Nov. 7 (Bloomberg) -- The case for further interest-rate cuts in South Africa is building as the global economy slows and recent labor disputes hurt output, according to the International Monetary Fund.
The central bank unexpectedly cut the benchmark interest rate by 0.5 percentage point to 5 percent in July to bolster the economy as the European debt crisis eroded demand for South African exports. On Oct. 25, Finance Minister Pravin Gordhan cut his growth outlook for this year to 2.5 percent from a February estimate of 2.7 percent, partly reflecting a loss of production at gold, platinum and coal mines because of strikes.
“The deterioration in the global economy, as well as the internal domestic strikes that you have in the mining sector, as well as other sectors of the economy, has without doubt had some impact on growth,” Calvin McDonald, the South African delegation chief in the IMF’s African department, told lawmakers in Cape Town today. These developments “strengthen the case” for South Africa to “rely increasingly on monetary policy to support economic recovery if conditions in the global environment continue to deteriorate.”
The central bank’s Monetary Policy Committee will make its next rate decision on Nov. 22.
The IMF regards the central bank’s 3 percent to 6 percent inflation target band as appropriate and allowing sufficient flexibility, and sees no need for it to be adjusted, McDonald said.
He urged the government to stick to its commitment to rein in borrowing to buoy investor confidence, contain growth in spending on civil servant salaries and reform labor laws to encourage hiring.
Standard & Poor’s and Moody’s Investor Services have lowered their ratings on South Africa’s sovereign debt since Sept. 27, citing an increased risk of the government missing its deficit targets. The downgrades have “taken a toll” on South Africa’s reputation, McDonald said.
The government is monitoring the effect of the downgrades, and taking steps to prevent a further decline in perceptions of South Africa, Gordhan said in a written reply to a parliamentary question today. This will include increased interaction with rating companies and investors to ensure they don’t have to rely on “sensationalist” media reports for information, he said.
The “government remains committed to taking the necessary measures to lift the growth potential and competitiveness of the South African economy,” Gordhan said. “The government has committed to a process of fiscal consolidation. Government debt is well controlled and completely sustainable.”
The IMF said on Oct. 9 that Africa’s largest economy will probably expand 2.6 percent this year and 3 percent in 2013, forecasts that were prepared before a wave of strikes broke out in August. The estimates have yet to be revised, McDonald said.
“We haven’t had any discussions with the government yet,’ he told reporters. “Things seem to have stabilized somewhat, which is good.”
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