South Africa’s central bank says rising fuel and electricity prices posed a domestic risk to the inflation outlook and impact on its 2019 growth.
The apex bank governor, Lesetja Kganyago, gave the remarks on Wednesday after the latest fourth-quarter data showed an annualised growth of 0.8 per cent.
Besides, Kganyago said the impact of the volatile Rand currency and tightening global financial conditions were also being monitored for possible inflationary impacts.
The governor, however, maintained that he expected the economy to grow by 1.7 per cent this year and two per cent in 2020.
The South African government is forecast to be hit by a tax revenue shortfall of almost R43 billion for the tax year ending next month, Finance Minister Tito Mboweni indicated in his budget speech on Wednesday.
There were pronounced risks to the local economic outlook with the main risk of concern being power utility Eskom and its financial woes, the 2019 budget review report indicated.
The report indicated that government tax revenue for the 2019 fiscal year would come in at R43 billion under the target set at the 2018 budget speech.
“There are pronounced risks to the economic outlook. The main risk of concern is Eskom. Failure to fully implement the reconfiguration of Eskom could lead to a negative market reaction that would prompt capital outlflows, with greater pressure on the rand. It would also perpetuate weak investor confidence and reduce economic growth,” the report said.
In the worst case scenario, National Treasury is forecasting negative 1% growth this year while its best-case scenario is just over 2% growth.
Mboweni cut the National Treasury’s forecast for economic growth for this year from 1.7% to 1.5% due to “fragile recovery in employment and investment, and a less supportive global trade environment”.
By 2021, the National Treasury’s best-case scenario is growth of 3% and its worst-case scenario is 1%.
“The economic and revenue outlook has deteriorated since the October 2018 medium-term budgetary policy statement and funding pressures from state-owned companies have increased,” the medium-term budgetary policy statement said.
“Several other state-owned companies are also in financial distress and have requested government support. As a result, the contingency reserve has been revised up by R6 billion in 2019/20 and any funding provided will be offset by the sale of non-core assets. Additional reforms to strengthen the governance, finances and operations of state-owned companies will be announced in the months ahead,” the 2019 budget review report said.
State companies that are looking for bailouts include the South African Broadcasting Corporation (SABC) and Denel.
“Several state-owned companies face negative cash flows and are financing operations from debt, which has become increasingly difficult to raise. This moves them perilously close to default unless they receive some form of recapitalisation.”
In another worrying sign, debt owed to municipalities is increasing. At the end of March, debt owed to municipalities is forecast to climb to almost R159 billion from almost R99 billion at the end of March 2015.
Of debts owed by municipalities that are more than 90 days in arrears, Eskom is the major creditor – it is owed R12.8 billion – followed by water boards with R6.4 billion.
“From July 2018 to June 2019 municipal financial year, 113 municipal councils adopted unfunded budgets, up from 83 the prior year.”
The government is expecting to issue $2 billion (about R28 billion) in debt by the end of the 2019 fiscal year.
Over the next three years, the government will raise an additional $8 billion (about R114 billion) in global capital markets.
“This year’s budget underlines the National Treasury’s continued commitment to these requirements in a difficult environment in which economic growth remains weak, public debt and debt-service costs have accelerated and governance and operational concerns are manifest across the public sector,” the review report said.
“Weak economic performance and residual problems in tax administration have resulted in large revenue shortfalls,” the report said.
“The deteriorating financial position of state-owned companies has put additional pressure on the public finances,” the report added.
“The government’s efforts to reform state-owned companies and the launch of the infrastructure fund are expected to increase growth and investment in the year ahead,” the 2019 budget review report said.
For the 2020 fiscal year, consolidated government expenditure is forecast to R1.83 trillion.
South Africa’s economy faces major challenges and government needs to win back the confidence of businesses and investors by tackling policy uncertainty and corruption, central bank governor Lesetja Kganyago said on Thursday.
Kganyago said in a speech at an investor conference in New York that weak business confidence had shaved an estimated one percentage point off South Africa’s economic growth last year. He said that the central bank would like to see inflation expectations anchored at around 4.5 percent, compared with 5.1 percent now. The volatile rand currency is the biggest risk to inflation forecasts, Kganyago said.
“Inflation today in South Africa is within the target. The highest it should be in terms of our forecast is 5.2 percent,” he said in a subsequent interview with Reuters. “That gives us room within the inflation target band...Inflation could rise but would remain within our inflation target,” Kganyago said.
The Governor of the South African Reserve Bank deflected questions on where he thought interest rates would move, saying there is no target.
The central bank kept its benchmark repo rate at 6.75 percent on Sept. 21, defying expectations at the time of a cut based upon easing inflation pressures and a sluggish recovery from a recession in the first half of the year.
“Everybody talks about are you close to neutral or off neutral? When the world over, nobody knows what neutral is because the world as we know it is different from the world we knew before the global financial crisis. Everybody is trying to find neutral,” he said.
The central banker, in his position since 2014, said that inflation would remain in the 3 to 6 percent target zone for the next two years.
“We are currently at 4.8 percent and the outlook is that inflation will average 5 percent this year. But we still expect to reach the bottom of 4.6 percent in the first quarter of next year. Over the policy horizon of 2018 and 2019, the highest inflation will be is 5.2 percent for the year,” he said.
With inflation remaining subdued, Kganyago also highlighted the improvements in the narrowing current account deficit. He said indications are that for the third quarter it should remain, at worst in the 2 percent area.
”And at best could actual decline as low as 1 percent.