South Africa’s Central Bank Governor Believes The Country Can Bounce Back From Junk Status

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Written by Peter Pedroncelli

South African Reserve Bank governor Lesetja Kganyago believes that the country is still capable of thriving despite being downgraded to junk status by two credit ratings agencies in the past few weeks.

President Jacob Zuma upset markets and triggered downgrades from both S&P Global Ratings and Fitch Ratings to BB+ after his surprise cabinet reshuffle at the end of March, which included the removal of respected finance minister, Pravin Gordhan.

This led to a weakened the rand against the dollar, leading to fears of inflation that could spiral out of control and the potential need to raise interest rates as a defensive function of monetary policy.

However, South African inflation slowed to 6.1 percent in March, and the central bank expects it to decrease to below 6 percent in the second quarter of 2017, according to MoneyWeb.

Junk status not an impossible situation

The Monetary Policy Committee of the South African Reserve Bank decided to keep the benchmark repurchase rate unchanged at the end of March, and Kganyago is choosing to be optimistic on prospects for the SA economy, despite the downgrade to junk status.

The former director of the South African National Treasury was speaking to students at a lecture on monetary policy at the University of KwaZulu Natal’s Westville campus when he made it clear that the country still has the ability to bounce back from the recent downgrades if the right approach is adopted.

“South Africa still has breathing space. We have been put on negative output by Moody’s and Standard and Poor’s with respect to our domestic currency denominated debt and what South Africans need to do is identify concerns of the ratings agencies, deal with those and protect ratings so that it doesn’t fall back,” Kganyago said, according to EastCoastRadio.

At 1.2 percent growth, the central bank’s forecast for the current year is slightly more positive than that of the World Bank at only 1 percent for 2017.

The governor admitted that it is difficult to predict how long South Africa will remain at junk status, but the Reserve Bank’s objective in the short-term is to keep inflation down, thereby assisting the economy to recover and create a potential scenario for interest rates to decline.

“The best way to get permanently lower interest rates is to bring down inflation – and then keep it low and predictable,” the governor added, according to Fin24. “Inflation is under control and if it is under control it reduces poverty and inequality.”

The third major ratings agency, Moody’s, is yet to pronounce judgment on South Africa following the downgrades from their fellow agencies.

New finance minister Malusi Gigaba met with the agency after his visit to the International Monetary Fund and World Bank Spring meetings in Washington DC over the weekend in an effort to avoid a third downgrade from Moody’s.