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Repo rate remains unchanged

Old Mutual economist Johan Els explains his optimistic view on the possible effects of the riots on investor sentiment, interest rates, inflation and growth.

FIFI PETERS: We are going back to that bigger money story of the day – earlier today when the Monetary Policy Committee meeting decided to leave the repo rate unchanged at 3.5% – the governor of the Reserve Bank Lesetja Kganyago also spoke for the first time about the potential effects of the riots on the economy. If you missed it, let’s listen in to what he had to say.

LESETJA KGANYAGO: Recent unrest and economic damage could have lasting effects on investor confidence and job creation. We estimate the unrest to have fully negated the better growth results from the first quarter, resulting in an unchanged estimate of 4.2% for growth in 2021. The direct and indirect cost of recent events will likely further slow South Africa’s economic recovery.

FIFI PETERS: Let’s discuss that further with Johann Els, economist at Old Mutual. Johann, good evening. You are, sir, one of the most optimistic economists I know in South Africa presently about the growth forecast for the economy this year. Having heard what the governor has just said, has that optimism being taken down a notch, or are you still the most optimistic economist I know in South Africa?

JOHANN ELS: I don’t know about that. Good evening. I still expect fairly strong growth this year adjusted back from 5.5 to 5%, which I suppose is still one of the most optimistic forecasts for this year.

And yes, there will be an impact on the economy from what has happened, from the direct impact but also indirectly through I suppose confidence that would have suffered a hit. But as you know, there will be rebuilding, there’ll be restocking – and maybe very little overall impact in terms of the medium-term outlook.

So this year maybe some short-term impact, but all the positives that you and I have talked about before – the structural issues in South Africa, the independent judiciary, the independent central bank, conservative policymaking, very sophisticated financial systems, and I can go on – all those are still in place and haven’t gone away. Investors will look through the noise and back to the positives.

So I still believe that the economy is on a recovery path, especially in the medium term, with better growth than what we’ve become used to over the last five or six years.

FIFI PETERS: What also hasn’t gone away, Johann, is load shedding. On a hectically cold day for the country we are experiencing yet more load shedding that we have unfortunately have had to become accustomed to. This is by most thoughts and forecasts not good for growth.

JOHANN ELS: Absolutely correct. Again, though, we are moving in the right direction. If we look forward, then medium-term growth should be better because the Eskom maintenance issue has been addressed – although barely maintaining, hopefully, its plants. So we are on a positive trajectory going forward. It’s not as if we haven’t started with maintenance.

The same applies when people tell me that, yes, our vaccination pace is very slow, it started so long after other countries, and we are running [around] – yes, that’s all true.

But if we look forward, the rate of change is improving. It’s not as if we haven’t started at all. So again, trying to look through the noise and look towards the future, especially in terms of the medium-term growth outlook, at least we’re not heading backwards, we’re heading towards an improvement in all of those.

FIFI PETERS: What also could be moving forward, according to the Reserve Bank, is the interest rate. The governor did guide that as from the fourth quarter this year – September, October or so – we could start seeing interest rates going up and then they would go up and up until about December next year. Is this in line with your forecast – and what is this dependent on, in your view?

JOHANN ELS: At some point the Reserve Bank will have to start normalising interest rates. But just a note of caution; that was the forecast of the quarterly projection model, the Reserve Bank’s econometric model that suggests rates should start going up from the fourth quarter of this year – by 25 basis points, as you say, throughout to the end of next year.

But the Reserve Bank also warned that it is not always following exactly what that model predicts. Roughly in line with that I expect rates to also start going up, but I expect that to happen only from early next year onwards. But of course the Reserve Bank warns us not only is it following that exactly, but it’s data-dependent.

But to answer your question, from next year onwards I expect it to be a slow and moderate upward path, because inflation is low and inflation expectations – and this is important – are anchored around the midpoint of the target range.

FIFI PETERS: Johann, how worried are you about our rising or very high borrowing costs which the governor also expressed his concern around. It seems like the 10-year bond in our market is now trading back at those pre-pandemic highs, when we did see the whole activity and volatility in the markets around March. How worried are you about these borrowing costs, and what does this mean for government’s budget and its plans to try and bring down borrowing costs?

JOHANN ELS: Yes, we need to bring those down of course, but to do that isn’t an overnight process. We need to continue to reform the economy so that we can get higher economic growth, because in turn higher economic growth will of course assist the state in keeping its budget deficit under control, assist it in terms of getting a stabilisation in the debt-to-GDP ratio and even get that ratio down. Those are the factors behind that borrowing cost, those bond yields that are high – to get the lowest yield and higher economic growth and continue to work hard on the fiscal space to get the deficit and the debt ratios under control.

But we’ve come some way. The risk alone has been reduced quite a bit since late last year, after the October Medium-Term Budget Policy Statement. We had a great February budget, with the growth uplifting nominal GDP thanks to commodity prices and so on. All of that’s helping us, and recent policy measures, policy reform, will continue to assist in getting that higher economic growth.

But you’re right. We need to get that, and we need to keep on working on that because that remains a risk.

FIFI PETERS: What stood out for me is what the governor said – that before the riots the MPC had actually planned to revise its growth forecasts for South Africa higher than the 4.2% that it kept it at, just really speaking to the impact that the riots had had on their thinking.

What’s stood out for you, Johann, from today’s MPC?

JOHANN ELS: Absolutely, that stood out. I would have loved to know what number they had in mind before keeping that unchanged. And what stood out for me is actually keeping unchanged the growth rates for next year. They are at 2.3% and 2.4% respectively. This is exactly where my numbers are. So, even though the committee worried is about the impact of the unrest on investor sentiment, that actually means that the members also think, as I believe and we talked about earlier, that the fundamentals are still strong enough and that this was really a once-off and we can keep on going forward. The medium-term growth hasn’t been impacted by these events yet.

FIFI PETERS: I hope you’re right, I honestly do, as do all those South Africans who don’t have jobs, all those South Africans who are living in this poverty line, and all those South Africans who are looking for a brighter future.

But I will leave it there for now, Johann. Thanks so much for your time, as always. Johann Els, economist at Old Mutual.

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