South Africa repo rate to hold but a rate hike could be around the corner

Written by  Madeleine Gracie Mar 15, 2021

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) is expected to hold the rate at the 23-25 March meeting, according to a unanimous vote by 25 panellists on Finder’s SARB repo rate forecast report.

  • Panel of 25 economists unanimously predict the SARB will hold the repo rate 
  • Just over a quarter (28%) expect a rate hike this year
  • 92% say South Africa is at risk of a sovereign debt crisis 
  • Unemployment rate to increase slightly by July 

While the majority (88%) of the panel is in favour of a rate hold, 12% think that the rate should be cut. On average, they say the rate should be cut by around 42 basis points.

 SARBS Repo Rate Hold

IQbusiness chief economist Sifiso Skenjana believes a rate cut will help bring relief to current economic pressure points.

“While we are reporting a better than expected revenue shortfall, the contribution was largely on the back of a mining earnings growth and not a stabilising economic growth context. The declining corporate income tax base is a clear sign of the economic pressure points and relief through an interest rate decrease is needed at this point in time,” he said.

University of Cape Town associate professor Sean Gossel also says the rate should be cut but notes this will result in less capital inflows.

“Unfortunately, SA is reliant on international capital so even though a further reduction in the repo rate would be a welcomed relief and assist SA recover, a decrease will lead to less capital inflows as a result of a tighter interest rate differential.

“There’s no free lunch (or capital flows), so SA will have to absorb the burden of higher interest rates so as to attract capital flows but at the cost of the domestic economy,” he said.

On the other hand, panellists such as Nedbank chief economist Nicola Weimar and Absa Group senior economist Peter Worthington say that the Bank should and will hold the rate because, at the moment, it’s a matter of waiting for previous policies and rate moves to take effect.

“Hiking now would not make sense, since inflation is well contained and the economy is still operating well below potential. Cutting would also not be wise, as the SARB has already done enough, the actual rate is below the neutral rate. So Monetary Policy is stimulatory enough.

“It is now just a case of waiting for the policy to impact on the economy and become a stimulus rather than a cushion against tough times,” said Weimar.

Alexander Forbes chief economist Isaah Mhlanga says the bank should and will hold the rate, despite inflationary pressures, as these trends are likely to be short-lived and that growth is starting to recover.

“At its January 2021 MPC meeting, the SARB kept rates unchanged and said inflation risks appear balanced over the short term and on the upside over the medium term.

“Growth is recovering and global inflationary pressure is rising, which will rule out any potential rate cuts. The economic recovery still remains modest and requires support, especially with fiscal policy that is expected to continue to consolidate in the medium term,” Mhlanga said.

When will the rate first increase?

The MPC will increase the repo rate sometime next year, according to over half (56%) of Finder’s panel. On the other hand, over a quarter (28%) of panellists believe that a rate increase is expected within the year.

SARB Repo Rate Chart 

Both DRM Group RSA economist Christopher Masunda and BNP Paribas chief economist Jeff Schultz, who believe the rate will first increase in the first and second half of 2022 respectively, say the Bank likely won’t consider an increase while CPI inflation stays within its 4.5% bound.

“A SARB that is likely to look through temporary exogenous shocks to CPI (for example, oil prices) and the persistence of a larger negative output gap than what the SARB currently estimates underpins our expectation that the SARB will not have to raise interest rates until H2 2022.

“An earlier-than-expected US Fed tapering (QE reduction), however, does run the risk of placing more pressure on the ZAR and capital outflows to high beta EMs like SA. This could force the SARB to act earlier, though we still maintain that even in this worst-case scenario, the SARB is unlikely to have to raise interest rates at all this year, with CPI inflation in 2021 and 2022 likely to remain below its 4.5% midpoint target by our estimates,” said Schultz.

University of the Free State senior researcher Dr Johan Coetzee also says the rate won’t increase until 2023, but that ultimately, the timings lie in the success of vaccination rollouts.

The success of the vaccination rollout is the major factor that will ultimately inform the interest rate decision going forward. We need to get the economy back at work in full force, and only once this has happened, can we make any informed assessment of what the likely interest rate trajectory will be.

I see the SARB erring on the side of caution for, at the very least, the next 12 to 18 months. We should also remember that the status of our local conditions are also a function of the health of the global economic environment and its ability to bounce back from the pandemic. There are just too many uncertainties that are still at play.

Economists in favour of taxes remaining unchanged

The majority (92%) of Finder’s panel agree with the government’s recent decision for direct taxes to remain unchanged.

SARBS Poll Chart 

EFConsult lead economist Frank Blackmore and Nedbank analyst Reezwana Sumad agree with the government’s decision and say that instead of increasing taxes, the government should look to expand the tax base.

“SARS needs to find a way to begin taxing the informal/cash economy. Including these informal businesses in the formal economy, or conducting more audits of cash-based businesses can unlock some revenue upside,” Reezwana said.

