MONETARY POLICY REVIEW
APRIL 2020
APRIL 2020
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ISSN: 1609-3194
Produced by the Publishing Section of the South African Reserve Bank
APRIL 2020
i
Preface
The primary mandate of the South African Reserve Bank (SARB) is to achieve and maintain price stability in the interest of
balanced and sustainable economic growth. In addition, the SARB has a complementary mandate to oversee and maintain
financial stability.
Price stability helps to protect the purchasing power and living standards of all South Africans. It provides a favourable
environment for investment and job creation, and supports international competitiveness. The goal of price stability is
quantified through an inflation target, which is set in consultation with government. The target is a range of 3–6%, which has
been in place since 2000.
The SARB has full operational independence. Monetary policy decisions are made by the SARB’s Monetary Policy Committee
(MPC), which is chaired by the Governor, and includes the Deputy Governors and other senior officials of the SARB.
The inflation-targeting framework is flexible, meaning that policymakers will seek to look through temporary shocks, thereby
avoiding excessive volatility in interest rates and economic output. The MPC takes a forward-looking approach to account for
the time lags between policy adjustments and economic effects. MPC decisions are communicated at a press conference at
the end of each meeting, accompanied by a comprehensive statement.
The Monetary Policy Review (MPR) is published twice a year and is aimed at broadening public understanding of the objectives
and conduct of monetary policy. The MPR covers domestic and international developments that affect the monetary policy
stance. In normal circumstances, the MPR is presented by senior officials of the SARB at monetary policy forums held in
major centres across South Africa. However, this particular MPR appears during the national COVID-19 lockdown, which has
forced the cancellation of these forums. As an alternative, questions about this document may be directed to Marlene Hugo,
at
APRIL 2020
Contents


Boxes

Statements issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Statement of the Monetary Policy Committee
Statement of the Monetary Policy Committee
Statement of the Monetary Policy Committee

APRIL 2020
Having monetary space,
and using it
Executive summary and
overview of the policy stance
The COVID-19 pandemic is the biggest disruption to the
global economy since the bankruptcy of Lehman Brothers in
2008. The South African Reserve Bank has space to respond,
given that inflation is projected under 4.5% this year, and is
likely to stay well within the target range over the medium
term. Accordingly, the Monetary Policy Committee lowered
the repurchase rate by a full percentage point in March.
Alongside January’s quarter-point cut, which predated the
outbreak but which was also premised on lower inflation and
lower growth, this brings the repurchase rate to a six-year low.
Monetary stimulus can help mitigate the economic costs of
the COVID-19 shock, by supporting the spending power of
firms and households. South Africa, however, suffers from
significant, pre-existing growth constraints. Better long-term
growth prospects will therefore require a range of interventions,
many of them outside the domain of the central bank.
Global growth slowed to a post-crisis low of 3% in 2019,
and will decelerate further in 2020. The COVID-19 outbreak
has severely reduced output in the first quarter of the year,
and the disruption will intensify in the second quarter. After
that, the outlook is uncertain, but most analysts expect a
rebound which will push up growth by 2021, although more
adverse scenarios are conceivable. In China, where the
outbreak began, the economy likely contracted in quarter-onquarter terms at the start of the year, but is now recovering.
By contrast, in the euro area and the United States (US) – the
other largest blocs in the global economy – the disease effects
only became widespread towards the end of the first quarter,
with the turning point not yet in sight. A number of other large
economies have also locked down, often pre-emptively, which
is prudent but will massively reduce economic activity in
the short term.
In the major economies, monetary policies have become
even more stimulative. In particular, the US Federal Reserve
(Fed) has lowered its policy rate to just above 0%, completely
unwinding the interest rate normalisation of 2015–2018, and
restarted quantitative easing. Similarly, the Bank of England
(BoE) has cut interest rates to almost zero, while the European
Central Bank (ECB) has expanded its quantitative easing
programme and established a new asset-purchase facility.
Inflation in these economies is likely to slow further this year,
having already been below targets in 2019 (at 1.5% in the US,
1.8% in the United Kingdom (UK), and 1.3% in the euro area).
Advanced economy central banks are now once again all
encumbered by the zero lower bound, which prevents interest
Percentage change over four quarters

Headline inflation*
Sources: Stats SA and SARB
* Dotted line indicates forecast

Midpoint
3–6% inflation target range

Per cent

G3 interest rates*

Source: SARB
* Dotted line indicates forecasts
Percentage change over four quarters

Growth in South Africa’s major trading partners*


Sep 2019

Mar 2020
Source: SARB
* Dotted lines indicate forecasts

APRIL 2020
rates from being lowered too far into negative territory. In the
emerging markets, by contrast, interest rates have not dipped
to zero and inflation has not persistently undershot targets,
leaving these central banks with more policy space.
In South Africa, 2019 inflation came out well below
expectations, ultimately averaging 4.1% for the year. This
was a rare instance of inflation in the bottom half of the target
range: since 2010, monthly inflation has been at or above the
4.5% midpoint of the target range for 77% of the time. Notable
contributors to this relatively low inflation rate were food prices,
which remained below longer-run averages, as well as housing
inflation, which decelerated to an all-time low of 2.2% in
December. (See Box 7 on for a discussion of the 2019
inflation forecast errors.) Inflation picked up temporarily at the
end of the year, as anticipated, on base effects from oil price
weakness the year before. The most recent inflation prints have
been 4.5% for January and 4.6% for February.
Inflation is expected to remain well contained within the
inflation target range across the forecast horizon. The most
recent Monetary Policy Committee (MPC) forecasts show
inflation in the bottom half of the target range again this year,
averaging 3.8%, before recovering to 4.6% in 2021 and 4.4%
in 2022. The main driver of low inflation this year is fuel prices,
following a collapse in world oil prices. Weaker demand is also
exerting downward pressure on inflation, partly offset by the
more depreciated exchange rate. The distribution of risks to
this forecast, as captured in the inflation fan charts, indicates
a high probability that inflation will be within the target range
throughout this period, with 92% of the probability distribution
between 3% and 6%. The chance of target misses is quite
small, with 4% of the distribution above the upper bound and
4% under it, over the forecast period (2020–2022). The chance
of a target undershoot is marginally higher in 2020, however,
with 5% of the distribution under the lower bound of the target
range. (Note that these probabilities refer to quarterly inflation
outcomes; the chances of target misses in individual months
are higher.)
Inflation expectations are well within the target range, having
declined steadily in recent years. The average two-year-ahead
expectation measure of the Bureau for Economic Research
(BER) is down to 4.8% as of the latest survey, from around 6%
in 2016, while current-year expectations have fallen to 4.4%,
a 14-year low. The COVID-19 outbreak will provide a test of
whether expectations are resistant to shocks, helping reveal
how firmly they are anchored. For the time being, however, it
is clear that expectations are better positioned than they were
historically, because they are no longer close to, or above, the
top of the target range. This means the South African Reserve
Bank (SARB) has monetary policy space at a moment of crisis,
which was a major objective of the strategic initiative, begun in
2017, to anchor expectations closer to 4.5%.
Percentage change over four quarters

Headline inflation*

* The bands around the central projection show confidence intervals
of 10%, 30%, 50% and 70%
This chart shows seasonally adjusted data, as used in the QPM
Sources: Stats SA and SARB
Probability (per cent)
>6%
4.5% < 6%
3% < 4.5%
<3%

Inflation forecast probabilities
Source: SARB
92% probability of 3–6% inflation

Headline inflation (percentage change)
Per cent

Two-year-ahead inflation expectations*

Sources: BER and SARB
* Dotted line indicates blended forecasts
Midpoint of the inflation target range

APRIL 2020
Gross domestic product (GDP) growth has been feeble.
Output expanded by just 0.2% last year, the lowest rate of
growth since the global financial crisis. The primary and
secondary sectors were particularly weak, principally due to
inadequate rainfall and electricity shortages. The tertiary sector,
by contrast, posted modest gains over the year, expanding
by 1.3%. This sustained a pattern that has prevailed since
at least 2016, in which the tertiary sector delivers narrowly
positive growth, while the other sectors are volatile and drive
fluctuations in the headline growth rate.
The COVID-19 outbreak will cause the economy to contract
this year. The current-year growth forecast was -0.2% as
of March, with output declining in the first and the second
quarters. This forecast predated government’s decision to lock
down the economy, meaning it is probably too optimistic. More
recent work suggests 2020 growth will be in a range of -2% to
-4%, with downside risks should the lockdown be extended, or
if the global economy weakens more than currently projected.
Further out, there is limited scope for a rebound, but growth is
now unlikely to exceed 1% in 2021. South Africa was already
in recession prior to the COVID-19 shock, and the situation
has become more challenging since. The upside risk to this
forecast, however, is that a deeper contraction this year would
permit a stronger rebound in 2021.

Percentage change over four quarters

Real GDP growth*
-2
-1

* The bands around the central projection show confidence intervals
of 10%, 30%, 50% and 70%
This chart shows seasonally adjusted data, as used in the QPM
Sources: Stats SA and SARB
Box 1 COVID-19 and monetary policy
For the March Monetary Policy Committee (MPC) meeting, the South
African growth forecast was lowered to -0.2% for 2020, from 1.2%
as of the January MPC meeting. Of this revision, approximately half
came from COVID-19. In other words, the 2020 growth forecasts
would have been lower than they were in January even without
the pandemic, mainly due to weak data outcomes over the past
two months. The MPC judged that risks to this forecast lay on the
downside, an assessment subsequently vindicated by the countrywide lockdown announced the week after the MPC. Updated
estimates show the economy contracting by around 2% to 4% in
2020, although these projections are tentative.
The March MPC forecasts marked growth among South Africa’s
trading partners down to 1.1% for 2020, from 2.7% as of the January
MPC meeting. These forecasts predated lockdown measures in the
United Kingdom, most euro area countries (except Italy), much of the
United States, and also South Africa’s regional neighbours. It is now
likely trading-partner growth will be around -1% this year. Growth is
still expected to rebound to 2.8% next year.
The March MPC had a lower inflation outlook, largely because of
the pandemic, although a downside inflation surprise in January also
contributed. The headline inflation projections were 3.8%, 4.6% and
4.4% for 2020, 2021 and 2022 respectively, while core was at 3.9%,
4.3% and 4.4% for those three years. These numbers will probably
change less than the March MPC growth projections, with some
Percentage change

