PERSPECTIVES ON RESERVE BANK’S MONETARY POLICY IN THE CURRENT ECONOMIC CLIMATE

SEMIYOU RAFIOU Senior Economist for the Coega Development Corporation

As most of us have come to learn – and experience – the South African Reserve Bank’s (SARB) latest adjustment to the repo rate, raising it by another 50 basis points, marks the 10th consecutive increase since

SARB policy tightening began in November 2021.

The rising cost of living continues to plague working-class South African households, many of whom rely heavily on salaries from businesses equally impacted by the economic downturn and concurrent energy crisis. it plays a crucial role in stabilising our country’s financial condition.

All of us are feeling the economic crunch, and it is challenging for one to set aside personal concerns when analysing the country’s economic landscape.

Those who found comfort and ease in borrowing while interest rates dropped during the peak of COVID-19 just a few years ago are likely to experience shock as loan repayments reflect a marked increase.

Predicting the repo rate became difficult for the SARB in its mission to maintain price stability in the country, amidst heightened food and energy prices, against the backdrop of a challenging global economic climate in the face of Russia's war with Ukraine.

Notably, the recent 50 basis point repo rate hike (475 basis points over 18 months), to 8.25 percent in May 2023, reflects a rocky recovery from unprecedented supply-side shocks, sticky inflation, and subdued domestic economic growth. Looking ahead, there are indicative signs that policy rates may stabilise and slightly improve towards the latter part of 2023.

However, this is subject to heightened uncertainty surrounding acute stress witnessed recently in global financial markets. With tightened global financial conditions, the SARB anticipates upside inflation risks, larger domestic and external financing needs, and the burden of loadshedding which may weaken currency prospects even further. As a result, the commitment to keep inflation anchored increases the likelihood of further monetary tightening and casts a shadow over any silver lining in the near term.

The first economic quarter performances of the country, published by Statistics South Africa (Stats SA), show growth, against some predictions of the market, to avoid a technical recession. This performance is due to the rise observed in the manufacturing, mining and quarrying, construction, and transport industries, and makes it hard to project future performances with an acceptable degree of confidence.

To put this into context, the repo rate is a short-term monetary policy measure controlled and managed by the SARB, and while its increase is as unpopular as it is unpleasant,

The repo rate typically affects monetary components such as the cost of borrowing, the value of our currency, and mortgage rates, which in turn, affect the broader economy. With higher repayments on loans, consumers have less disposable income to channel back into the economy.

Considering the prevailing economic conditions in South Africa, individuals can take straightforward steps to adjust their finances:

Budgeting: creating a realistic budget, focusing on essential expenses, and cutting down on discretionary spending can help you navigate financial challenges; Debt management: evaluating and managing existing debts, renegotiating terms where possible, and exploring debt consolidation options can provide relief and improve financial stability;

Savings: prioritising savings, building an emergency fund, and exploring investment options can provide a safeguard during upcoming financial uncertainties.

While additional revenue generation, or entrepreneurship, might be a step in the right direction, it is important not to lose sight of the impact of the energy crisis and rampant inflation. Private total investment growth is still lagging as the current energy crisis, characterised by frequent power outages, supply chain challenges and rising costs, has had a significant adverse impact on small businesses in South Africa.

The lack of a reliable power supply disrupts production processes, hampers service delivery, and increases operational costs. Small businesses often struggle to afford alternative energy sources, resulting in reduced productivity and potential revenue losses. Moreover, inflation poses additional challenges for small businesses.

Higher input costs, including raw materials, fuel, and utilities, squeeze profit margins and limit investment and expansion opportunities. Small businesses also face challenges in passing on cost increases to consumers due to competitive pressures and limited pricing power, which can further impact their profitability.

The key would be to focus energy on revenue streams that would require minimal capital input and operating costs. Think about what you’re good at and how you can turn it into a profitable small business venture, for example, a knowledge-based service such as consulting.

Despite the challenges, small and medium businesses continue to show significant resilience. According to McKinsey and Co, small businesses in South Africa contribute close to 60 percent of the country’s gross domestic product and have the potential to significantly alleviate the high rate of unemployment in the country. Although high costs present significant barriers for the small business community, entrepreneurs are working more efficiently to overcome challenges by adopting technologies that are critical to their success.

For a larger organisation like the Coega Development Corporation, adapting to the current economic outlook requires agility. While

Coega is a state-owned entity, the organisation has formulated a strategy intent on achieving financial sustainability and while the organisation has its own controls in place to weather the fiscal storm, each business unit has a role to play in terms of generating additional revenue towards its sustainability strategy.

Despite the economic downturn, Coega continues to see silver linings, having secured a doubledigit number of investors in the fiscal year 2021/22. The 2022/23 financial year results will be available following an official audit of the Integrated Annual Report 2022/23.

The role of economists and analysts in the Coega Development Corporation’s Research Unit remains to provide insight and foresight to the organisation in attracting domestic and foreign direct investment into the Coega Special Economic Zone. Indeed, the organisation’s Research Unit has a qualified team, with an extensive depth of knowledge pertaining to global and local economic issues, ranging from senior and junior quantitative economists and analysts with years of experience in economic research, economic impact studies as well as data analysis.

Aligned with the organisation’s vision of being a catalyst for the championing of socio-economic development, and the strategy of achieving financial sustainability, the research unit contributes to its revenue generation by providing technical and advisory services to external stakeholders through the Coega Development Corporation external programmes.

In conclusion, whether your perspective is drawn to individual circumstances or a business outlook, the steps shared in this article may apply to varied degrees.