South Africa economy to shrink 4.9% in 2020, SARB to cut rates in May

Johannesburg

JOHANNESBURG (Reuters) – South Africa’s economy will contract sharply this year as activity is hit by the coronavirus outbreak, despite expectations the central bank will cut interest rates again in May, a Reuters poll found on Monday.

The country is already in recession, with the economy expected to have contracted 1.9% last quarter and to shrink an unprecedented 23% this quarter, the poll showed.

Another rate cut from the central bank – which cut 100 basis points from borrowing costs on March 19 and then again on April 14 – is expected to help the finance ministry, which has already ramped up borrowing.

Economists now expect the economy to shrink 4.9% this year before recovering with 2.0% growth next year. Last month’s survey had suggested 0.3% and 1.2% expansions, respectively.

The forecasts showed huge levels of uncertainty due to a country-wide lockdown. Even the most optimistic economist forecast a contraction of 1.0%, while the most pessimistic predicted a 14.6% contraction.

Base effects may play a role next year, with the most optimistic economist forecasting growth of 5.1%, but some respondents said the lockdown would make it costly and difficult to bring the economy back to normality.

With consumers staying home and global oil prices falling sharply, inflation forecasts were also cut. Prices are now expected to rise 3.8% this year and 4.5% in 2021, compared with 4.2% and 4.6% in a March poll.

That would give the South Africa Reserve Bank room to ease policy.

Nine of 15 economists polled in the past week expected interest rates to be cut by 50 basis points to 3.75% in May, while three said the Bank would cut by 25 basis points. Two expected no move, and one pencilled in a 100 basis-point cut.

“Given the scale of the SARB’s forecast revisions and that of its surprise rate cut, there is little doubt now that its hawkish reservations to cut rates have been lifted,” said Francesca Beausang, economist at Continuum Economics.

On April 14 the central bank slashed its repo rate by 100 basis points to 4.25% in an unscheduled meeting, similar to the U.S. Federal Reserve’s emergency cuts last month, to mitigate the impact of the coronavirus.

“It seems as though it is keen to cut more than any emerging markets bank to make up for its previous reservations,” Beausang added.

Meanwhile, the balance sheet of the South African Reserve Bank looks more healthy and counter-cyclical in dealing with exogenous shocks than that of the National Treasury.

Economists answering an extra question said South Africa asking for an International Monetary Fund rapid financing facility without conditions or the SARB increasing its purchase of bonds on the secondary market would be most effective in mitigating the country’s funding crisis during the lockdown.

Other measures favoured included the SARB issuing coronavirus or disaster bonds targeted exclusively for the lockdown period or issuing more shorter-maturity bonds.

Capital Economics said the chances of South Africa turning to the IMF were rising.

“Finance Minister Tito Mboweni ruled out the possibility of any multilateral support that comes with conditions. But the IMF’s Rapid Financing Instrument (RFI) or its new Short-Term Liquidity Line might fit the bill,” it said in a note.

The RFI provides rapid and low-access financial assistance to member countries facing an urgent balance of payments requirement, without the need to have a fully fledged programme in place.

Mboweni ruled out an IMF adjustment programme last week and said the country didn’t need budget support, despite acknowledging that there would be a deep recession this year because of the global COVID-19 pandemic.

Asking multilateral institutions, especially the IMF, for cash is deeply unpopular with a faction in the governing African National Congress and trade unions that the party uses to rally support before elections. The ANC and two allies warned Mboweni earlier this month against seeking IMF assistance.