Blackmore furthers this, saying that “taxes need to be reduced for both individuals and corporates, while tax base should be expanded through economic inclusion and business growth so the country can be more internationally competitive.”

Carpe Diem Research Services independent economist Elize Kruger also agrees that taxes should remain unchanged. Instead, the focus should be on improving employment, which in turn will lead to more taxes being paid to SARS.

“The business environment needs to be made attractive, and the ease of doing business (licensing, taxation, red-tape) in SA must improve. Also, the cost of doing business must be reduced, so that private companies can flourish, which will naturally lead to more job opportunities, more taxes to be paid to SARS.”

Mkhabela agrees with Kruger’s stance, saying taxes aren’t key to growing an economy.

South Africa needs to reflect again on these high personal Income Taxes and Corporate Income Taxes. We need to move to a lower attractive tax system for a better economic development and activity, as tax never grew any economy, and we need to attract investors and allow our middle class to invest for the future.

While Peter Worthington also agrees regarding the decision on direct taxes, he believes VAT should be increased.

“South Africa’s VAT rate is very low by international standards. We should lift it and use part of the proceeds to enhance social grants to the poor,” he said.

Unemployment rate to rise, slightly

In the fourth quarter of 2020, South African unemployment rose to 32.5%. By July, the panel anticipates that unemployment will increase, but only slightly, up to 32.8% on average.

Of the 23 panellists who provided a forecast, over half (57%) predict an increase in unemployment, while 30% say it will decrease and the remaining 13% think it’ll stay the same.

Antswisa Transaction Advisory Services CEO and chief economist Miyelani Mkhabela was the least optimistic about South African employment, predicting that a little under 2 in 5 South Africans (38%) will be unemployed come July.

When asked how he thinks employment rates could be improved, he said “South Africa needs Energy security to attract investors in downstream and upstream industrial and strategic investments in the agricultural sector across the country.”

Investec chief economist Annabel Bishop, Frank Blackmore and Jeff Schultz, who all predict that around a third of South Africans will be unemployed by July, say that structural reforms are necessary to curb unemployment.

According to Bishop, the government needs to “rapidly introduce free market structural reforms and reduce the size of the state and the suppressing effect [of] the high regulatory burden (high state control) on the state to increase the ease of doing business.”

Economist at STANLIB Ndivhuho Netshitenzhe meanwhile emphasizes the importance of the COVID-19 vaccine’s role in improving employment rates.

“This will ease the high level of uncertainty in the economy around the constant re-introduction of lockdown measures and give businesses some confidence to start making more permanent investment and hiring decisions.”

However, she said that in the long term, the government needs to focus on reforms that will increase the confidence of both businesses and consumers in economic growth.

“In order to do this, [the] government needs to be less involved in the economy, and instead [the] government should create an environment that encourages businesses to invest, expand and employ, and one that nurtures and promotes entrepreneurship and SME creation,” she said.

Timeline for a budget surplus

The South African economy isn’t expected to reach a budget surplus for around 10 years or more, according to just over half (52%) the panel. Just over a quarter (28%) expect to see budget surplus between 2026-2030, and one in five (20%) expect to see this happen within the next five years.

SARB Surplus Chart 

Economist and lecturer at UNISA, Mzwanele Ntshwanti, who thinks budget surplus won’t be achieved for another 10 years or more, recalled the minister’s words, “we owe too much money to a lot of people,” and added, “we need to achieve some level of stability and self sufficiency.”

Elize Kruger says the debt burden will continue to rise if South Africa continues on the current trajectory.

“If the country needs to borrow money to fund non-interest expenditure (as is currently the case, i.e. the country runs a primary deficit), the debt burden will just continue to rise and an ever bigger portion of tax revenue will be eaten up by interest payments.”

Several panellists, including Annabel Bishop and Nicola Weimar noted that a budget surplus isn’t as important as a primary surplus (i.e. the budget balance less interest rates).

“I don’t think they necessarily need to run a budget surplus. They should aim for a primary surplus to slow the rate of debt accumulation. However, if they can run a consolidated deficit of around 3% of GDP, it would probably be more appropriate for a developing country like SA, with high unemployment, high inequality and poor growth prospects,” Weimar said.

Professor of economics at the University of the Western Cape Matthew Kofi Ocran noted that deficits aren’t bad per se, and it’s more a question of sustainability.

Sean Gossel shared a similar sentiment, noting that it’s important to demonstrate debt management.

“Because of SA’s downgrades, it’s more important to show consistent debt management than a (likely) temporary budget surplus.”

Professor at the North-West University School of Economics Waldo Krugell highlighted that a primary surplus is the only way to avoid a future debt crisis.

Is South Africa on the verge of a sovereign debt crisis?

