South African Economy Faces Downside Risks, Gordhan Says

South African Finance Minister Pravin Gordhan said risks of a further slowdown in Africa’s biggest economy are intensifying as Europe fails to resolve a debt crisis in the region.

“There’s no doubt the downside risks have been increasing as we see Europe moving from one point of non-resolution of their problems to another point of non-resolution,” Gordhan said in an interview yesterday in Los Cabos, Mexico, where he is attending a meeting of the Group of 20 nations. “We are hoping that both at this summit and the European summit later this month, there will be sufficient decisiveness.”

Gordhan has already cut his forecast for economic growth this year to 2.7 percent from 3.4 percent previously, as a possible recession in Europe curbs exports from a region that buys about a third of South Africa’s manufactured goods. That’s hindering job creation, undermining a government pledge to cut the unemployment rate to 14 percent by 2020 from 25.2 percent currently.

The investment climate in South Africa and globally “is not encouraging” and companies are hoarding cash rather than investing, Gordhan said. The ruling African National Congress will seek to resolve investors’ concerns about the party’s economic policies at a conference next week, he said.

“We’ve put in place all sorts of incentives for businesses to come in and we understand people have concerns about our policy on mining, for example, and all of those issues will be adequately resolved in the policy conference,” Gordhan said.

Interest Rates

The rand has dropped 6.9 percent against the dollar since April 1. The currency weakened 0.2 percent to 8.2213 a dollar at 9:40 a.m. in Johannesburg.

The South African Reserve Bank has kept its benchmark lending rate at 5.5 percent, the lowest level in more than 30 years, since November 2010 to help buffer the economy against Europe’s debt crisis.

The government has given the central bank room within its inflation-targeting framework to take account of employment and growth when making its policy decisions, Gordhan said.

While Governor Gill Marcus said on June 8 that policy makers will act without “fear or favor” in adjusting interest rates, inflation near the top of the central bank’s 3 percent to 6 percent target range is making it difficult to ease monetary policy. The inflation rate rose to 6.1 percent in April from 6 percent in the previous month, according to the statistics office.

Traders are increasing bets that the Reserve Bank will lower interest rates as soon as this year as economic growth slows. The yield on the forward-rate agreement due in December has dropped 24 basis points to 5.26 percent in the past month, the lowest level since November.

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