South Africa's Economy Faces Challenging Future, Kganyago Says

  • Reserve Bank doesn't try to act against rand weakness
  • Institution remains on rate normalization path, Mminele says

The South African economy faces a challenging future and is constrained by a lack of certainty about electricity supply, Reserve Bank Governor Lesetja Kganyago said.

“South Africa’s growth outlook is extremely fragile,” Kganyago said at a conference in Johannesburg on Tuesday. “Investment plans could be shelved or delayed because of lack of guarantee of electricity supply. These constraints had contributed to the decline in our estimate of potential output growth.”

Africa’s second-largest economy contracted in the three months through June for the first time in more than a year as power shortages, low global demand and falling commodity prices weighed on output. The Reserve Bank is facing a dilemma, with inflation forecast to exceed its 3 percent to 6 percent target range while it lowered its economic growth forecast for 2015 to 1.5 percent, unchanged from last year’s rate.

The Monetary Policy Committee kept its benchmark repurchase rate unchanged in September after raising it by a full percentage point to 6 percent in three steps since last January to contain price growth. The exchange rate remains one of the main risks to inflation even as the pass-through to prices has been relatively muted compared with previous episodes of rand weakness, Kganyago said.

“This does not mean we’re trying to act against rand weakness,” he said. “Our reaction to exchange rate changes is focused on the potential inflationary impact of exchange-rate depreciation in conjunction with a range of other variables.”

The currency was 0.6 percent stronger at 13.2175 per dollar as of 10:27 a.m. in Johannesburg on Tuesday, paring its decline for the year to 13%. A government report on Wednesday will probably show inflation accelerated to 4.7 percent in September, according to the median estimate of 26 economists surveyed by Bloomberg.

The MPC “remains on a gradual normalization path and is of the view that monetary policy remains accommodative,” Deputy Governor Daniel Mminele said in a separate speech on Tuesday. “The MPC has to achieve a fine balance between realizing its core objective, and not unduly undermining growth in the short term.”

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