South African versus trading-partner real
GDP growth*
-1

Source: SARB
* Dotted lines indicate forecasts

South Africa’s trading partners

South Africa

APRIL 2020
subsequent developments pushing prices down (oil, the output gap)
but others pushing them up again (primarily the exchange rate).
-
Fuel prices were the main reason for the lower inflation forecast
in March. The oil price assumptions for the forecast were
US$40.4 per barrel for 2020, slowly recovering to US$45 per
barrel by 2021Q2. Cheaper oil implied fuel price deflation of
5.8% in 2020, relative to an increase of 4.2% projected for the
January MPC. However, the recovery in oil prices next year
creates a temporary uptick in headline inflation in 2020.1
-
The inflation forecast was also lowered by a more negative
output gap. The March forecast had this gap reaching -2.3% of
potential gross domestic product this year, which is larger than
it was following the global financial crisis. New estimates
suggest a more negative gap, even if some of the lockdown
losses are deemed permanent, implying lower potential growth.
-
The exchange rate is the main source of upward inflation
pressure on the forecast. The March projections assumed the
exchange rate would average R15.55 per US dollar this year, up
from R14.45 per dollar last year, for a rand undervaluation close
to 6% for 2020. The undervaluation is now likely to be larger.
However, as per the modelling framework and historical
experience, the exchange rate is likely to overshoot and then
recover over the medium term. Pass-through is lower than it was
historically, which mitigates the inflation threat posed by a
weaker rand.
-
Crucially, with both headline and core inflation projected in the
bottom half of the target range this year, there is space to absorb
short-term inflationary pressure.
The major central banks have all loosened policy, with the United
States Federal Reserve in particular cutting rates back to zero. For a
country like South Africa, which is a net borrower from the world, this
creates more policy space. Specifically, in the modelling framework,
it lowers the neutral rate. There are some offsetting pressures on
neutral because of rising South Africa-specific risk, but the overall
neutral is still lower by 0.2 percentage points.
The MPC responded to the COVID-19 outbreak by lowering the
repurchase rate (repo rate) by 100 basis points. The forecasts
described above were premised on a somewhat higher repo rate,
with three 25 basis point cuts spread over 2020 and early 2021.
This suggests the policy decision internalised some of the downside
risks to the growth outlook, many of which have subsequently
materialised.

This posed a problem for the Quarterly Projection Model forecast,
because the forward-looking repo rule overlooks most of the lower
inflation from cheaper fuel, but sees the upward pressure from the
base effect. This reduces the repo rate reaction in the model, a
consequence that was discussed in the MPC forecast meeting.
Percentage change over four quarters

Headline inflation

Sources: Stats SA and SARB

Jan 2020

Mar 2020
Forecast
Changes in the headline inflation forecast
between January and March 2020
Percentage points

Core inflation
Food
Petrol
Electricity
Headline inflation
Sources: Stats SA and SARB

APRIL 2020
Overview of the policy stance
This Monetary Policy Review (MPR) covers three MPC
meetings: in November 2019, January 2020 and March 2020.
Over these meetings, the repurchase rate (repo rate) was
reduced by 25 basis points at the January meeting and by
100 basis points in March. The repo rate is now at 5.25%, its
lowest level since January 2014, when the SARB commenced
a hiking cycle. (The all-time repo low is 5%, in force from
July 2012 to January 2014.)
The November MPC meeting followed the October release of
the Medium Term Budget Policy Statement (MTBPS), which
had spelt out a significant deterioration in the fiscal position.
National Treasury’s projections for the fiscal deficit shifted to
around 6% of GDP across the medium term, in contrast to
forecasts in the region of 4% in the February 2019 Budget.
Although additional burdens on the fiscus had become clear
prior to the publication of the MTBPS, that document did not
announce offsetting measures to stabilise sovereign debt.
In response, South Africa’s sovereign risk premium spiked
higher, and two of the credit rating agencies adopted negative
outlooks on the sovereign’s rating. In the forecasting framework,
these developments fed into the forecast of a higher neutral
interest rate, because South Africa had become riskier, as
well as a more depreciated exchange rate outlook. However,
this upward pressure on rates was mitigated by lower inflation
projections as well as a weaker growth forecast, and with it a
wider output gap. As a result, the Quarterly Projection Model
(QPM) signalled a repo rate cut towards the end of 2020, in
contrast to the preceding forecast which had pointed to an
unchanged repo rate stance.
The forecast shifted markedly for the January 2020 MPC
meeting, with both growth and inflation data coming in lower
than expected. This required downward revisions to the
forecast starting point, reducing the 2020 inflation projection
from 5.1% to 4.7%, and 2020 GDP growth from 1.4% to 1.2%.
Meanwhile, the risk environment shifted in an unexpected
direction, with favourable global conditions offsetting South
Africa-specific risk factors, allowing the rand to appreciate
from around R14.90 to the dollar in November to R14.40 in
January. The QPM rate path shifted lower again, with rate cuts
in both the first and the fourth quarters of 2020. The MPC
chose to reduce rates at this meeting, a move which surprised
the majority of analysts and was not fully anticipated by
markets (pricing for forward rate agreements (FRAs) indicated
approximately a 40% probability of a cut). The rate cut was
nonetheless consistent with a standard Taylor-type rule, like
that in the QPM, and followed shifts in the data, underscoring
the MPC’s frequently reiterated data dependence.
Per cent

Repurchase rate
Source: SARB

Per cent

Evolution of the QPM repo rate path*

Source: SARB
* Dotted lines indicate forecasts

Nov 2019

Jan 2020

Mar 2020
Per cent

Real neutral rate*


Nov 2019

Jan 2020

Mar 2020
Source: SARB
* Dotted lines indicate forecasts

APRIL 2020
For March, three fundamental changes occurred. The inflation
forecast shifted much lower for 2020, well into the bottom half
of the 3–6% target range. The growth outlook deteriorated
substantially, with the output gap becoming more negative.
Finally, global short-term interest rates dropped to zero, pulling
down South Africa’s neutral rate (despite a partial offset from
higher domestic risk). Most of these changes stemmed from
the COVID-19 outbreak, although the effects of this shock were
reinforced by new data prints (both GDP and inflation surprised
to the downside) as well as a breakdown in cooperation
between OPEC1 and non-OPEC oil producers (which further
depressed oil prices).
These circumstances prompted an interest rate cut of
100 basis points, the largest repo adjustment since May 2009.
This was significantly larger than analyst expectations,2 and
more than the QPM projections envisioned over the entire
forecast period. The scale of the move reflected expectations
that the COVID-19 pandemic would have large negative effects,
concentrated in the near term. As such, delaying stimulus would
risk missing the worst of the crisis. (By analogy, firefighters
should aim to arrive before the fire gets going, not when it
peaks.) In ordinary circumstances, policy can adjust gradually,
pausing to incorporate new data, to steer inflation and output
back towards equilibrium levels. This is the basic operating
procedure of the QPM, which hardwires an incremental policy
response through a large smoothing parameter in the Taylor
Rule. The COVID-19 shock, however, threatened a sudden
downward shift in South Africa’s economic performance,
which merited a more forceful response.
As the COVID-19 pandemic intensified, financial conditions
became increasingly stressed, with liquidity strains appearing
in various markets by mid-March. In response, the SARB
followed up the March MPC decision with measures to meet
markets’ increased demands for cash (that is, liquidity). These
included holding repo auctions on a daily rather than weekly
basis, as well as offering repos for longer timeframes than the
usual overnight period. The Standing Facility borrowing and
lending rates were adjusted lower, to improve the supply of
liquidity in interbank markets and discourage cash hoarding
by individual banks. Furthermore, the SARB began expanding
its monetary policy portfolio by purchasing government bonds
on the secondary market, both to stabilise that market and to
inject new cash into the financial system.

Organization of Petroleum Exporting Countries

Median expectations varied between -25 basis points and -50 basis
points, depending on the survey.
Per cent

Risk premium*


Nov 2019

Jan 2020

Mar 2020
Sources: JPMorgan and SARB
* Dotted lines indicate forecasts

APRIL 2020
This last measure has attracted particular attention because
of its resemblance to quantitative easing (QE). It should not
be interpreted as QE, however, because: (1) it is not a policy
necessitated by the zero lower bound on interest rates, as
South Africa’s short-term rates are still well above zero; (2) it
is not required to prevent deflation, as inflation is unlikely to
deviate from the target range over the medium term, let alone
fall below zero; and (3) it is not aimed at crowding investors
out of the government bond market and into riskier assets,
an important QE channel. It should also be remembered
that balance sheet expansion in moments of financial stress
is a phenomenon dating back hundreds of years, not a
21st century invention.3
The interventions described above have improved market
functioning, furthering the SARB’s financial stability mandate
and supporting effective monetary policy transmission. It
should be noted, however, that these decisions did not require
a meeting of the MPC, and were not intended to replace or
amend the policy stance agreed by that Committee.

J Barker, D Bholat and R Thomas, ‘Central bank balance sheets:
past, present and future’, Bank Underground, 3 July 2017, available at

sheets-past-present-and-future/.
Per cent
R2030
R2048
Selected government bond yields
Source: Bloomberg
March 2020

Changes in liquidity
strategy announced

APRIL 2020
Global economy:
new decade, new crisis
Global growth reached a decade-low in 2019. A recovery
had been anticipated for 2020, but this has been derailed by
the COVID-19 outbreak. Although detailed data are not yet
available, the global economy is almost certainly in recession
already, with China contracting in the first quarter and both
the United States and the euro area likely to follow suit in the
second. Forecasts at this stage are highly uncertain, but the
most likely outcome is that global growth will rebound next
year, as the pandemic effects fade. Inflation rates are generally
below targets in the advanced economies and well contained
in most of the major emerging markets, permitting additional
monetary stimulus.
Global growth and the
COVID-19 pandemic
Global growth slowed to just 2.9% in 2019 from 3.6% in 2018,
the weakest pace of expansion since the 2008–2009 global
financial crisis. The most visible driver of this underperformance
was trade policy conflict, particularly between the United States
and China: global trade activity contracted by 0.5% in 2019,
the worst rate since the 2012 euro area crisis. Manufacturing
sectors were harder-hit while the services sectors proved more
resilient, which helped to maintain employment growth rates
in the advanced economies. Emerging markets, by contrast,
continued to underperform, in the context of a persistently
strong dollar, heavy debt burdens and a variety of countryspecific factors, from financial sector disruptions in India to the
after-effects of a sudden stop in Turkey.
By the end of 2019, with the US and China agreeing on a
preliminary trade deal – and with some Brexit uncertainty
resolved through a decisive UK election – it appeared the
global economy was primed for a rebound. The International
Monetary Fund’s (IMF) January forecasts looked forward
to growth of 3.3% in 2020, followed by 3.4% in 2021. These
prospects, however, were destroyed by the COVID-19
outbreak, which began in late 2019 and was a global news
story by February 2020. The infograph on the next page
sets out the timeline to date, illustrating how rapidly the crisis
has escalated.
The outbreak originated in China. The number of new cases
recorded accelerated from January to mid-February and
then began to slow again, fading out almost entirely by early
March. Lockdown measures severely interrupted economic
activity during the quarter, with the manufacturing Purchasing
Managers’ Index (PMI) falling to 40.3 in February (its lowest
level on record), industrial production contracting by 13.5%
from December, and the official unemployment rate (for urban
Percentage change

