My recent take on the SARB’s rate cut announcement. Bottom line; it’s a good start but he should have gone a whole lot further and it is now time for other sectors in government top play their part.
The plea from citizens as the bowl of the economy is scraped bare
By Shaun Harris
The recent 50 basis points (bps) interest rate cut by the Reserve Bank was no surprise. Financial markets shrugged it off. Hard-pressed consumers largely welcomed it but also shrugged it off. Which begs the question: should Reserve Bank Governor Lesetja Kganyago have done more? And what should he have done, and what should he do in the future?
“I would have expected 100 bps, but even 50 is useful because lowering debt repayments means there’s a little bit of extra money in the pockets of consumers,” says Economic Justice and Dignity spokesperson Mervyn Abrahams.
Before the Reserve Bank’s announcement of the latest cut banking analyst Simon Stockley was expecting 50 bps but hoping Kganyago might go further. “I do genuinely believe the Governor has latitude to go even further, say 100 bps, but is unlikely to do so, given his historic cautionary approach to monetary policy.”
Now that we know how much lower interest rates are, what do we expect the Governor to do next? “I would be surprised if there was another rate cut so soon after the previous one,” says Magda Wierzycka, CEO and founder of asset management company Sygnia. “Rather I would expect that they will want to ensure liquidity in the market through further bond purchases, as well as stabilizing the banks’ balance sheets. South Africa’s prime interest rate, which is linked to the repo rate, is still relatively high. Consequently there is still further room for rate cuts in the future.”
However interest rate decisions and other means to stimulate South Africa’s crippled economy effectively fall under government. And ultimately, President Cyril Ramaphosa should be, and “should be” must be emphasized, calling the shots.
“The one thing we did not do when the lockdown was declared was to ask questions,” says widely respected political analyst Dr Ralph Mathekga. “The lockdown brought with it a freeze on many important political processes.”
“Excessive use of executive power during the lockdown is dangerous and our politicians must always remember that South Africa is a constitutional democracy and that the lockdown does not mean that the constitution has been suspended even though a few rights were,” says Mathekga.
On Sunday night, May 24, President Ramaphosa announced fewer restrictions when the country moved to Level 3 lockdown. Once again, no surprises, the JSE shrugged off an expected boost to share prices. “The severe interruptions to supply chains, along with a huge loss in incomes, a plunge in the circulation of money and the high levels of unemployment have damaged both supply and demand, while Level 3 still has a number of restrictions to the smooth functioning of the economy,” says Annabel Bishop, chief economist at Investec.
Wierzycka has clear views on the benefits, and restrictions, of Level 3. “It is possible that the relaxation to Level 3 ensures that certain sectors of the economy can spring back relatively quickly. The informal sector is also fairly flexible. However some large employment sectors, such as tourism and aviation, will not recover for a long time.”
“There are no obvious domestic substitutes to absorb the number of unemployed people.”
Stockley is also concerned at the possible spill-out from unemployment. He urges government to recognize how serious the situation is, “with current levels of unemployment, social disobedience and civil unrest is moments away.”
“Government must engage with business constructively. Forget Stalinist centrally controlled solutions to the crises. It is only through forming a social and economic compact with business and citizens that we will emerge from the crises,” says Stockley.
Government’s response to handling the crises through the levels of the lockdown reveals serious splits in the Cabinet and destructive rivalry at the very top.
Government behavior was initially laudable, with the lockdown and mobilizing business support measures, says Sasfin Securities in a report on May 25. But it was “thereafter laughable, with policy confusion and ludicrous measures.” It highlights, says Sasfin, “ongoing factionalism with the ANC and the strength of the corrupt old guard.”
This factionalism has been fed by many rumours. Most serious is of a rift between President Ramaphosa and Minister of Co-operative Governance and Traditional Affairs, Nkosazana Dlamini Zuma. It dates back to before the elections, her role now as possible successor to Ramaphosa should he be indisposed, and the strong support for her with a faction of the ANC.
Rumours, yes, but some rumours have a nasty habit of turning out to be true. It seems Dlamini Zuma’s power extends way beyond her rabid-like fixation on banning smoking.
“It’s time now for all other role players in government to step up to the plate and make a contribution to saving lives and the economy. Inactivity and hesitance is likely to prove more deadly than the pandemic. It’s time to reopen the country, Mr President,” says Stockley.
Wierzycka says “people have run out of money and out of goodwill to comply.” She fears the implications of a possible IMF bail-out. “I don’t have the answers as to what the government should be doing other than to say that it needs to listen to economic and medical advisors rather than making up rules on the fly.”
Bold steps need to be taken. Now.