You're listening to Strictly Business Podcast with Lindsay Williams.
The South African economy is stuttering.
GDP is anemic, the PMI in negative territory, and I think that's seven months
in a row.
And also business confidence is under pressure.
But on the upside, the round is stable, the bond market nice and steady,
and inflation well below the South African Reserve Bank's 3% to 6% target range.
So is it time for change when it comes to that target range?
With me is Vivian Tabra.
investment director at 91 in Cape Town.
Inflation is doing well.
Let's start with that, Vivian, and then move on to is the 3% to 6% still relevant?
Yes.
So, inflation is doing well.
I think although the last print was a little bit higher than was expected for
the first time in many months,
what we did see was we saw that the surprise really came through on the food
side and that can be explained away,
but there was still a positive of surprise on the core side.
So inflation is very much under control.
I think the market is generally expecting inflation now to turn upwards into the
back part of this year and gradually
converge back to 4.5%.
But I think if we look at where the rand is now, we've actually got a stronger rand
again,
and we look at sort of the international situation, and we look at the anemic
growth that you've mentioned,
there's a chance that those forecasts are going to be revised down again.
and that we're going to see inflation better behaved for longer because there's
certainly no demand pressure in the economy
at all.
I like that phrase, by the way, better behaved for longer.
And this is where we lead on to inflation targeting.
Is it time to change?
But anyway, finish what you were going to say and then we'll move on to that knotty
problem.
Yes.
And I was going to say, certainly our governor believes that it's time to
change.
And I think the timing is good.
generally at a time when inflation is well contained, it is behaving well,
it's the time where the costs of sort of moving to a lower target are going to be
lower.
Those short-term costs that the market is likely to have to bear.
What difference does it make and why do we have this target range?
I mean, is it as simple as this to a layman?
If it goes above 6%, say, given the current range, then you raise rates.
If it goes below 3%, then you cut rates.
Obviously, there are lots of other factors to take into consideration, but that's
what many people believe.
Yes, and that is a very simplistic way to look at it.
But essentially, what we need is we need anchored inflation, anchored inflation
expectations.
It drives stability in the economy.
It drives growth.
It helps with so many different things.
It helps protect the value of the rand.
So there are so many positives from having well-contained inflation.
And if we look at the paper that the Reserve Bank put out around what they want
to do and why they see inflation at
a lower level.
lower target level being so important, we can understand what the impact would be.
So, if we look at what's happening in South Africa at the moment, debt interest
costs are growing faster than nominal GDP.
So, we're reaching a point where it's difficult to stabilize things.
Lower inflation, lower real interest rates make it easier for the man in the street
to budget,
it makes easier for businesses to invest, and it makes it then easier for the
economy to grow.
Let's look at that working paper that you referenced there.
It comes from the South African Reserve Bank.
I want to read something from it.
It says here, an inflation target of 3%
in tandem with a strategy that emphasises short-term and inflation-linked borrowing
could generate almost
R870 billion in savings on debt service costs over a decade.
That's a really big number.
Is it realistic?
I think it is.
They've done their homework well.
It is very realistic.
If we look at the shape of the South African curve and we look at what we pay
to issue bonds and we look at the real interest
rate that's being paid at the moment to try and keep inflation at these lower
levels,
you can see how much is being spent on debt service costs.
So government spends 20% of its revenue on debt service costs and 5% of GDP.
That's a huge amount of money.
If that is brought down, that money can be spent on other things.
things like infrastructure that will feed back into the economy and give much more
bang for back.
The working paper does issue a warning that says that not moving soon in reducing
the inflation rate creates risk.
That space to issue debt in the short end of the yield will disappear.
So clearly, the paper has a look at the markets, a fixed income, for example.
What do you think that the reduced inflation target would do to the markets?
Well, I think we've already seen that the...
the talk of the reduced inflation target is positive for the markets.
I mean, now sitting with a situation where the South African 10-year yield has
dropped below
10% today for the first time in three years.
So that is a positive.
Obviously, there are other drivers there as well, but there's growing confidence
that this is something that is imminent.
So I think it is a positive for the market overall.
That is not to say that, you know, if we land up with higher prints as we go
through to the backside of this year, uh,
It means that rates won't stay higher for longer to sort of anchor inflation
expectations.
But it does mean that the positive impact, certainly on the longer end of the curve,
is starting to evidence itself.
So the market is already factoring in a potential change in targeting.
There is, of course, a juggling act to be done by the South African Reserve Bank's
Monetary Policy Committee.
And that is, of course, with growth.
And if growth stays where it is.
I mean, the last print we saw on a month on month basis was.
minus 0.1%. And the yearly figure, gosh, it depends who you believe, but let's call
it 1.1, 1.2%,
something like that, Vivian.
People are going to say, you can cut rates now, please cut rates so that we can get
the economy going.
On the other hand, that does have implications for inflation, as you've
said.
Yes,
but also maybe somewhat less big implications for inflation given the state
of demand.
And also given the composition of our inflation basket.
So really what we need for inflation to stay lower for longer is we need those
administered
price levels to come down.
We need them to rise in line with the inflation target, where over the last few
years,
their increases have been way above the sort of 4.5% level that the SAAB has been
targeting.
So that is quite key.
What we don't want to see is we don't want to see these.
big increases in administered prices continue to be the case because that is
impacting on inflation
expectations and that is stopping inflation expectations from coming lower.
The SAAB is hopeful that if the target is lowered that inflation expectations
will converge with that lower target by the end of 2027 but a lot of that will
depend on what happens to administered
prices.
Do you think that the government of national unity will listen to words like
yours and say, yes, you're absolutely right,
we have to control administered prices?
Or is it too politically controversial?
I think it's becoming less and less politically controversial.
I think we're sitting at the stage now where the Department of Finance is now
considering it.
We had our Minister of Finance coming out yesterday and saying that it is being
looked at, the paper, but they're undecided at the moment.
But certainly the pressure is growing and the pressure is growing from all sides.
And actually, we even had the OECD come out in the last day or two saying that
they supported a
lower inflation target for South Africa.
And we are higher than our emerging market peers.
Most of our emerging market peers in Latin America are sitting at 3%.
And once you start looking at Asia, those rates are even lower.
A lot of them are at 2%.
What do you think at 91?
We think that they should move there.
We do think that there is likely to be some short-term pain.
I don't think that can be avoided.
But over the longer term, it is certainly something that would be welcomed by 91 and
by the markets generally.
Vivian, thank you very much for your time and your analysis.
Vivian Tabor is Investment Director at 91 in Cape Town.
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