Global growth
Source: IMF
-1

Thousand people
Feb 2020
Mar 2020
New COVID-19 cases
New
definition
used
Sources: Johns Hopkins University and SARB
Jan 2020
In China
Outside of China

Percentage change

Chinese economic growth forecasts
Source: OECD

Nov 2019

Mar 2020

APRIL 2020
areas) spiking to 6.2% from 5.3% in January. GDP data are not
yet available, but output almost certainly contracted in the first
quarter. In sum, China’s experience has been one of a large
but quite short-lived shock, which is likely to be reversed with
the help of policy stimulus – provided the second, global stage
of the pandemic does not derail the recovery.
From China, the pandemic spread widely, with Italy and South
Korea the next two worst-affected countries as of mid-March.
The Italian outbreak necessitated a country-wide lockdown,
followed by similar measures in France, more or less
guaranteeing that the euro area will suffer a recession. The US,
while initially less affected than Asia or Europe, saw infections
increase rapidly from mid-February, leading to a restrictions on
movement in a number of states. A range of other countries
has subsequently adopted partial or complete lockdowns,
31 Dec 2019
China treats dozens of
pneumonia patients
11 Jan 2020
China reports
its first death
15 Jan 2020
Japan reports
its first case
23 Jan 2020
Wuhan isolated
by authorities
2 Feb 2020
First death outside of
China (Philippines)
13 Feb 2020
Peak of new cases
in Hubei
19 Feb 2020
First case reported
in Iran
23 Feb 2020
Italy implements lockdowns
in response to surge in cases
7 Jan 2020
New strain of
coronavirus identified
13 Jan 2020
Thailand reports
its first case
20 Jan 2020
South Korea reports
its first case
30 Jan 2020
WHO declares global
health emergency
10 Feb 2020
Death toll in China
surpasses global
SARS deaths
14 Feb 2020
First death in Europe
21 Feb 2020
South Korea implements
shutdown and gathering
restrictions
29 Feb 2020
US reports its first death,
implement travel
restrictions
5 Mar 2020
South Africa reports
its first case
13 Mar 2020
US declares national
emergency
16 Mar 2020
Spain enters lockdown,
institutes public control
over health care
18 Mar 2020
Global confirmed cases
exceed 200 000
21 Mar 2020
Italy records 793 deaths,
a new global single-day high
23 Mar 2020
South Africa announces national
lockdown, to begin 26 March;
New York City confirms 21 000 cases,
on par with Iran
25 Mar 2020
US Senate approves US$2 trillion
stimulus package;
India enters lockdown
3 Mar 2020
Fed cuts interest rates
by 50 basis points
6 Mar 2020
Global confirmed cases
exceed 100 000
15 Mar 2020
South Africa implements travel
and gathering restrictions, declares
national state of disaster,
at 61 confirmed cases;
Fed cuts interest rates
by 100 basis points
17 Mar 2020
France enters lockdown
19 Mar 2020
SARB cuts repo rate
by 100 basis points;
nearly all US states declare
state of emergency
22 Mar 2020
Global confirmed cases
exceed 300 000
24 Mar 2020
UK enters partial lockdown;
global confirmed cases
exceed 400 000
26 Mar 2020
South Africa enters lockdown
COVID-19 timeline

APRIL 2020
with one quarter of the world’s population under some form of
lockdown by late March. Globally, the worst-affected industries
have been those which move or assemble people, particularly
airlines, as well as the entertainment, restaurant and tourism
sectors. Financial markets have also been highly volatile (as
discussed in the following chapter).
Context
Although the COVID-19 outbreak has imposed a single theme
on the global economic narrative, it appeared against a
backdrop of diversity, with the US having performed relatively
well, the euro area being weaker, and many major emerging
markets having already struggled with protracted low growth.
In the US, growth was steady around a trend rate of
approximately 2% throughout 2019. US unemployment
registered 3.6% in January 2020, a 51-year low, and job growth
was unexpectedly robust, with net job gains averaging over
200 000 monthly in the second half of the year and reaching
273 000 jobs added as late as February 2020. By contrast,
euro area growth was just 1.2% in 2019, a seven-year low.
Japan and the UK also lagged US growth levels, with those
economies growing 1% and 1.3% respectively during 2019.
Inflation in the major advanced economies once again fell
below central banks’ targets in 2019. In the US, targeted
inflation averaged 1.4% for the year. It was 1.2% in the euro area
and 0.6% in Japan. The UK has had inflation closer to target
recently, mainly due to exchange rate depreciation, but the
consumer price index (CPI) has nonetheless slowed in 2019, to
average 1.8% for the year. Persistently low advanced economy
inflation remains an acute challenge to both monetary policy
practice and theory, prompting, so far, many hypotheses but
as yet no consensus answers.4
Emerging market growth disappointed yet again in 2019. India’s
slowdown intensified, with growth falling to just 4.8% in the
year, from 6.8% in 2018. Other major emerging markets, having
stagnated through much of the past decade, once again failed
to accelerate meaningfully. (For instance, Brazil grew 1.2%,
Mexico 0%, and Russia 1.1%.) Meanwhile, China’s slowdown
persisted, with growth of 6.1% for the year against 6.6% the
year before. In this context, and with inflation generally wellbehaved, emerging market central banks had been lowering
rates, with a total of 53 easing policy during 2019. This trend
has since been reinforced by the COVID-19 pandemic, with a
new round of easing broadly underway since February.
In sub-Saharan Africa (SSA), some countries grew rapidly, while
others continued to struggle with stagnations induced by lower
commodity prices and excess debt, among other challenges.

For a review of these hypotheses, see S Belz, D Wessel and J Yellen,
‘What’s (not) up with inflation?’, Hutchins Center on Fiscal and Monetary
Policy, The Brookings Institution, January 2020, available at
brookings.edu/product/ explaining-the-inflation-puzzle/.
Percentage change over 12 months
G3 unemployment and inflation
Source: Haver
-4
-2

Unemployment (per cent)

Targeted inflation
US
2000–2020
Japan
2000–2020
Euro area
2000–2020
Major emerging market growth
Percentage change
0.6*
4.5

Russia
Brazil
India
China
Source: Haver

2010–2018 average
Percentage change
-3

Trade volumes in emerging markets
2010–2016

Source: CPB Netherlands Bureau for Economic Policy Analysis

Imports

Exports

APRIL 2020
The region’s three largest economies – South Africa, Nigeria
and Angola – all underperformed, with 2019 growth rates of
0.2%, 2.3% and -0.3% respectively. By contrast, the next three
biggest economies – Kenya, Ethiopia and Ghana – delivered
2019 growth rates of 5.6%, 7.4% and 7.5% respectively.
Strikingly, while growth averages for the SSA region were
around 3%, few countries recorded growth around 3%; instead,
the distribution was bimodal. South Africa’s major regional
trade partners have mostly fallen into the worse-performing
group, partly because of exposure to South Africa, but also
due to domestic factors. Zimbabwe’s economy, for instance,
contracted by around 7% in 2019, in the context of renewed
hyperinflation (official statistics show prices rose 540% for
the 12 months following the reintroduction of a domestic fiat
currency in February 2019). Meanwhile, Mozambique’s growth
slowed to a 19-year low of 1.8%, given the shock of two major
cyclones in March and April, in addition to ongoing debt
troubles. (Mozambique is one of seven countries in the region
in debt distress, as classified by the IMF.)
Conclusion
The global economy slowed in 2019, with export-oriented
economies generally the hardest-hit. Growth deteriorated
further at the start of 2020, mainly due to the COVID-19
outbreak interrupting a global recovery. The baseline forecast
assumes this is a temporary shock with a recovery underway
from late-2020, helped by fiscal and monetary stimulus. More
adverse scenarios are conceivable, however, and the outlook
is unusually uncertain. For a range of major emerging markets,
including South Africa, this marks yet another delay in a multiyear failure to restart growth – an inauspicious start to a new
decade after the serial disappointments of the 2010s.
Changes since 31 Jan 2020 in basis points
Sources: Haver and SARB
Emerging market policy rates


Colombia
India
Taiwan
Czech Rep.
Malaysia
Russia
Thailand
Poland
Indonesia
Chile
Brazil
Mexico
Peru
South Africa
Turkey
China

Number of countries
Distribution of SSA growth for 2019
SSA average 3.2%
Sources: IMF and SARB
<0

>7

APRIL 2020
Financial market developments:
a riskier country in a riskier world
The COVID-19 pandemic has caused financial market turmoil
on a scale not seen since the 2009 crisis. Risk assets have
sold off, while signs of market dislocations have appeared in
major financial centres. Central banks in these jurisdictions
have implemented massive easing policies, drawing on the
tools developed a decade ago. South African assets have
followed the global risk-off trend, with the exchange rate falling
to record lows, equities declining abruptly, and long-term
government interest rates rising. Expectations for short-term
rates have fallen, however, consistent with a looser monetary
policy stance.
Global asset markets recorded significant gains in 2019,
especially in the closing half of the year. The MSCI benchmark
for emerging market equities rose 15% during 2019, while
developed market equities did even better, returning 25%. (US
stocks rose 29%.) Within the fixed-income space, emerging
market sovereign bonds outperformed developed market
counterparts as risk appetite improved towards the end of the
year. The reach for yield also benefitted corporate and highyield bonds. Most emerging market currencies appreciated
versus the US dollar in the final quarter of last year, and the
British pound also gained as some Brexit uncertainty lifted.
These trends reversed abruptly in early 2020, as the COVID-19
outbreak spread around the world, followed by an oil price
war between OPEC and non-OPEC oil producers. The VIX,
a measure of risk aversion, began climbing in February and
reached 2008 levels in March, paralleled by the MOVE, which
tracks volatility in US Treasury bonds. Safe-haven assets
mostly benefitted; the 10- and 30-year US Treasury bond
yields, for instance, declined to record lows, with the US
Treasury curve entirely below 1% at one point (on 9 March).
Core European government bond yields also fell, while
spreads between German bond yields and those of riskier
euro countries widened. Equities sold off, in both advanced
economies and emerging markets, with the MSCI world equity
index down almost 30% for the year to date. Similarly, the
S&P 500 lost nearly 30% from its February peak, with circuit
breakers halting trading on several occasions following falls
of 7%, while the MSCI equity index for emerging markets fell
over 30% from its January high. February also saw the gold
price breach US$1 600 per fine ounce for the first time since
2013 – a rally which drove the copper-gold ratio to historic
lows, reflecting gold’s role as a hedge in uncertain times and
copper’s status as a proxy for real economy activity.

