The news that South Africa’s economy shrank by an alarming 3.2% in the first quarter is not what President Cyril Ramaphosa, who is keen to lift the country out of its slump, needs right now. Analysts were quick to point out that it is the worst contraction since the 2009 credit crunch. Added to the local pressures, the international business environment battles with the US-China trade war. On the day of bad news, ANC Secretary-General, Ace Magashule announced that the organisation’s National Executive Committee had asked the government to appoint a task team to explore quantitative easing. Well, he actually called it quantity easing in his media statement, in other words creating money out of nothing, which immediately brings Zimbabwe and Venezuela to mind. Finance Minister Tito Mboweni was quick to respond. He said on Twitter that the government sets the mandate for SARB. “There is no quantitative easing” and Reserve Bank President Enoch Godongwana added that there was no decision to expand the Reserve Bank mandate. The Wall Street Journal warns that fiddling with the South African Reserve Bank mandate “could scare investors”. South Africa should instead concentrate on “speedy economic overhauls” to boost investment and growth. – Linda van Tilburg
South Africa’s economic slump challenges Ramaphosa
(The Wall Street Journal) JOHANNESBURG – The South African economy shrank sharply early this year, underscoring the steep challenges facing South African President Cyril Ramaphosa as he embarks on his new term.
Africa’s most developed economy fell into its steepest quarterly contraction in a decade, shrinking at an annualised 3.2% in the first quarter, as lengthy power outages hammered key mining and manufacturing sectors.
The steep contraction will further complicate matters for Mr. Ramaphosa, whose African National Congress won national elections in May. Since ousting his scandal-battered predecessor Jacob Zuma, Mr. Ramaphosa has failed to boost growth and significantly reduce unemployment, two promises at the centre of his campaign for the top job.
Tuesday’s data surprised many South Africans, who are already battling an unemployment rate of more than 27%. Rolling power outages – stemming from a government-owned electricity company that is nearly bankrupt – crippled many businesses.
South Africa’s currency weakened Tuesday, with the US dollar buying R14.691 compared with 14.451 the previous day.
Nearly all sectors of the economy shrank in the first quarter, during which businesses and citizens suffered their worst rolling power cuts in years. Eskom, the government-owned electricity company, is effectively bankrupt and its ageing power stations are regularly breaking down. Amid the cuts, South Africa’s mining industry, which was also hit by a five-month strike at a major gold mine, shrank 10.8% on the year, while manufacturing was down 8.8% in the same period.
Read also: SA Govt seeks help finding solution to “biggest threat to economy”
Agriculture, a smaller contributor to the overall economy, contracted by 13.2%, mostly because of dry weather in central and western South Africa, said Wandile Sihlobo, chief economist at Agbiz.
Overall, it was the economy’s worst quarterly performance since the first three months of 2009, when GDP dropped 6.9% in the wake of the global financial crisis.
Mr. Ramaphosa’s investor-friendly policy proposals, including making it easier to do business in South Africa, are running into opposition within his own party. Just over an hour after the statistics office released the GDP data, the ANC’s secretary-general announced that the party would seek to expand the mandate of the South African Reserve Bank, currently focused on price stability, to also include growth and employment, and said it would explore quantitative-easing policies.
But changing the SARB’s mandate and bringing it into line with the US Federal Reserve and other central banks could disturb investors, as its independence is in enshrined in South Africa’s constitution, and create fears over runaway inflation. The SARB, which is one of the few central banks in the world that still has private shareholders, is still balking at an earlier ANC resolution to nationalise it.
Mr. Ramaphosa’s government will struggle to keep its deficit and debt in check amid the low growth. The most recent budget still forecast 1.5% growth this year, while the central bank only expects a 1% expansion. The government will also have to approve a new bailout for Eskom, likely by taking on a big chunk of the company’s R420bn ($29bn) debt.
Following a visit to South Africa, the International Monetary Fund warned Monday that without speedy economic overhauls, investment will fail to pick up, growth will remain weak and per capita income in one of the world’s most unequal societies will decline.
Write to Gabriele Steinhauser at [email protected]
