South Africa's fiscal tightening headwind for the economy, SARB may cut rate to offset fiscal drag

South Africa's private sector credit expanded at the fastest pace in three months in January, the South Africa Reserve Bank reported Tuesday. Private sector credit rose 5.56 percent y/y in January after rising 5.1 percent in the prior month. This was the fastest expansion since October. The M3 growth improved to 7.91 percent from 6.07 percent in December. Economists had forecast the annual growth to slow to 6 percent.

Finance Minister Gordhan’s budget presentation last week delivered on the anticipated continued fiscal consolidation with further tax hikes. The budget for fiscal 2017/2018 focused on austerity at the expense of growth. However, the government’s commitment to supply-side reforms remains unclear amid uncertainty and political dynamics in the run-up to the ANC policy and elective conferences this year.

However, Treasury has achieved its first primary surplus (at the consolidated level) since 2008 due to better expenditure control and tax hikes. Still, further tightening is needed to stabilize the debt-to-GDP ratio at around 50 percent. Monetary tightening is likely over for now, but further fiscal tightening will be another headwind for the economy.

Next policy meeting of the SARB is scheduled on March 30, and no rate hike is likely then.

"While our call has been that the central bank will stay on hold, there may be scope for monetary policy to negate some of the impact of fiscal policy this year if the rand sustains recent gains. Price dynamics are turning more positive and it now seems possible consumer inflation will decline to near 4.5 percent oya at year-end." said JP Morgan in a report.