Index (both scales)

Volatility indices

Source: Bloomberg

VIX

MOVE (right-hand scale)

Euro area

US

China
Index
Financial conditions
Sources: Bloomberg and SARB
Less than 0 = tighter financial conditions


Ratio

Copper/gold price ratio

Sources: Bloomberg and SARB

APRIL 2020
In exchange rate markets, the US dollar weakened momentarily
as the Fed lowered rates, which reduced its interest rate
differential with other major currencies. It has since benefitted
from its status as the world’s reserve currency, however,
helping the Bloomberg Dollar Index to an all-time high in midMarch. Few other currencies have been so resilient. The UK
pound sank to a 35-year low in March, while emerging market
currencies retreated to the lowest levels on record (as per the
JPMorgan Emerging Market Currency Index).
Policymakers in the major economies have responded to
the crisis with a range of measures, both to stimulate their
economies and to keep financial markets functioning. In the
US, the Fed reduced its policy rate by 1.5 percentage points
in a pair of unscheduled meetings, taking it to around zero,
and restarted quantitative easing with US$700 billion of asset
purchases. It also opened a variety of borrowing facilities
to improve liquidity in exchange for an expanded range of
collateral. In China, policymakers implemented stimulus worth
approximately 1.2% of GDP, through liquidity measures, tax
cuts and a range of other interventions, supplemented by an
interest rate cut in late March.5 Similarly, the ECB expanded its
QE programme as well as two bank lending programmes, and
introduced a new €750 billion Pandemic Emergency Purchase
Programme for government bonds, while leaving interest
rates unchanged (the deposit rate was already negative, at
-0.5%). The BoE cut Bank Rate to just above zero, released
its countercyclical capital buffer (a macroprudential tool used
to manage credit growth), and launched a new bank lending
scheme. Together, a network of six major central banks6 also
activated foreign currency swap lines, ensuring they could act
as lenders of last resort for their respective financial systems,
in foreign as well as domestic currency. These measures were
subsequently extended to a wider range of central banks,
including some large emerging markets (Mexico, Brazil).
Domestic financial market
developments
The fourth quarter of 2019 delivered a series of domestic
disappointments, including renewed electricity load-shedding,
a worse fiscal outlook (as announced in the October MTBPS),
and negative ratings outlooks from Moody’s and Standard &
Poor’s. Despite these factors, the rand outpaced its emerging

The 1.2% estimate is drawn from T Wang, N Zhang, J Zhong, A Luo and
K Jiang. 3 March 2020, ‘Macro keys: how large is China’s policy response?’,
UBS Global Research.

The six are as follows: the US Federal Reserve, the ECB, the Bank of
Japan, the BoE, the Swiss National Bank and the Bank of Canada.

Oct
Nov
Dec

Jan
Feb
Mar
US dollar and emerging market exchange rates
Source: Bloomberg

Bloomberg US Dollar Index

JPMorgan EM Currency Index

(inverted right-hand scale)

Index (both scales)


Oct
Nov
Dec

Jan
Feb
Mar
Emerging market currencies
Source: Bloomberg

Rand/US$

JPMorgan EM FX Index
Cumulative percentage return since 1 Oct 2019
-1

Per cent
Developed market bond yield curves*

US

UK

Germany
Source: Bloomberg

* Dotted lines reflect October 2019; solid lines reflect 28 March 2020
Years to maturity

APRIL 2020
market peers in the fourth quarter, appreciating more than
8% against the dollar, with the bilateral exchange rate nearing
R14.00 at some points. On a nominal effective exchange rate
(NEER) basis, the rand strengthened over 6% in the fourth
quarter of 2019.
These gains were based on an accommodating global
environment rather than domestic strengths, and they
evaporated as the global climate changed. With risk aversion
spreading in financial markets, the rand depreciated rapidly,
passing R17.00 to the dollar in mid-March, and then R18.00
per dollar towards the end of the month, following Moody’s
downgrade of the sovereign to below investment grade. The
local currency’s year-to-date performance ranks among the
poorest by emerging market standards, with the rand having
weakened nearly 22% against the US dollar. (Since the
previous MPR, the rand has depreciated 14.1%, compared
with an emerging market average of 11.1%.)
As risk sentiment deteriorated, capital flows out of emerging
markets picked up to levels exceeding those seen in 2008,
hitting both bond and equity markets. The JSE All-Share
Index (Alsi) gave up its late-2019 gains by early February, with
losses reaching 30% year-to-date by March. These losses
were broad-based across the Alsi sub-indices. Meanwhile,
long-term government bond yields rose to over 10%, and the
yield curve steepened further. The gap between long-term
nominal bond yields and short-term ones is now the widest on
record; the 2023 and 2048 bond yields, for instance, are over
500 basis points apart. (On average, the gap between 2- and
30-year bonds has been around 360 basis points over the past
five years.)
Expectations for short-term interest rates had been shifting
lower before the COVID-19 outbreak, and then declined
rapidly as the crisis took hold. The November MPC forecast
had indicated a repo rate cut in the third quarter of 2020,
which FRAs then priced in completely. The January repo rate
reduction was only partially priced in, with the FRA market
giving the probability as 40%. Following that meeting, markets
also began pricing in a second cut in the fourth quarter, in
line with the forecast repo rate projection. In February and
March, as the pandemic intensified, markets began pricing
in a larger pre-emptive cut, nearing 100 basis points by the
second quarter of 2020, with short-term rates then expected
to rise again by around 25 basis points towards the end of
the year. Following the March MPC decision, markets began
to anticipate another 50 to 75 basis points of cuts in the
second and third quarters, again with some normalisation of
rates subsequently.
Cumulative percentage return since 1 Oct 2019
Oct
Nov
Dec

Jan
Feb
Mar
Equity performance
Sources: Bloomberg and SARB

China CSI 300

Euro Stoxx

MSCI EM

US S&P 500

Japan Nikkei


Basis points

Spread: 2-year versus 30-year government bonds
Sources: Bloomberg and SARB

South African EMBI+ spread

Domestic portion
-100

Basis points

South African EMBI+ decomposition
Sources: Bloomberg and SARB

APRIL 2020
In assessing local asset market developments, it is important
to disentangle global factors from local ones. South African
assets, especially the rand, are used as proxies for emerging
markets more broadly. For this reason, their prices tend to
follow and magnify what is happening in wider markets (in
financial jargon, they have ‘high beta’). But South Africa has
idiosyncratic challenges, which also affect market pricing.
A decomposition of risk measures (both the EMBI+ and CDS
spreads) into these general and idiosyncratic components
shows, strikingly, that the South Africa-specific portion had
been rising sharply into February, reaching levels last seen
during the ‘Nenegate’ episode of late 2015. The global
portion, which attaches to emerging markets in general,
then also begins accelerating as the COVID-19 crisis hits.
Both the idiosyncratic and the general elements of risk are now
unusually elevated.
As the global crisis intensified in mid-March, liquidity strains
began to emerge in some domestic funding markets.
To facilitate smooth market functioning, the SARB therefore
introduced a range of liquidity-enhancing measures, starting
the day after the March MPC. These measures have made
it easier for banks to get cash, by increasing the number
of opportunities to source liquidity from the SARB, and by
offering it for longer periods (rather than just overnight).
They have also created incentives for banks to lend money
on, rather than holding it at the central bank, with a lower and
therefore unattractive rate on money deposited back at the
SARB. In addition, the SARB has also purchased government
bonds in the secondary market, which has expanded liquidity
and also moderated abrupt shifts in government bond yields,
which appear to have been driven by market malfunctions
rather than economic factors. To date, these measures appear
to have improved market functioning.
Conclusion
The COVID-19 outbreak has caused turmoil in financial
markets, reducing the value of risk assets and driving returns
on risk-free assets to new lows. The crisis comes at a moment
of vulnerability for South Africa, given a deteriorated fiscal
situation and therefore a rising domestic risk profile. Markets
have nonetheless understood that the SARB has space to lower
interest rates, which has put downward pressure on shorterterm rates even as longer-term borrowing costs have risen.
Per cent (changes since 1 Oct 2019)
Range
Min.
Max.
Current
Government bond yields
Source: Bloomberg

Years to maturity
Basis point change
Turkey
Russia
Indonesia
Mexico
Brazil
South Africa
-5

10-year local currency bond yields
Source: Bloomberg
Year to date
Since 1 Oct 2019


Oct
Nov
Dec

Jan
Feb
Mar
JSE share prices
Source: Bloomberg

Mining

Industrial

Retail

Banking

All-Share
Cumulative percentage return since 1 Oct 2019

APRIL 2020
Box 2 South Africa’s term-premium shock

Estimates of the term premium follow the approach by T Adrian,
R K Crump and E Moench, ‘Pricing the term structure with
linear regressions’, Journal of Financial Economics 110(1), 2013,
pp 110–138.

G Rudebusch, B P Sack and E Swanson, ‘Macroeconomic
implications of changes in the term premium’, Federal Reserve
Bank of St. Louis Review 89(4), 2007, available at
stlouisfed.org/publications/review/07/07/Rudebusch.pdf.
South Africa’s long-term borrowing costs have been elevated despite
lower inflation expectations and lower short-term interest rates. The
benchmark 10-year government bond returned around 9.6% in 2019,
compared to an average of 8.7% for the period from the start of 2010
to the end of 2015. As this box demonstrates, upward pressure on
long-term rates has been coming from a higher term premium.1 This
likely contributed to disappointing growth outcomes, pre-COVID-19,
and will likely remain a challenge when that shock has faded.
A term premium provides compensation for lending long-term
instead of short-term. Bond market investors can choose between
buying long-dated instruments (like 10-year bonds) and rolling over
a series of short-dated instruments (like 3-month Treasury bills)
for an equivalent time period. The first approach is riskier because
the money is locked in, making the investment less liquid and also
leaving it more exposed to inflation surprises and credit risk (meaning
a whole or partial default). For this reason, investors typically charge
more for long-term funds. By contrast, short-term rates usually follow
the central bank’s policy rate. The long-term rate can therefore be
decomposed into expectations for the short-term rate, over the
whole life of a given bond, plus a term premium.
The South African term premium has been rising quite steadily
since 2015, with spikes around episodes of heightened risk. (These
including ‘Nenegate’ in late 2015 and the 2017 medium-term
budget, which announced a severe fiscal deterioration.) Between
2015 and 2019, it climbed by around 2 percentage points, with
an additional increase of roughly half a percentage point in the first
quarter of 2020. Taking a longer average, it was 103 basis points
higher in 2019 than it was for the 2010–2015 period. Were it not
for this term premium, long-term borrowing costs would have been
around 8% in 2019, comparable to their lowest ever level, reflecting
reduced inflation expectations as well as a repurchase rate well
below historical averages.
A higher term premium is bad for growth.2 Econometric estimates
by South African Reserve Bank staff indicate that a 100 basis point
term-premium shock weakens growth by around 0.6 percentage
points at the point of maximum impact, which is about four quarters
after the shock. The estimated effect on inflation is more ambiguous,
with the disinflationary impact of weaker demand offset by currency
depreciation, as risk deters investors.
These estimates cannot be transferred directly to South Africa’s
experience, which has been about a sustained upward trend in
the term premium rather than a one-off shock. Nonetheless, this
mechanism helps to explain how sovereign debt accumulation has
weakened growth. In addition, it is one of the key channels through
which fiscal repairs – as discussed in both the recent State of the
Nation Address and the 2020 Budget – could benefit the economy
over time.
Percentage points

