South Africa Outlook Hinges on Virus and Restrictions, SARB Says

JOHANNESBURG (Capital Markets in Africa) — South Africa’s near-term economic outlook is highly dependent on the development of the coronavirus pandemic and the extent of restrictions on business activity to limit the spread, the Reserve Bank said.

The government implemented a strict lockdown to curb the virus on March 27. For five weeks, almost all activity, except essential services, were shuttered and most citizens were only allowed to leave their homes only to buy food, seek medical care, and collect welfare grants. While the restrictions were eased from May 1, allowing the phased reopening of some industries, many businesses had shut down permanently and job losses surged.

The Reserve Bank now sees the economy shrinking by 7% this year, the most since the Great Depression, when output fell by 6.2% in 1931, followed by growth of 3.8% in 2021 and 2.9% in 2022. The contraction and slow rebound from the virus shock will keep inflation well below the 4.5% mid-point of its target range this year, the Pretoria-based central bank said Monday in its 2019-20 annual report.

“As the crisis unfolds, the SARB will remain vigilant and continue to deliver on its mandate of price and financial stability,” it said. The monetary policy committee “will continue to assess the risks to inflation, including from weaker economic growth and those arising from wage and price pressures and the depreciation of the rand exchange rate,” the central bank said.

The central bank’s approach to inflation meant that price growth has stayed below the 6% top of the target band for three years. That gave the MPC room to cut its benchmark interest rate by 275 basis points this year, taking the repurchase rate to the lowest level since it was introduced in 1998, to support the economy. The Reserve Bank also relaxed accounting and capital rules to release additional money for lending and tripled its holdings of South African government debt, helping to bring down borrowing costs in the domestic bond market in response to the virus.

The central bank said its main priorities during the pandemic are to provide support to households and businesses to help stabilize economic activity while anchoring long-term inflation expectations and to maintain financial stability and the smooth functioning of financial markets. It will also focus on ensuring a regular flow of credit to households while ensuring the safety and soundness of regulated financial institutions, the SARB said.

Source: Bloomberg Business News