South Africa Inflation Risks Balanced as Growth Slows

South Africa faces slower economic growth as mining strikes erode investor confidence, while inflation risks are balanced, the Reserve Bank said.

Higher food and oil costs, combined with a weaker rand, are adding to price pressures, though that’s being offset by benign demand pressures, the central bank said in its Monetary Policy Review released in Pretoria yesterday.

“Growth risks remain skewed to the downside while inflation risks appear fairly evenly balanced,” the bank said. “Recent volatility in the mining sector and a weaker secondary sector suggest lower output growth for the economy as a whole in the third and likely fourth quarters of 2012.”

The Reserve Bank kept the benchmark repurchase rate at 5 percent, the lowest level in more than 30 years, on Sept. 20 after a surprise cut in July to stimulate Africa’s largest economy. The bank has lowered its growth forecasts this year as strikes spread in the gold and platinum industry, while raising inflation projections. Consumer prices rose 5.5 percent in September from a year earlier, staying inside the bank’s 3 percent to 6 percent target band.

“For the last two meetings, we have seen risks to the inflation outlook evenly balanced,” Brian Kahn, an adviser to Governor Gill Marcus and a member of the Monetary Policy Committee, said in Pretoria yesterday. “It’s hard to say what we’re more concerned about,” he said, referring to inflation and growth risks. “We’re clearly concerned about both,” he said.

Wage Settlements

A weaker rand threatens to boost inflation, adding to risks from rising global food and fuel prices, according to the report. While pressure from wages had moderated in 2011, recent increases offered to striking mineworkers have made the outlook “uncertain,” it said.

Inflation is forecast to average 5.1 percent in the third quarter and 5.2 percent next year, the central bank said.

Strikes that began at Lonmin Plc (LMI)’s Marikana mine in August and spread to shafts owned by Anglo American Platinum Ltd. (AMS) and Gold Fields Ltd. (GFI) have cost the economy 10.1 billion rand ($1.17 billion) in lost output this year, Finance Minister Pravin Gordhan said on Oct. 25. Lonmin ended a six-week illegal strike by giving workers increases of as much as 22 percent.

“Recent high wage settlements in the mining sector could set a precedent for wage settlements more generally,” the report said. “Greater stability in the wage and industrial relations environment would boost confidence and prove supportive of growth across the economy in coming months.”

Rating Downgrades

The strikes have shaved off 50 basis points from this year’s economic growth rate, National Treasury Director General Lungisa Fuzile said on Oct. 26. The government is forecasting 2.5 percent expansion this year.

Standard & Poor’s and Moody’s Investors Service have lowered South Africa’s credit rating, citing slower growth and pressure on the government to boost spending to tackle a 25 percent unemployment rate. Since the Moody’s downgrade to Baa1 on Sept. 27, the rand has declined 4.8 percent against the dollar, the worst performer of the 16 major currencies tracked by Bloomberg. The rand lost less than 0.1 percent to 8.6483 per dollar by 7:53 a.m. in Johannesburg.

The currency may come under pressure as the current-account deficit widens, the central bank said. The shortfall on the current account, the broadest measure of trade in goods and services, widened to 6.4 percent of GDP in the second quarter, the biggest in almost four years.

Factors that boosted the deficit this year, such as rising imports and higher dividend payments, may moderate in coming months, Chris Loewald, head of research at the central bank, said in Pretoria yesterday.

To contact the reporter on this story: Andres R. Martinez in Johannesburg at amartinez28@bloomberg.net

To contact the editor responsible for this story: Nasreen Seria at nseria@bloomberg.net

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