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South Africa: Optimistic Outlook With Rates, Inflation Easing

Mariam Isa

5 January 2009

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Johannesburg — FALLING interest rates, inflation and petrol prices will bring relief to the embattled economy this year, but conditions for business and consumers are set to remain tough.

Global markets are being buoyed by optimism that official rescue packages will pull the world's biggest developed economies out of recession, which would be good news for emerging markets such as SA.

But analysts say it remains to be seen whether the upbeat mood will hold over the next few weeks as traders and investors return from year-end holidays.

SA faces its own challenges ahead of this year's general election, which may put prudent economic policies to the test as slowing growth forces companies to shed jobs and scale back investment plans.

"The business environment will remain tough in 2009, especially in the first half of the year," said Raymond Parsons, economic consultant for Business Unity SA.

"Markets tend to turn before economies, and neither the global nor the SA economy is out of the woods yet."

SA is in a good position to weather the global downturn as it does not have to pump money into its banking sector, which has been shielded from the global credit crunch by capital controls and sound regulation.

But prices for key mineral exports have plunged on waning global demand while consumer spending contracted for the first time in a decade.

Local recession still looks unlikely, but economic growth probably slowed to about 3% last year, from an average of 5% in each of the previous four years. It is expected to moderate further to nearly 2% this year.

"It would be premature to say that the worst is behind us," said Citigroup economist Jean-Francois Mercier. "There are still many uncertainties, starting with the global environment."

Consumers will benefit from plunging petrol prices and interest rate cuts this year, after the Reserve Bank kicked off an easing cycle with a half-percentage point reduction last month.

But Mercier said market expectations of rates falling another 3,5 percentage points by the middle of this year were unrealistic. To get there, the Bank would have to slash rates by more than 100 basis points at each of its three scheduled meetings and in between.

That would smack of panic, which would be unwarranted in a financial system where lending has not stalled and banks are not on the brink of collapse. Realistically, interest rates should fall by another three percentage points by the time the easing cycle ends next year.

That will put more money in the pockets of consumers, who drive two-thirds of the economy. A record 18% cut in petrol prices this week will also boost sentiment in households and businesses, although it will be months before the effect of lower lending rates are felt.

Slowing private and public sector investment is also a concern for SA, as this was expected to take up the slack from waning consumer demand.

Parsons, who is part of the National Economic Development and Labour Council, said much would depend on a fiscal stimulus package due in the budget next month. Business would also "closely scrutinise" the election manifesto which the African National Congress (ANC) will release at the end of this week, he told Business Day.

"That will be a signpost on what economic direction the political alliance has decided," he said, referring to the ANC and its left wing allies, the Congress of South African Trade Unions (Cosatu) and the South African Communist Party.

There is heavy pressure for more populist policies to counter the effect of slowing growth and to address political dissent within the ANC's ranks since the creation of breakaway party the Congress of the People.

Neren Rau, CEO of the South African Chamber of Commerce and Industry, said it would be bad news for the economy if recent calls from Cosatu to alter labour laws to mitigate job losses were heeded.

"That would kill business. Instead of losing some staff through retrenchments all staff would be lost through business closures," he said.

The next few weeks would be "very telling" in terms of which way the economy is headed. But uncertainty would persist until the second half when policy changes are clear, lower interest rates take effect, and the global backdrop had settled.

"In the first six months we won't see anything positive and the policy uncertainty surrounding the forthcoming election doesn't help sustain a stable business environment," Rau said.

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