June 4, 2019 / 10:24 AM / 3 months ago

South African central bank mandate back in crosshairs after GDP shock

PRETORIA/JOHANNESBURG (Reuters) - South Africa’s governing party has agreed to expand the central bank’s mandate to include employment and growth as well as inflation, a senior party official said on Tuesday, hours after data showed the worst economic contraction in a decade.

FILE PHOTO: Friends talk by candle light during load shedding in Embo, South Africa March 18, 2019. REUTERS/Rogan Ward/File Photo

The rand extended losses after the comments from African National Congress (ANC) Secretary General Ace Magashule, as investors are nervous about any changes that could curb the independence of the South African Reserve Bank (SARB).

Magashule, who is responsible for the day-to-day running of the ANC, is part of a faction within the party that has tried to push President Cyril Ramaphosa into pursuing more radical economic policies.

Ramaphosa did not immediately respond to Magashule’s remarks on Tuesday, and his spokeswoman was not available.

“The National Executive Committee lekgotla (meeting) agreed to expand the mandate of the South African Reserve Bank beyond price stability to include growth and employment,” Magashule told a news conference.

A spokeswoman for the central bank, whose Governor Lesetja Kganyago has vocally opposed altering the bank’s focus, told Reuters that officials would discuss Magashule’s statement with Finance Minister Tito Mboweni.

Debate about whether the mandate of the SARB should be changed has raged since January, when a call for a broader mandate appeared in the ANC’s election manifesto. Ramaphosa said then that the party had no intention of interfering with the independence of the central bank.

Magashule’s comments will nevertheless worry credit rating agencies, which cite the strength of institutions like the central bank among factors preventing further downgrades.

South Africa only has one investment-grade credit rating left, from Moody’s.

Magashule also said on Tuesday that the ANC executive wanted the government to set up a team to explore quantitative easing, after the statistics office said gross domestic product contracted a quarterly 3.2% in the first three months of 2019.

The shock GDP reading was far worse than the 1.7% decline economists had expected and was another sign that Ramaphosa’s growth drive is struggling to gain traction.

“This was the largest economic contraction in almost a decade ... It was largely driven by manufacturing, then mining,” Statistician General Risenga Maluleke said.

The rand was around 1.8% weaker against the dollar at 1600 GMT, reflecting worries about the weak economy and potential changes to the central bank’s focus.

Investor confidence in Africa’s most industrialised economy remains fragile, despite Ramaphosa’s pledges to woo investment, create jobs and root out rampant corruption after his party won re-election last month.

He faces formidable obstacles, including factional fighting within the ANC, weak consumer demand and ailing state firms like power utility Eskom, which was forced by capacity constraints to impose blackouts early this year.

(GRAPHIC: South Africa GDP and interest rates link: tmsnrt.rs/2WH4SiZ).


Although Moody’s still has South Africa’s credit rating at Baa3, the lowest rung of investment grade, some economists fear the power crisis and other economic frailties could cost the country that rating and lead to billions of dollars of outflows.

Fixing Eskom and other loss-making state-owned firms such as South African Airways (SAA) is seen as critical to shoring up confidence among the investors South Africa relies on to finance its big budget and current account deficits.

“The South African economy is not doing well; there are all these false starts where we think the economy is just about to re-accelerate and then it drops back again,” said Cristian Maggio, head of emerging markets strategy at TD Securities.

“The government really has very little time to start doing what it has to do.”

Statistician Maluleke said load-shedding — a local term for controlled power outages — had contributed to the economy’s decline in the first quarter.

Tuesday’s data showed mining output dropped 10.8% in the first quarter from October-December. Manufacturing output fell 8.8%, agriculture dropped 13.2% and construction declined 2.2%.

But output edged up 1.1% in the finance sector.

Slideshow (2 Images)

Year-on-year growth in the first quarter was zero compared with forecasts for growth of 0.7%, the statistics office said.

A recent Reuters poll forecast the South African economy would expand by around 1% in 2019 as a whole, compared with growth of 0.8% last year, although analysts are likely to revise that view in light of the new data.

Even that level of growth would be insufficient to make a meaningful dent in poverty and unemployment or reduce severe inequality, which persists in South Africa more than two decades after the end of white minority rule.

Additional reporting by Karin Strohecker in London; Editing by Catherine Evans

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