Mboweni: little room to change economic policy

South African Reserve Bank Governor Tito Mboweni this morning said there is little room to manoeuvre economic policy after an April 22 election.
Reuters reports Mboweni also told members of the Johannesburg Country Club the government’s infrastructure spending plan and the Reserve Bank’s inflation targeting policy had provided a buffer against the global economic crisis.
He said any increase in electricity prices would have a negative impact on inflation and needed to be watched carefully.
Mboweni said he “might not be surprised” to see another quarter of negative growth, which would send Africa’s biggest economy into recession.
“There might be a bit of a difference of opinion between me and the Finance Minister,” added. “He’s confident we won’t see another quarter of negative growth. We are of the view that we might not be surprised to see another quarter of negative growth … technically that’s a recession.”
Reuters separately reports Finance Minister Trevor Manuel yesterday said there was plenty of room for further monetary easing in South Africa’s economy, adding that as inflation falls, so too will interest rates.
The central bank has cut interest rates by a total of 250 basis points since December, on signs that inflation is easing, while the economy in under strain from waning domestic demand and the global recession.
The Reserve Bank had lifted interest rates by 5 percentage points between June 2006 and June 2008 to curb inflation.
“Unlike in the US and the UK, we have plenty of room for further monetary easing, and as inflation continues to fall, so too will our interest rates,” Manuel said in a speech at the Gordon Institute of Business Science.
But this interest rate outlook might not help overly-indebted households and firms. 
“These sorts of macroeconomic offsets to falling demand are not a panacea, and will do little to stop the economic adjustment facing overly-indebted households and firms,” said Manuel.
“Our task in the short and medium term is to ensure that we minimise the damage to the rest of the economy from deflation in the over-indebted groups and sectors,” he said, adding that some sectors might shrink further due to uncompetitiveness.
Manuel said South African households have set the stage for a recovery in consumption.
“Household debt levels have declined sharply (and this) along with declining debt service costs, will help to free up considerable purchasing power.”
The economy grew by an average 5 percent a year between 2003 and 2007, driven mainly by consumer demand, but contracted by 1.8 percent in the fourth quarter of 2008, with weak manufacturing and mining output data indicating South Africa is on course for its first recession in 17 years.
Manuel said the impact of the international crisis on South Africa had been less severe than in other countries and a competitive exchange rate would boost foreign demand for exports, which have fallen sharply, when the global economy begins to recover.
Manuel did not answer a question on whether South Africa would increase the size of its deficit to accomodate more spending, only saying: “I think that it is less about the size than about about how it is spent.”
In February, Manuel announced increased spending to boost the economy, which would see South Africa’s budget shifting back into a deficit in 2008/09 after three years of surpluses. The Treasury said last week the deficit would be 1.2 percent of GDP.
“I’m not queasy about running a deficit, it is not a statement of religious intent, it is a measure you take when you have done your assesment of what the capital allows you to do,” Manuel said on Monday.
Leftist allies of the ruling African National Congress, want to increased public spending, but Manuel has mostly been conservative in his 13 years as minister.
Manuel did not shed any light on the direction of policy after an April 22 election. “I’m hoping (that) beyond the elections the top priority will be for a wider discourse on the economy,” he said in answer to a question.
Investors have been unnerved by the increasing power of the leftists in the ANC since they helped Jacob Zuma ascend to leadership of the party, setting him on course to become state president.