Term premium on the South African 10-year bond

Sources: Bloomberg and SARB
Percentage points
GDP response* to a 100 basis point
term-premium shock
Sources: Bloomberg and SARB
Quarters


* Dotted lines show plus or minus
one standard error
Percentage points
Inflation response* to a 100 basis point
term-premium shock
Sources: Bloomberg and SARB
Quarters


0.4
* Dotted lines show plus or minus
one standard error

APRIL 2020
Real economy: low growth
and a new shock
South Africa’s growth rate slowed to 0.2% in 2019, the worst
performance since the 2009 recession. The forecast indicates
output will contract in 2020, based primarily on the COVID-19
outbreak. Other domestic constraints would nonetheless have
kept growth near-zero this year, even in the absence of this
shock. Accordingly, potential growth is also very low, under 1%.
In the outer forecast years, the economy recovers somewhat,
to a growth rate a little over 1%, given an assumption that
the global economy rebounds and domestic circumstances
improve. It is difficult to say whether this projection is optimistic
or pessimistic: it is around half of South Africa’s longer-run
average growth rate, but it is roughly double the average rate
of the past four years.
A bad ending to a lost decade
The final quarter of 2019 yielded another GDP contraction
(-1.4% in annualised terms, quarter on quarter). With the
-0.8% recorded for the third quarter, this put South Africa
in a technical recession, for the second time in two years.
It also confirmed that the 2010s were the worst decade for
South African growth on record.7 Total output expanded by
only 15.9% between the first quarter of 2010 and the final
quarter of 2019, which compares unfavourably with the crisisridden 1980s and 1990s, during which GDP grew by a total of
18.9% and 16.7% respectively.8
Growth has been unusually volatile in recent years. As noted in
previous issues of the MPR, the primary and secondary sectors
have moved abruptly in response to shocks. This pattern
persisted in 2019, where mining, manufacturing and agriculture
all contracted (by 1.9%, 0.8% and 6.9%, deducting 0.1,
0.1 and 0.2 percentage points from 2019 growth respectively).
Meanwhile, the rest of the economy posted positive but low
growth rates. This ‘core’ growth was 0.9% over the year, close
to its five-year average rate of 1.1%.
The underperformance of agriculture was primarily due to
insufficient rainfall, with a rebound likely this year given better
growing conditions and therefore larger crop estimates.
By contrast, electricity shortages constituted the major
constraint for mining and manufacturing – the two most
electricity intensive sectors of the economy. Over the past year,
Eskom shed 1352GWh from the system, with the Electricity
Availability Factor (EAF) falling to 66.9% – implying that only
two-thirds of installed capacity was producing electricity,

Quarterly GDP data are available from 1960.

These calculations reflect the difference between output in
the first quarter of the decade and the final quarter (2010Q1
and 2019Q4). No other quarters are considered.
Indices: first quarter of decade = 100
Real GDP levels
Sources: Stats SA and SARB
Year

1960s

1970s

1980s

1990s

2000s

2010s

Agricultural crop estimates*
Annual percentage change

Midpoint
SA real yield
US nominal
yield
2.2
SA CDS
spread
2.5
US-SA target
differential


Summer 2019/20
Winter 2019
Summer 2018/19
White maize
Yellow maize
Wheat
Malting barley
Other
Total
* Based on tons
Sources: DAFF and SARB

Percentage of total industrial use
Electricity use by industry
Finance
Sources: Stats SA and SARB
Construction
Transport
Agriculture
Trade
Electricity etc.
Community etc.
Mining
Manufacturing

APRIL 2020
an all-time low. As in 2015, the previous most severe episode
of load-shedding, electricity shortages have coincided with
contractions in both mining and manufacturing. Transport also
declined in both instances, plausibly related to offline power
stations not needing coal. These sectors are likely to remain
under pressure in an environment of ongoing load-shedding;
electricity availability has been only around 62% so far this year.
In these difficult economic circumstances, unemployment
has risen. Job growth stalled in 2019, with the total number
of employed people declining from 16.44 million at the end
of 2018 to 16.34 million at the end of 2019 (using seasonally
adjusted data). Meanwhile, the labour force continued to
expand, with a net increase of 481 000 people during 2019.
Over the past decade as a whole, the total increase in the
workforce has been 4.87 million people, compared with an
employment increase of 2.52 million.
Wage growth has also slowed markedly, in stark contrast to
the situation a decade ago, when pay boomed even as the
economy shed jobs. Formal sector wages, as measured by
the Quarterly Employment Statistics (QES) survey, declined by
0.7% in the first three quarters of 2019, extending a downward
trend in wage growth which began around 2015. Bonus and
overtime pay appears to have slowed more than base pay,
although the available data only start in 2018, so it is difficult to
establish a trend. According to the Andrew Levy survey, wage
growth in sectors with collective bargaining arrangements
has also decelerated, although in this case increases have
maintained a fairly constant margin over inflation, generating
constant real gains. There is also some evidence of slowing
growth in public sector wages in 2019, after an extended
period of growth above private sector rates. (For instance,
public wages have outpaced private wages over both the
2000-date and the 2010-date periods.)
Shifts in the composition of GDP
Despite this pressure on households, household consumption
has trended steadily higher over the past decade as a share
of total demand, reaching an all-time high in 2019, at just over
62% of GDP (based on inflation-adjusted data). By definition,
this means other components of GDP have been growing
more slowly. Investment has held up better than is usually
understood, at levels narrowly below 20% of GDP, compared
with a longer-term average of 16.9%. Public sector investment
has weakened sharply in recent years, but private sector
investment has been more resilient, which has supported
aggregate investment at levels that are better than historical
norms (although still lower than desirable). Government
consumption has also been elevated, above 20% of GDP.
By contrast, net exports have been unusually depressed for
most of the decade. Imports, which detract from net exports,
have held up surprisingly well for an economy suffering from
weak demand. Meanwhile, exports have stagnated, despite
Millions of people

Labour trends

Labour force

Employed
Source: Stats SA
Total salaries and wages
Percentage change
0.6*
4.5

Total
Private
Public
Total
Private
Public

Sources: QES and SARB
2000–2019
2010–2019

Percentage of GDP

Household consumption*

* Real seasonally adjusted and annualised
Sources: Stats SA and SARB

APRIL 2020
unusually favourable commodity prices, especially in rand
terms. (Mining export prices were on average 40% higher in
the 2010s than they were in the 2000s; export volumes grew
only 5.5%.) In sum, the composition of GDP has shifted such
that the economy has become excessively reliant on internal
demand, a growth model that has generated substantial
fiscal and current account deficits, as well as poor overall
economic performance.
Credit growth
This analysis also helps to cast some light on an emerging
household credit puzzle. Over much of the past decade,
households sought to repair the excesses of the 2000s
housing boom by deleveraging. As a result, the household
debt-to-income ratio declined from 85.7% in 2008 to 72.0% in
2018. While there were some bursts of credit activity during this
period, particularly the unsecured lending boom of 2012–2013,
household credit growth was generally low. This prompted
debate over the relative contributions of different factors,
including new regulations (Basel III), weak growth prospects,
cautious lending practices and policy settings. More recently,
household credit has been growing again, led by unsecured
lending but with a supporting contribution from mortgages – a
development that has been attributed to a range of factors,
including banks competing for market share, technological
improvements making credit more convenient, and consumers
borrowing to compensate for declining incomes.
The puzzle is whether this is desirable. For a central bank
aiming to close a negative output gap with a lower interest rate,
credit growth is an important part of the policy transmission
mechanism. However, where that central bank also has a
financial stability mandate, credit growth in excess of income
growth or overall GDP growth is a risk warning.
Reflecting on the changing composition of GDP, it becomes
clearer that pushing consumption still higher, using either
household or government debt, will likely not permit higher
overall growth. In the short term, it may provide useful support
to an economy under demand stress. The longer-term
policy challenge, however, is finding tools to achieve higherquality demand rather than just more demand. South Africa’s
consumption-focused growth model appears to have passed
its limits.
Percentage of GDP

Gross fixed capital formation*

* Real seasonally adjusted and annualised
Sources: Stats SA and SARB

Private business enterprises
General government and public corporations
Percentage of GDP

Net exports*
-5

Long-term
average
Sources: Stats SA and SARB

* Real seasonally adjusted and annualised
Percentage change over 12 months

Household credit extension


Nominal

CPI inflation-adjusted
Sources: Stats SA and SARB

APRIL 2020
Box 3 What is different about this downswing?

