further – not because we didn’t make things more difficult, but because we did nothing to make them easier, compared to other countries who did a lot more to make it easier.
NOMPU SIZIBA: And the very last thing. What bells ring in your head when you see the finance minister tweeting about needing to speed up reform now, and stuff like that? He could talk to his colleagues behind closed doors. Where does that come from, do you think, and what does that make you think as an economist?
ANNABEL BISHOP: Partly I suppose, having been used to him as a Reserve Bank governor, he does speak his mind, and we are used to that. A lot of people are not used to him speaking his mind. I think he’s been told recently by the ANC not to! But the bottom line, he is not wrong either. The thing about reforms if you don’t make structural changes today and reap very strong economic growth tomorrow, as you obviously know. Structural reform takes years to come through.
An example is we were getting really good private-sector fixed-investment growth last year. There is not an investment strike. People say the private sector is on an investment strike – it’s not true. We had 16% growth in the second quarter, 11% in the third quarter and positive growth in the first quarter. So that’s something that’s going to feed through into stronger growth this year and next year. That’s the lag that it takes. So structural reforms will then start to boost private-sector fixed investment further, which in turn will eventually have a longer-term impact on growth. It can take two, three years for it to feed through. That’s is why we need to be quick about it.
NOMPU SIZIBA: Annabel, lovely having you in the studio. Thank you.