WAS last week’s 50-basis point rate hike about inflation or about credibility? The answer is surely both.
It’s not clear that SA can undo the damage it did to itself with December’s finance minister debacle any time soon. The strength of its institutions, particularly the finance ministry and central bank, was a key factor differentiating it from other emerging markets.
December put that in doubt, perhaps irreparably. And although reappointed Finance Minister Pravin Gordhan and a couple of his Cabinet colleagues have been trying to get the markets back on board, investors were looking at two key events as early indicators of whether policy makers could actually deliver on promises to "do whatever it takes". Last week’s monetary policy committee was one. This month’s budget is the other.
For a while now, the monetary policy committee’s apparent hawkishness may have been as much about credibility and independence as about economic fundamentals.
Rate decisions are often finely balanced, but the committee has seemed particularly concerned to make sure it is seen to be pursuing its inflation-targeting mandate.
Last week’s decision was in a way a no-brainer for an inflation-targeting central bank, because of the extent to which the rand’s crash and the drought’s increasing severity had hit the inflation outlook since the committee’s November meeting. But the new inflation forecasts the committee revealed last week are somewhat worse than most private sector estimates. Did private sector economists miss something? Or was the Bank taking a worst-case view to support a rate decision prompted by more than just the need to prevent inflation and inflationary expectations spiralling? It seemed an unusually contested decision.
Barclays economist Peter Worthington has suggested that the committee was driven in part by the unarticulated need to protect the rand.
With the market sensitive to any more "policy mistakes", and pricing in a 50-basis point hike, anything less could well have hit the rand hard and made inflation worse. But the committee was surely looking not simply to the rand, but to credibility more broadly — reaffirming its independence at a time when it is one of the few institutions the Zuma administration has not had a go at eroding.
The budget is a more formidable challenge. Many in the market have huge faith in Gordhan, and there is a (mistaken) notion that he now calls all the shots because he can’t be fired.
Restoring credibility now will require that he not only stick to the targets set out in October’s medium term budget but better them. That will mean being brutally realistic about the growth rate, not just this year, but in the next two years. He can’t kick the can down the road as the past couple of budgets have done and hope that the growth rate will jump in the outer years of the fiscal framework and so stabilise the deficit as promised.
In essence, what the market now wants to see is that he is willing, and able, to take steps that are politically unpalatable. He can’t just raise tax rates, and the politics of any hikes will be closely watched — is he willing or able to look at raising the value-added tax rate, for example? Or is he scoring political brownie points by targeting corporates and the wealthy?
But, spending will be even more important a signal than revenue. The budget will need to include actual spending cuts. Sticking to the expenditure ceiling as government has done since 2012 may not be nearly enough, so the question is what can cut.
Much rests on the credibility of the budget, and if Gordhan gets it wrong, the damage will be very hard to undo. Crucially though, a good budget isn’t enough on its own. Good monetary and fiscal policy decisions are the necessary conditions for SA to start rebuilding its credibility, but they are not nearly sufficient.
The ratings agencies have emphasised that it’s about growth, not just the fiscal framework, and that SA needs to take steps to raise its economic growth rate if it wants to avert a ratings downgrade.
Markets will be looking to next week’s state of the nation address to see if President Jacob Zuma will come up with more than the usual platitudes, and whether there is a real desire to go for growth.
• Joffe is editor at large
Pravin Gordhan. Picture: TREVOR SAMSON
WAS last week’s 50-basis point rate hike about inflation or about credibility? The answer is surely both.
It’s not clear that SA can undo the damage it did to itself with December’s finance minister debacle any time soon. The strength of its institutions, particularly the finance ministry and central bank, was a key factor differentiating it from other emerging markets.
December put that in doubt, perhaps irreparably. And although reappointed Finance Minister Pravin Gordhan and a couple of his Cabinet colleagues have been trying to get the markets back on board, investors were looking at two key events as early indicators of whether policy makers could actually deliver on promises to "do whatever it takes". Last week’s monetary policy committee was one. This month’s budget is the other.
For a while now, the monetary policy committee’s apparent hawkishness may have been as much about credibility and independence as about economic fundamentals.
Rate decisions are often finely balanced, but the committee has seemed particularly concerned to make sure it is seen to be pursuing its inflation-targeting mandate.
Last week’s decision was in a way a no-brainer for an inflation-targeting central bank, because of the extent to which the rand’s crash and the drought’s increasing severity had hit the inflation outlook since the committee’s November meeting. But the new inflation forecasts the committee revealed last week are somewhat worse than most private sector estimates. Did private sector economists miss something? Or was the Bank taking a worst-case view to support a rate decision prompted by more than just the need to prevent inflation and inflationary expectations spiralling? It seemed an unusually contested decision.
Barclays economist Peter Worthington has suggested that the committee was driven in part by the unarticulated need to protect the rand.
With the market sensitive to any more "policy mistakes", and pricing in a 50-basis point hike, anything less could well have hit the rand hard and made inflation worse. But the committee was surely looking not simply to the rand, but to credibility more broadly — reaffirming its independence at a time when it is one of the few institutions the Zuma administration has not had a go at eroding.
The budget is a more formidable challenge. Many in the market have huge faith in Gordhan, and there is a (mistaken) notion that he now calls all the shots because he can’t be fired.
Restoring credibility now will require that he not only stick to the targets set out in October’s medium term budget but better them. That will mean being brutally realistic about the growth rate, not just this year, but in the next two years. He can’t kick the can down the road as the past couple of budgets have done and hope that the growth rate will jump in the outer years of the fiscal framework and so stabilise the deficit as promised.
In essence, what the market now wants to see is that he is willing, and able, to take steps that are politically unpalatable. He can’t just raise tax rates, and the politics of any hikes will be closely watched — is he willing or able to look at raising the value-added tax rate, for example? Or is he scoring political brownie points by targeting corporates and the wealthy?
But, spending will be even more important a signal than revenue. The budget will need to include actual spending cuts. Sticking to the expenditure ceiling as government has done since 2012 may not be nearly enough, so the question is what can cut.
Much rests on the credibility of the budget, and if Gordhan gets it wrong, the damage will be very hard to undo. Crucially though, a good budget isn’t enough on its own. Good monetary and fiscal policy decisions are the necessary conditions for SA to start rebuilding its credibility, but they are not nearly sufficient.
The ratings agencies have emphasised that it’s about growth, not just the fiscal framework, and that SA needs to take steps to raise its economic growth rate if it wants to avert a ratings downgrade.
Markets will be looking to next week’s state of the nation address to see if President Jacob Zuma will come up with more than the usual platitudes, and whether there is a real desire to go for growth.
• Joffe is editor at large
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