This calculation assumes an upswing had not begun as of
February 2020.
South Africa is in the midst of the longest business cycle downswing
in its history. Historically, downswings have lasted on average 20
months. The current downswing has so far extended for 74 months,1
beating out the slump of March 1989 to May 1993, which lasted
51 months. This box explores the behaviour of the different
components of gross domestic product (GDP) during this and past
downswings, to better understand its unusual character. Two major
differences stand out. First, imports have been unusually buoyant.
Second, public sector investment has fallen much more than normal.
Most downswings are concluded after about three years.
On average, the level of GDP moves marginally higher over this
period, reflecting the fact that downswings are periods of poorer
economic performance, not necessarily output contractions.
Exports, household consumption and government consumption all
grow faster than GDP, while private sector investment and imports
contract. These last two components are then also the items that
expand the most in the upswing phase. Public sector investment
normally holds up better during the initial phase of a downswing but
weakens later, perhaps reflecting the pressure a weak economy puts
on government finances over time.
In the current downswing, the trio of exports, household consumption
and government consumption has followed the average downswing
pattern fairly closely. Exports are moderately weaker than usual,
especially towards the end of the sample, while household
consumption has been stronger. Government consumption was
initially somewhat weaker than average, but it has picked up
recently. The standout differences, however, relate to imports and
public sector investment. Imports normally end a downswing around
5% below their level when the downswing commenced. In this case,
imports are currently around 10% above their starting point. (After
three years, when most downswings are concluded, imports were
about 5% above their starting point – still a significant difference.)
Inversely, public sector investment is now around 20% below its
starting point, where, for the average downswing, the trough is
approximately -5%.
This weakness in public sector investment helps to explain the
disappointing total investment numbers. While overall investment
is lower than it was at the start of the downswing, private sector
investment has risen. Over the first three years of the downswing,
private sector investment followed its usual pattern, declining
by around 5%. It has since recovered, however, to a level around
5% higher than the 2013 starting point (as of the third quarter of
2019). This suggests that firms are maintaining their capital stock and
some are implementing new projects, contrary to the ‘investment
strike’ hypothesis which has been mooted in the press.
Ongoing import strength may reflect a combination of supply-side
weakness (including electricity shortages and policy uncertainty)
alongside significant demand support (large fiscal deficits and
relatively low short-term interest rates). Although fair-value estimates
show the exchange rate has been undervalued through most of
the downswing period, strong imports suggest it may have been
overvalued. Another hypothesis is that South Africa has become
more integrated into the global economy, although if this were the
case, then exports should also have benefitted.
Index: upswing peak = 100
GDP growth
Imports
Private capex
GDP, private capex and imports: average past
downswings since 1960 (excluding current downswing)
Sources: Stats SA and SARB
Number of quarters

10 11
12 13
Index: upswing peak = 100
GDP growth
Imports
Private capex
GDP, private capex and imports: current
downswing up to 2019Q2
Sources: Stats SA and SARB
Number of quarters

0 1

Index: upswing peak = 100
Current downswing
Average past downswings
(excluding current)
Public capex: current downswing versus average
past downswings since 1960
Sources: Stats SA and SARB
Number of quarters

0 1

APRIL 2020
Growth outlook
The 2020 growth forecast has been revised down substantially
since the start of the year, from 1.2% as of the January meeting
of the MPC to -0.2% in March. More recent estimates are lower
still, suggesting a range of -2% to -4% is now likely. Potential
growth for 2020 was estimated at 0.8% for the March MPC,
but this will likely fall further in new forecasts: the lockdown
means some growth now becomes irrecoverable. The output
gap is nonetheless likely to be even more negative than the
March projections (-2.2% of potential GDP), because the
COVID-19 effect also has demand-shock characteristics, with
much of the supply side of the economy likely to emerge from
the lockdown with capacity intact but demand missing.
As of the March MPC, the COVID-19 shock was not yet visible
in most sources of real economy data. International passenger
arrivals through airports fell in February, and there was
abundant anecdotal evidence of cancelled tourist bookings
and corporate events. The overall growth outlook was highly
uncertain, however, with clear downside risks. The post-MPC
announcement of a country-wide lockdown made it clear far
larger swathes of the economy would be affected. Based on the
number of working days lost to the lockdown, and differences
in the extent to which sectors are likely to be affected, recent
SARB calculations suggest the 21-day shutdown will reduce
2020 growth by 2.6 percentage points. But the indirect effects
are less easily estimated. Most data, including those for trade
and retail sales, are only available with a two-month lag, so it
will be some time before we achieve precision about even the
near-term impact of this unusual shock.
In 2009, the previous instance of a major crisis, the economy
contracted by 1.5% for the year, with the primary and secondary
sectors deeply negative (-4.4% and -6.4% respectively) and
the tertiary sector slightly positive (+0.7%). Within the tertiary
sector, however, hotels and restaurants fell 3.9%. Vehicles
and finance were both down 3.6%. In that year, business
travel also declined by over a third. The comparison with 2009
has limitations, however, with the starting point having been
significantly more favourable, given a fast-growing economy
and a more robust fiscal position when that crisis hit. The nature
of South Africa’s current lockdown also suggests the tertiary
sector will be the main drag on growth this year, in contrast to
its normal role as a relatively stable demand component.
Over the medium term, the SARB forecasts continue to project
a mild recovery, to around 1.0% in 2021 and 1.6% in 2022. This
expectation of moderately stronger growth in the outer years
has been the norm for recent forecasts, to their detriment: they
later had to be revised down. Nonetheless, this forecast feature
has been maintained for the latest projections. This choice is
based on two reasons.
Percentage of potential GDP

Output gap


Sep 2019

Mar 2020
Source: SARB

Percentage change

Real GDP growth*


Sep 2019

Mar 2020
Sources: Stats SA and SARB
* Dotted lines indicate forecasts

APRIL 2020
First, in the structure of the QPM, the growth outlook is shaped
by the output gap, which the model aims to close over the
medium term (around three years). The growth forecast is
therefore largely determined by whatever is required to close
the output gap. Because this gap measures the difference
between actual and potential output, it can be eliminated by
lowering potential output. But the potential output estimates
have already been revised down substantially. Various measures
of slack suggest this economy is not operating at full capacity,
and the COVID-19 pandemic is doing more damage to the
demand side of the economy than the supply side. (Although
both demand and supply have been deliberately turned off for
the duration of the March–April lockdown, the supply side will
still have capacity to meet demand afterwards.) This suggests
the output gap should be negative and potential growth
should not be marked down to the point that the output gap
disappears. (See Box 5.) But this then implies stronger catchup growth over the forecast period. To mitigate this problem,
the QPM results have been adjusted by the forecasting team
so that the gap closes more slowly than the model would
normally allow. It therefore remains slightly negative in 2022,
the last year of the forecast period, at -1.5% of potential GDP.
Second, there are plausible reasons why growth might
improve somewhat over the medium term. The starting point is
now extremely low, given a year-on-year contraction in 2020.
Electricity load-shedding will persist throughout 2020 and into
2021, but power stations are being taken offline to create time
for maintenance, which will ultimately improve the quality of
supply. New initiatives to allow large users to generate their
own power should also help to ease constraints on some
businesses. In addition, government has tabled a range
of structural reforms designed to raise growth. Finally, the
COVID-19 pandemic will likely dissipate this year, permitting
a global recovery. Together, these considerations suggest
growth could restart next year, even if it does not return to
longer-run averages (around 2.5%) over the medium term.
Current account
South Africa’s current account deficit averaged 3.0% of GDP
in 2019. This outcome marked a deterioration from 2017, when
it had moderated to 2.5%, mainly due to import compression.
(The smallest quarterly deficit recorded was 1.7% of GDP
in the fourth quarter of 2016.) However, the current account
narrowed sharply in the fourth quarter of 2019, to just 1.2%
of GDP. About half of this adjustment came from the trade
balance, which moved by 1.1 percentage points of GDP, mostly
(0.9 percentage points) on account of lower imports. The other
half was due to a recovery in net dividend payments, following
an unusually large corporate transaction in the third quarter.
The current account deficit typically fluctuates with swings
in the trade balance, which tend to follow movements in the
business cycle. Meanwhile, the Services, Income and current
Transfers (SIT) account contributes steady deficits, in the region
of 3–4% of GDP, which ensures the overall current account
remains consistently in deficit. This item also explains why
GDP growth, potential GDP and output gap
(March 2020 forecasts)
Annual percentage change, September 2019 forecasts in brackets
Actual
Forecast
2016 2017 2018 2019


Ouput gap
(percentage

Sources: Stats SA and SARB
Percentage of GDP

Current account balance
Source: SARB


APRIL 2020
South Africa typically has one of the largest current account
deficits among the large- and medium-sized economies, even
when the economy is weak, imports are subdued, and the
trade balance is in surplus.
Given the more subdued growth outlook, the current account
forecast has been revised down, so that deficits now average
around 3% of GDP for the medium term. This implies persistent
trade surpluses. It is difficult to narrow the current account
deficit much further, however, as foreigners have been major
purchasers of government debt, producing a large stream of
outgoing interest payments (1.4% of GDP in 2018, for example).
Unlike dividends, interest costs are not responsive to local
business conditions, so they do not help the current account
rebalance when growth is slow.
Fiscal accounts
The 2020 Budget envisioned similar fiscal deficits to those
outlined in the 2019 MTBPS, which was discussed in the
previous MPR. (The MTBPS had -6.5% of GDP for 2020/21
and -6.2% for 2021/22; the 2020 Budget has -6.8% and
-6.2% for those fiscal years respectively.) The debt trajectories
in the two documents were also comparable, passing 60% of
GDP in 2019/20 and exceeding 70% by 2022/23. However, the
Budget was better received than the MTBPS, mainly because
it included significant reductions to the wage bill, over three
years, for total savings of around R160 billion. These cuts
were offset by a weaker growth outlook as well as additional
spending on bailouts, which explains why the deficit figures
were similar.
The COVID-19 shock will dramatically expand the 2020 budget
deficit, simply by depriving the government of revenue. It will
also require additional spending, especially if infections are not
contained by the lockdown, and many more South Africans
– especially those served by the public sector – require
medical attention. The outlook is highly uncertain, but it is
plausible the deficit will exceed 10% of GDP this year, rivalling
historical records. (The largest deficit in South African history is
11.6% of GDP in 1914; the next largest is 10.4% in 1940, which
underlines the relevance of the war-time parallel invoked in
some COVID-19 analysis.)9
Conclusion
South Africa has entered a period of a global crisis encumbered
by a very low growth rate, a problematic composition of growth,
and little or no fiscal space. The SARB forecasts indicate an
economic contraction this year, followed by a limited recovery
in 2021 and 2022 as the global economy revives and some
of South Africa’s domestic constraints, such as electricity
shortages, ease. Monetary policy provides a boost to demand,
but the reach of these measures is limited by weak economic
fundamentals and the scale of the COVID-19 shock.

See P Mauro, R Romeu, A Binder and A Zaman, ‘A modern history of fiscal
prudence and profligacy’, International Monetary Fund Working Paper
No. 13/5, 2013. Data available at
IMF/imported-datasets/external/pubs/ft/wp/2013/Data/_wp1305.ashx.


Percentage of GDP
Current account decomposition

Source: SARB

Trade balance

Net SIT

Percentage of GDP

Main budget deficit
Source: National Treasury

2019 MTBPS

2020 Budget


Percentage of GDP
Fiscal deficit
Sources: Mauro et al. (2013) and National Treasury


-11.6%
-10.9%

APRIL 2020
Box 4 The fiscal impact on growth

See L Sheiner and S Belz, The Hutchins Center’s Fiscal Impact
Measure, 26 July 2019, available at
research/the-hutchins-centers-fiscal-impact-measure/. The estimate
for South Africa reported here excludes interest payments and bailouts
for state-owned enterprises, in contrast to the Brookings Institution’s
estimates for the United States. Detailed calculations will be available in
T Radebe (forthcoming, 2020).

For the calculations reported here, potential growth is the estimate
used for the Monetary Policy Committee forecasts.

Measured as the change in the consumer price index.