South Africa is at some level of risk of a sovereign debt crisis, according to the overwhelming majority of panellists (92%).

SARB Sovereign Debt Crises 

Over a third (36%) say the risk is high and 40% say the risk is moderate, while 16% say there’s only a slight risk of this happening. Just 8% (2 panellists) say South Africa is not at risk of a sovereign debt crisis.

Mzwanele Ntshwanti says the crisis is already here.

“In the last 10 years, the debt has exponentially increased from around 23% to around 80%. This is a crisis.”

Miyelani Mkhabela agrees that there’s a high risk, noting that the situation will only worsen as the COVID-19 pandemic continues.

“By the end of 2021/22, gross loan debt is expected to be at a range of 84% and 90% of GDP, which is highly riskier as the COVID-19 crisis continues, and in the future, we forecast environmental consequences. The situation is bad for a developing economy.”

Stellenbosch University COO Stan du Plessis noted that with an interest burden of almost 5% of GDP, South Africa is well within the likely zone of a fiscal crisis.

“The sovereign rating already reflects the precarious state of the government’s finances. When the bond market wakes up to this situation, the asset markets can accelerate the fiscal crisis rapidly,” he said.

However, Nicola Weimar says the risk is moderate given the bulk of South African debt is rand-denominated.

“Ultimately, the debt burden is unsustainable. If foreign lenders lose interest, SA will have to fund the deficit through access to IMF, World Bank or more destructive means. The risk is, however, reduced by the fact that the bulk of SA sovereign debt is rand-denominated,” she said.

Meanwhile, chief economist at Efficient Group Dawie Roodt says there’s no risk given that South Africa will likely deflate most of the ZAR debt away, highlighting that there are sufficient reserves to cover non-ZAR debt.

Will mortgage approvals continue at this volume?

The trend of a high volume of mortgage approvals we saw in 2020 will likely come to an end this year, according to just under half the panel (45%). However, over a third of the panel (36%) say the trend will continue, and 18% say they’re not sure.

 

Peter Worthington, who doesn’t think the trend will continue, says the volume we saw last year can be attributed to a stock adjustment.

“The problem is that incomes are not there to keep this going on a long term basis,” he added.

Reezwana Sumad agrees mortgage approvals won’t continue in the same volume and noted 2020 set a high base.

“[It] will be difficult to meet or beat this volume because we do not expect interest rates to decline in 2021 as they did in 2020. The sharp reduction in the repo rate resulted in an increased demand for mortgages as opposed to rentals,” she said.

Ndivhuho Netshitenzhe thinks the trend will reverse as interest rates have likely bottomed out.

“[It’s] most likely that people were taking full advantage of the historic low interest rates and this trend should start to reverse as interest rates are likely to have bottomed out,” she said.

However, on the flip side, many of those who expect to see the trend continue say the low interest rate regime and changing lifestyles due to COVID-19 will continue to bolster the sector.

Property price forecasts

Property prices in South Africa’s 10 biggest cities are set to increase by an average of 2.2% over the next 6 months, according to 14 of the panellists who provided property forecasts.

 

Several economists noted that the current low interest rates will prop up the market.

Matthew Kofi Ocran put it simply: “The continued low-interest-rate regime will provide an incentive to increased market activity.”

Professor at the University of Johannesburg Ilse Botha, who gave property forecasts ranging from 2-3% across all cities, noted that the lower interest rate environment means that owning property is more affordable than renting.

However, global head of operational risk at Fitch Solutions Chiedza Madzima says that while the low interest will support the sector, prices will remain subdued when accounting for inflation.

“A low interest rate environment will support the sector, and prices will likely move slightly higher in nominal terms (year on year). However, in real terms, housing prices will remain subdued when accounting for inflation. Larger cities/areas will see higher demand compared to smaller/high density areas. In lower income brackets, the recovery will be slower,” she said.

On average, Cape Town is expected to increase the most (4.5%), followed by Johannesburg, (3.07%) and Durban (2.79%). Meanwhile, cities like East London (0.64%) and Port Elizabeth (0.93%) are expected to increase only marginally by less than 1%.

Dr Johan Coetzee, who provided the highest price increase forecast for Cape Town at 15%, says the Western Cape will be seen as an investment opportunity as the economy starts to pick up.

Frank Blackmore expects to see moderate growth inland while coastal cities could see a reduction in prices.

He forecasts cities like Port Elizabeth and Pietermaritzburg will see slight drops of 3% and 2% respectively, while cities like Johannusburg and Durban will increase by 3% or 4%.

Mzwanele Ntshwanti says any increases will be marginal due to the ongoing economic consequences of COVID-19.

“The market is generally struggling due to COVID-19 and loss of income for many people. Inequality is showing itself greatly as well in this industry since high earners are the winners and low earners are the losers. Thus, increases will be marginal.”

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