Is Mboweni Stoking Stagflation? While Reserve Bank Governor, Tito Mboweni Relentlessly Pushes Up Interest Rates to Combat Inflation, Economic Growth Forecasts Have Been Cut to Just 2% and the Danger of Stagflation 100ms Larger. Which Way Should South Africa Go? Tom Nevin Has Been Investigating
Nevin, Tom, African Business
Savage and relentless interest rate hikes, power cuts, demands by the government-owned electricity monopoly for a real 60% price hike, budget-decimating food price increases and an out of control fuel price have mauled the South African economy down to a meagre 2.1% growth in the first three months of 2008, from a consistent and confident 5.5% last year.
And there is worse to come. Inflation jumped to over 10% in early June, breaching for the 13th month its target range of 3% to 6%. Climbing inflation also ignored interest rate hikes, in increments of 0.5% every two months for the past two years, that have taken the bank rate to 15%.
The South African Reserve Bank governor, Tito Mboweni, however, remains convinced that the principal culprits in the economic implosion are South Africa's consumers and warns that he will bludgeon them further with an all-at-once deadly 2% hike at the next monetary policy meeting. If he is as good as his word, he will deliver the South African economy to the gates of stagflation, analysts maintain.
Goolam Ballim, Standard Bank's group economist describes the situation as "not a pretty environment", and agrees that South Africa is entering a stagflation-like episode in which growth and employment deteriorate noticeably and inflation is high. "It is really the worst condition, other than an outright recession, that an economy or the authorities would want to face," he says. "In some respects it is precisely an attempt to capture and restrain inflation that contribute to even more muted growth and the growth sacrifice in the short term can be quite sharp, all with the aim of creating a more favourable atmosphere later on."
Ballim fears that the stagnation process might even have started. "There's almost a halving in the type of growth that we've been accustomed to over the last couple of sensational years, and frankly, inflation is in my view 2.5 times higherthan its natural level some years ago at the retail level. And that's a pretty stark change."
"The Reserve Bank got it wrong"
"Clearly it's unpleasant, people are losing their homes, their cars," Ballim points out. "You know, it is immensely insightful, if you go back just one year and you look at the Reserve Bank's inflation prognosis then. They produced a vision of inflation where with 90% confidence they were of the opinion that inflation would not rise higher than 7%. So, clearly, a very capable Central Bank has got it wrong, and I don't mean that disparagingly. Many private sector individuals in the streets, too, have missed this surge in inflation and price instability."
While many African countries continued to rejoice in booming commodity prices, "South Africa's energy crisis and the forced closure of its mines have far outweighed any beneficial impact from higher commodity prices", says Razia Khan, Africa analyst for Standard Chartered Bank.
Meanwhile, South Africa's big four banks joined the chorus against an all-in-one interest rate hike of 2%, warning that it could trigger a consumer recession. A rate hike that big could push debt service costs and default rates beyond the tolerance of an already overburdened economy, they say.
"Any further increase in interest rates would exacerbate the financial difficulty consumers are already experiencing as a result of the high inflation," says Absa Bank Group CEO, Steve Booysen.
Nedbank senior economist Nick Weimar believes a 2% rate rise would take the ratio of debt service costs to disposable income above 13%. "In these circumstances households will be under considerable strain and defaults and bad debts can be expected to increase disproportionately. Household spending will probably contract, and we will more than likely have a retail or consumer recession on our hands. Banks would feel the pinch of falling household demand for credit and rising bad debt." The banks had every reason for discomfort and alarm as banking shares nosedived after Mboweni's threat of a 2% rate rise. …