Tax changes are discounted for the marginal propensity to consume,
given that tax adjustments do not typically move demand precisely
R1 for R1. Consistent with the South African Reserve Bank’s Core
Macroeconometric Model, households’ marginal propensity to
consume is 0.4% and corporates’ is 0.8%. For other direct taxes, it is
0.6% (the average of the two). The revenue estimates also adjust for
transfers to households.
Fiscal policy has loosened recently, with more spending and smaller tax
increases. As this box shows, the estimated fiscal impact on growth
was around +0.6 percentage points in 2019. This estimate excludes
interest spending as well as bailouts for state-owned enterprises. The
fact that growth slowed to a post-crisis low, despite the larger fiscal
impact, suggests either that other factors offset the stimulus, or that the
negative, indirect effects of a deteriorated fiscal position cancelled out
the positive, direct effects.
The fiscal impact measure (FIM) described here is based on the
methodology developed by the Brookings Institution’s Hutchins Center.1
Its core intuition is counterfactual, where taxes and spending just follow
the economy’s potential growth rate2 plus inflation.3 Government is
providing stimulus if it is growing spending faster than this counterfactual,
neutral rate. Similarly, it is also providing stimulus if it takes in less tax
than it would in this counterfactual scenario, leaving more money in the
hands of firms and households.4
Looking at the results, the fiscal response to the global financial
crisis stands out as a major stimulus. In subsequent years, as the
fiscal authorities attempted fiscal consolidation, the stance becomes
marginally contractionary. The revenue contributions are more negative
than those for spending, showing that National Treasury leaned more
heavily on tax increases than spending cuts. The fiscal impact becomes
positive again in 2017/18 and peaks in 2019/20, with more spending
and less downward pressure from taxation. The counterfactual slows
more than actual spending and taxation in this period, consistent with
Treasury forecasts overestimating potential growth and inflation.
The FIM is not a comprehensive measure of the fiscal policy stance.
First, it excludes all indirect effects. This means it ignores offsetting
factors such as higher interest rates that might follow from extra
government borrowing. It also ignores productivity; a rand of expenditure
is deemed the same whether it pays for new infrastructure or is lost to
corruption. Second, it focuses purely on the change in the fiscal stance.
If policymakers implement a massive stimulus and then do not expand
that stimulus further in the following year, by at least potential growth
plus inflation, the fiscal impulse will become contractionary – even if the
fiscal stance is looser than it was before the initial stimulus.
Given these considerations, FIMs should be consulted alongside
other indicators, such as cyclically adjusted budget balances
and fiscal multipliers. Taken together, the range of indicators
available makes it clear that the aggregate fiscal stance has been
loose recently. It is less obvious, however, that this benefitted
growth, with both the efficiency and the sustainability of spending
in question.
Percentage points
Fiscal impact measure
2009/10
2011/12 2013/14 2015/16
Source: SARB

Revenue measures

Expenditure*

Total

* Non-interest, non-bailout spending
2017/18 2019/20

APRIL 2020
How fast can South Africa grow, over the medium term? The question
matters both because growth has slumped – even before the COVID-19
shock – and because constraints on growth have tightened (such as
persistent electricity shortages). For monetary policy, it is not enough to
know that growth is low. The crucial question is whether growth is below
potential. If growth is undershooting the economy’s capacity, then lower
interest rates can help by boosting demand. If not, then stimulus just
prompts more inflation and more imports.
Potential growth cannot be observed, and therefore has to be estimated.
Given South Africa’s growth challenges, staff at the South African
Reserve Bank (SARB) have recently re-estimated potential growth using
a range of different methods, to better assess spare capacity. The major
takeaways are as follows.
-
Potential growth estimates, and therefore output gaps, should be
used with caution. This is because they are often revised
substantially when new data become available.1 For instance, in
2013, South Africa’s output gap appeared to be large and negative,
at -3.2% of potential gross domestic product (GDP); current
estimates suggest it was much smaller (-0.4% of potential GDP).
-
All available estimates agree that potential growth is lower than its
longer-run average, of around 2.5%, but they also all agree that the
output gap is negative (even before the COVID-19 shock). The
Hodrick-Prescott filter identifies a positive output gap for the final
quarter of 2017; the Composite Activity Index2 has a positive gap
for three quarters in 2018. Otherwise, all measures have negative
output gaps for every quarter since at least 2016. The estimates for
the 2019 output gap range in size from -2% of potential GDP to
-0.1% of potential GDP, with an average of -0.6%.
-
Some output gap estimates are negative over long time periods.
This conflicts with the textbook deviation of an output gap as
reflecting temporary deviations from a trend. Purely statistical
methods do not have this feature. However, there is an argument in
the literature that output gaps may have negative means owing to
rigidities in wages. This causes employers to shed labour in
downturns more than they raise employment in upturns, meaning
that labour resources are usually underemployed.3
-
South Africa’s electricity shortages are clearly a constraint on
growth, but they affect some sectors more directly than others.
In broad terms, mining and manufacturing are the heaviest users.
One implication of this is that other, less electricity-intensive sectors
can still grow, even with scarce electricity. Another is that the
balance of payments is likely to become a constraint on growth, as
the tradeables sector is most exposed to electricity shortages.

A Kangur, K Kirabaeva, J Natal and S Voigts, ‘How informative are realtime output gap estimates in Europe?’, International Monetary Fund
Working Paper No. 19/200, 2019, available at
Publications/WP/Issues/2019/09/20/How-Informative-Are-Real-TimeOutput-Gap-Estimates-in-Europe-48645.

Based on the measure calculated for the US by J H Stock and
M W Watson, ‘Slack and cyclically sensitive inflation’, National Bureau
of Economic Research Working Paper No. 25987, June 2019, available
at

S Aiyar and S Voigts. ‘The negative mean output gap’. International
Monetary Fund Working Paper No. 19/183, 2019, available at https://
www.imf.org/en/Publications/WP/Issues/2019/08/23/The-NegativeMean-Output-Gap-48605.
Percentage of potential GDP

Output gap estimates
Source: SARB
-6
-4
-2

Official*

Finance-neutral*

Composite Activity Index

Official latest data

HP filter

Production function
* Real time
Percentage of potential GDP

Evolution of the SARB’s output gap estimates
Source: SARB
-6
-4
-2

Lines show MPC
output gap estimates
at 6-months intervals
-
Lower inflation helps. Having inflation close to or below 4.5%
reduce the risks of a policy mistake, because there is less
chance of missing the target even if the potential growth
estimate is significantly wrong. Inflation also has the
advantage of being observable, so it is easier to recognise
mistakes timeously.
In sum, South Africa’s slowdown up to 2019 has been mostly
structural, linked to problems larger than monetary policy.
However, growth has undershot even this low trend rate, resulting
in a negative output gap. This verdict is premised on imperfect
estimation methods, but it is robust to a range of different tests.
The COVID-19 pandemic will widen this gap substantially, as it
represents a significant demand shock to South Africa, although
it also poses some supply-side challenges.
Box 5 Powerless? Monetary policy and potential growth

APRIL 2020
Price developments:
starting at the midpoint,
ending at the midpoint
Inflation dipped below the target midpoint in 2019, averaging
4.1% for the year. It returned to 4.5% at the start of 2020, but
is expected to fall sharply in the near term on lower fuel prices,
before recovering next year. Headline inflation is therefore
expected to average 3.8%, 4.6% and 4.4% through 2020, 2021
and 2022 respectively.
Starting point
South African inflation reached a nine-year low in November,
at 3.6%, before rebounding to 4.5% in January and
4.6% in February. This uptick in inflation reflected a base effect
in fuel prices, which was anticipated. Underlying inflation has
softened, however, with core inflation at its lowest levels since
October 2011 (at 3.8% as of the February CPI release). These
developments alone would have justified reducing the 2020
inflation outlook to around 4.2% for 2019. However, they have
been compounded by a collapse in world oil prices and a
substantially more negative output gap due to the COVID-19
shock. Accordingly, the 2019 inflation forecast has been
revised down to just 3.8%, which, if realised, would be a
14-year low.
It is possible COVID-19 will interrupt publication of the CPI.
Statistics South Africa (Stats SA), however, had already
completed surveys for March before the lockdown was
announced. (Early indications are that an April figure will
also be published, although it may be based on more limited
surveys.) This means the first-quarter CPI numbers will not
feature significant COVID-19 effects.
One reason this matters is that there is a seasonal pattern in
the CPI, with price changes concentrated in January, February
and March. The fact that the first quarter is already fixed puts
a floor under the 2020 inflation outcome: even if there are no
price changes for anything from April onwards – except in July,
when electricity and other administered price adjustments
occur – the annual inflation outcome would still be 3.4%. Fuel
price deflation will of course lower this number, but it is probably
unrealistic to expect no other price increases, economy-wide,
for the remainder of the year. It is therefore unlikely inflation
will undershoot the 3–6% target range for 2020 as a whole,
although there may be target misses in specific months.
Food and non-alcoholic beverages
Food inflation has averaged 3.5% over the past 24 months,
well below its longer-run average of 5.9% (for 2010–2019).
During the past 12 months, food inflation has bottomed out,
at 2.9% early in 2019, and has since trended higher, nearing
Percentage change over four quarters

Headline inflation*

Sources: Stats SA and SARB
* Dotted lines indicate forecasts

Actual

Sep 2019

Mar 2020

Midpoint of the
inflation target

Percentage change over 12 months
Headline and core inflation
Sources: Stats SA and SARB
Jan

Headline inflation
Core inflation

4.6
Midpoint of the inflation target range
Mar
May
Jul

Sep
Nov
Jan
Percentage change over four quarters

Food and non-alcoholic beverages inflation forecasts*

Sources: Stats SA and SARB
* Dotted lines indicate forecasts

Actual

Mar 2019

Sep 2019

Mar 2020

APRIL 2020
4.0% during 2019 (the peak was 3.9%). It is expected to climb
further during 2020, to a high of 4.9% in the fourth quarter of
this year, before easing again to average 4.4% in both 2021
and 2022.
Historically, food price inflation has on average been higher
than 4.4%. However, long-term averages are no longer reliable
guides to future inflation rates, because the overall level of
inflation in the economy has fallen. Since 2010, the gap between
CPI and food inflation has been around 0.7 percentage points.
Were the forecasts to continue using long-term food inflation
averages, the implied gap would rise to around 1.5% annually,
implying a substantial increase in food prices relative to other
items in the CPI. It is therefore important to avoid relying on
historical averages for food price forecasts, although this
simplifying assumption is often employed in forecasts.
The main surprise in food inflation last year came from meat. An
outbreak of foot-and-mouth disease closed export markets from
January 2019, increasing the supply available domestically and
thereby suppressing prices. In these circumstances, meat prices
deflated for four months in the first half of the year and remained
subdued thereafter, for a 2019 inflation average of 0.3%.
Given meat’s large weight in the food basket – nearly a third
– this shock was sufficient to offset higher bread and cereals
inflation, which had been better anticipated. The inflation
trough for this category occurred in 2018, as a base effect
from the 2016/17 drought, and prices accelerated afterwards,
to a peak of 8.6% in August 2019, more or less in line with
expectations. Bread and cereals inflation is projected to slow
to around 3% by the end of 2020, in the context of a favourable
production outlook. Crop estimates for maize, for instance,
point to a harvest of 14.6 million tons for the 2019/20 season,
up from 11.3 million tons for 2018/19.
Percentage change over four quarters

