By Xola Potelwa
JOHANNESBURG (Reuters) – South Africa’s economy faces “enormous headwinds” caused largely by self-inflicted domestic problems, including a crippling strike in the platinum sector, but a recession is unlikely, Reserve Bank Governor Gill Marcus said on Tuesday.
Africa’s most advanced economy contracted in the first quarter of the year as output from the key manufacturing and mining sectors shrank, the later hit by a five month long strike in the platinum sector.
The first quarter contraction has raised fears of a recession, the first since 2009, which was largely triggered by the global financial crisis. However, the latest economic dip stems mostly from domestic problems, Marcus says.
“While the global backdrop remains difficult as the advanced economies emerge from the very deep financial crisis of the past seven years, it is no longer the main cause of South
Africa’s weak domestic economic performance,” she said.
“The slowdown we have experienced is domestically driven, largely self-inflicted and we cannot blame external factors alone.”
Marcus also told a business meeting in Johannesburg that the era of abundant portfolio flows to emerging markets appeared to be over and the outlook for the region was fragile, comments which pushed the rand weaker.
While a recovery in the United States was “good news” for the global economy, this had implications for emerging markets that have benefited from massive asset purchases by the Federal Reserve to prop up the world’s largest economy.
“The era of abundant flows to emerging markets appears to be over: the volume of flows is likely to be lower and more discriminating than was the case in recent years,” Marcus said.
“This applies more strongly to countries such as South Africa, where sustainability of current account deficits are perceived to be an issue.”
The rand, which tends to bear the brunt of bouts of global risk aversion because of a stubbornly wide current account deficit, presently at 5.1 percent of GDP, fell to a session low of 10.7115 to the dollar after Marcus’s comments.
The South Africa Reserve Bank has kept interest rates on hold at its last two policy meetings to give the economy some breathing space, after raising them by 50 basis points in January.
But Marcus reiterated on Tuesday that the central bank was in a tightening cycle, and that interest rate hikes were part of a necessary cycle to deal with inflation, which breached the 3-6 percent target band to 6.1 percent in May.
“If there is a view that the central bank is not concerned about inflation, it will undermine credibility of monetary policy and impact adversely on inflation expectations,” Marcus said.
