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South Africa: Markets Take ANC Left Turn in Their Stride
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Business Day (Johannesburg)
13 May 2008
Posted to the web 13 May 2008
Mariam Isa
Johannesburg
FINANCIAL markets are giving economic policy changes proposed by the new leadership of the African National Congress (ANC) the benefit of the doubt, despite growing signs of a significant shift to the left.
Part of the reason is widespread recognition that it is time for change, given that the policies which spurred growth of about 5% in the past few years will not have the same effect in the existing global or domestic environment.
Another reason for market composure is that there is still a large degree of uncertainty over what exactly will change, and over what sort of time frame.
Since he was elected ANC president last December, Jacob Zuma has gone out of this way to reassure foreign investors that the policy mainstays that have won SA credibility in global markets, will remain in place.
ETM economist Russel Lamberti said: "Markets have taken the view that it's a wait-and-see game as things run their course. With Zuma courting investors and bankers overseas and speaking in terms of policy continuity it's difficult to turn too pessimistic too quickly."
But the latest proposals at the weekend from the leftist allies of the ANC have made clear that one of those policy cornerstones -- inflation targeting -- is definitely up for review.
Abandoning this policy, even though it does not seem to be working at the moment, would spook SA's financial markets.
Yet there is consensus that tinkering with the framework may not spark a sell-off of the rand or other South African assets, as inflation is a global problem that is being creatively addressed by many central banks.
"If the change of the target was small, or if a different measure of inflation was targeted, it would be easy to understand and accept," said Absa Capital economist Jeff Gable. "But a large change, or the elimination of the target would have a very significant impact on markets."
The country's main inflation gauge has breached its official 3%-6% target range for a year, reaching a five-year peak of 10,1% in March.
The soaring global cost of food, fuel and other commodities makes a near-term return to the target look very unlikely and could prompt the Bank to raise interest rates even further.
That would curb slowing economic growth, and be anathema to the Congress of South African Trade Unions and the South African Communist Party, the ANC's allies.
But the Reserve Bank is not alone with its monetary policy dilemma. In Turkey, another key emerging market, the central bank is in a similar position and has dealt with it by saying it will reconsider the balance between growth and inflation, while not abandoning inflation targeting over the long term.
At the same time, central banks in some of the world's most developed markets -- the US, Europe and Britain -- have either cut interest rates or held them steady in the face of rising inflation, to weather the fallout from a global credit crunch.
"Change is not necessarily bad," said Brait economist Colen Garrow. "The inflation target has to be fine-tuned -- the system is dynamic and what will change is up for debate. There will be greater accent on growth and job creation -- and that's not a bad thing."
The tripartite alliance members have also said they want to remove value-added tax on basic foods, which would help SA's poor and help to mute inflation.
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This is unlikely to upset markets but they will be more sensitive to rhetoric from the alliance as SA heads towards next year's general election.
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