Meat inflation forecasts*
Sources: Stats SA and SARB
-2

Actual

Mar 2019

Sep 2019

Mar 2020

* Dotted lines indicate forecasts
Percentage change over four quarters

Bread and cereals inflation forecasts*
Sources: Stats SA and SARB
-6
-4
-2

Actual

Mar 2019

Sep 2019

Mar 2020

* Dotted lines indicate forecasts
Consumer food price inflation (March 2020 forecasts)
Percentage change over four quarters, September 2019 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight 2009–2019*
2019*
2020*
2019Q3
2019Q4
2020Q1
2020Q2
2020Q3
2020Q4
Food and non-alcoholic beverages


* Annual average percentage change
Sources: Stats SA and SARB

APRIL 2020
Fuel
The main fuel price development of the past six months has
been a substantial slide in oil prices, which started with the
COVID-19 outbreak in China and intensified when the major
oil-producing countries failed to agree on production cuts and
started a price war instead. From a high of US$67 in December,
the Brent crude benchmark fell to US$56 in February and then
to under US$30 per barrel in late March, its lowest level since
2016. This development has prompted downward revisions
to the oil price assumptions, to US$40 per barrel for 2020,
US$44 per barrel for 2021, and US$45 per barrel for 2022.
The lowest quarterly assumptions are US$35 per barrel for
the second and third quarters of 2020, with the price edging
higher in each subsequent quarter.
Over the course of 2019, domestic fuel price inflation benefitted
from the relatively elevated 2018 starting point. The end of
2018, in particular, was marked by higher oil prices as well
as a more depreciated exchange rate, lifting the petrol price
(for example) to R17.4 per litre. As oil prices moderated again
in 2019, and the rand recovered some ground, the petrol price
recovered, averaging R16.0 per litre for 2019. As a result,
fuel price inflation was muted during the year, averaging
2.2%, and even deflating in some months. The effect was
most marked in October and November, driving the dip in
headline CPI to 3.7% and 3.6% respectively. Fuel price
inflation then leapt to 13.7% in January 2020, as the flattering
base effect disappeared.
Over the forecast period, fuel price inflation is expected to
average -5.8%, 8.7% and 3.9% for 2020, 2021 and 2022
respectively. Fuel taxes will rise 25c this year, as announced
in the 2020 Budget Speech, and subsequent increases are
projected to be of comparable magnitudes.
Electricity
Electricity inflation averaged 9.6% in 2019, up from
5.2% in 2018 but close to its 10.8% average for the past
decade. It is expected to accelerate somewhat in 2020, to
10.4%, before moderating again to 7.5% and 6.0% in 2021
and 2022 respectively. The lower outlook for electricity price
inflation in the outer years of the forecast is consistent with the
National Energy Regulator of South Africa (NERSA)-approved
increases: 9.4% for 2019/20, 8.1% for 2020/21, and 5.2% for
2021/22. (Note that these are not calendar-year increments;
they cover the period July through to June of the following year.)
There are, however, upside risks to these numbers, based on
Eskom court action to recoup costs that Eskom claims should
have been reimbursed during the previous Regulatory Clearing
Account process.
Forecast
US$ per barrel
Rand per US$

Exchange rate and oil
Sources: Bloomberg and SARB

Exchange rate

(right-hand scale)

Brent price


US$ per barrel

Evolution of crude oil price forecasts*
Source: SARB

Actual

Mar 2019

Sep 2019

Mar 2020

* Dotted lines indicate forecasts

APRIL 2020
Core inflation
Core inflation, which as recently as 2016 was at 5.6%, has
moderated substantially. It has been in the bottom half of the
target range since April 2018, averaged 4.1% in 2019, and
declined further to 3.8% as of February 2020. Over the forecast
period, it is expected to average 3.9%, 4.3% and 4.4% in 2020,
2021 and 2022 respectively.
Perhaps the biggest surprise in the recent inflation data has
been the sustained slowdown in service price inflation. Having
long been stuck close to 6%, inflation for this category began
decelerating in 2017 and slowed markedly in 2019. Specifically,
services inflation started the year at 5.2% and finished at
4.1%, the largest decline in this series since 2011.
The moderation in services inflation has been broad-based.
The single most important contributor to lower services
inflation, however, has been housing, which is also the largest
single item in the CPI basket, at 17% (and around a third of
services). Housing alone explains the bulk of the 2019 forecast
errors for the services category.
For this category, unusually low inflation reflects a mix of
higher supply and falling demand. The demand-side problems
are well known: households’ economic prospects have
deteriorated, reducing their willingness and capacity to make
major purchases. This is evident in the Lightstone Property
transfers series, which has been trending lower in recent years,
as well as in First National Bank’s (FNB) property barometer
survey, which has shown a marked uptick in the proportion of
respondents downscaling for financial reasons. (It also shows
a corresponding decline in the share of respondents upscaling
for the same reason.) Meanwhile, on the supply side of the
market, there has been an ill-timed expansion of the housing
stock. In inflation-adjusted terms, the value of new residential
housing coming on-stream reached a post-crisis high in 2019,
primarily due to rapid growth in the supply of urban apartments.
Combined, these two factors have pushed housing inflation to
an all-time low, of 2.5% in December 2019.
While services inflation has been slowing, core goods inflation
has mostly been rising over the past two years: it averaged
2.3% in 2018 and 3.1% in 2019. Despite this upward trend,
core goods inflation has come in lower than expected through
much of the past year. The previous MPR, for instance,
anticipated core goods inflation of 3.3% in 2019, a miss of
0.2 percentage points.

Housing

Communication

Restaurants and hotels

Public transport
Percentage points
-1

Contributions to services inflation
* Percentage change over 12 months
Sources: Stats SA and SARB

Education

Insurance

Other

Total services*

Percentage change over 12 months
R billions (real)*

Supply of residential housing and housing inflation

Residential buildings completed excluding

additions and alterations (right-hand scale)

Housing inflation
* 12-months moving average
Sources: Stats SA and SARB

Percentange of sellers

Sources: FNB and SARB
Reasons for selling houses

Upgrading

Downscaling due to financial pressure

APRIL 2020
The three most important components of core goods are
vehicles, clothing, and alcohol and tobacco, which together
account for more than two-thirds of the core goods basket. Of
these, alcohol and tobacco products have the highest inflation,
by a significant margin: the 2019 outcome, for instance, was
5.6%. The relatively high inflation for this category is due to sin
taxes, which have been rising by around 7% annually. (See
also Box 6.)
Vehicles inflation hit a high of 7.6% in 2016 and then moderated
sharply afterwards, reflecting both an exchange rate recovery
and a base effect. From a trough of 3.1% in 2018, inflation
for this category has now picked up somewhat, averaging
3.6% for 2019, which makes it the second-largest contributor
to core goods inflation. This peak, trough and recovery pattern
in vehicles inflation is also the main reason why inflation for the
broader core goods category has been accelerating over the
past two years.
In clothing, by contrast, inflation has averaged just above
2% for the past three years. Retail sales growth has been
slowing, averaging 1.3% in inflation-adjusted terms in 2019,
down from 2.4% in 2018. Meanwhile, retail competition has
intensified, with new market entrants challenging established
players, reducing their pricing power. Both factors have
favoured lower inflation. Import prices have also been falling,
as discussed below.
Headline inflation (March 2020 forecasts)
Percentage change over four quarters, September 2019 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight 2010–2019*
2019*
2020*
2019Q3
2019Q4
2020Q1
2020Q2
2020Q3
2020Q4

Annual average percentage change
**
CPI excluding food, non-alcoholic beverages, fuel and electricity
***
Combines actual rentals and owners’ equivalent rent
Sources: Stats SA and SARB
Percentage change over four quarters

Core goods inflation forecasts*

Source: SARB
* Dotted lines indicate forecasts

Actual

Mar 2019

Sep 2019

Mar 2020

Midpoint of the
inflation target range

APRIL 2020
Medium-term outlook
In the QPM, the longer-term forecast is based on four major
variables: the exchange rate, wages and productivity, the
output gap, and inflation expectations. By design, the QPM
delivers inflation in line with its programmed inflation target (set
at 4.5%) over the medium term, which it does by moving a
fifth variable: the repo rate. As in the previous MPR, inflation
stabilises at 4.5% in the final quarter of 2021.
Wages and unit labour costs
South African wage growth has trended steadily lower in recent
years. Labour productivity has, however, also declined, in the
context of a weak economy. These two developments have
offsetting inflationary consequences: lower wages reduce
inflationary pressure, but reduced productivity means that
wages are higher per unit of output.
To capture this dynamic in full, the QPM relies on unit labour
costs (ULC), a measure of wages adjusted for output. Given
the reduced wage growth, the QPM measure of ULC growth
has moderated recently, to 3.6%. This is significantly lower
than the ULC growth levels of around 6.2% recorded for
the period 2010 to 2017, a period of higher wage growth. A
positive ULC gap, with wage growth in excess of productivity
growth, nonetheless generates some inflation pressure. Over
the forecast period, this pressure is expected to fade, based
on wage growth staying low but productivity recovering. This
permits the ULC gap to reach zero by the end of the forecast
period, at which point it becomes neutral for prices.
Exchange rate
In the QPM, the exchange rate affects some prices directly
(such as those for fuel) and other components indirectly (such
as those for services or core goods). The direct effects are
relatively straightforward to model, using only the projected
rand/dollar exchange rate. For the rest, however, the QPM uses
a real exchange rate gap, which is the difference between an
estimated equilibrium real exchange rate, based on economic
fundamentals, and the projected real exchange rate.
This measure shows that the real exchange rate gap is
currently negative, meaning the exchange rate is undervalued
and therefore generating upward pressure on inflation.
The implied fair-value rand/dollar exchange rate is around
R14.20 presently, compared with an average outcome of
R15.30 for the first quarter of 2020 and a projected R16.00 for
the second quarter (a number that will likely have to be revised
up in future forecasts, to over R17.00). The model treats the
current rand sell-off as an exchange rate overshoot, so the real
-2

Percentage change over 12 months
Contributions to core goods inflation
Sources: Stats SA and SARB

Alcoholic beverages and tobacco

Other core goods

Clothing

Vehicles

Core goods
Forecast
-1.0
-0.5


Per cent
Contributions to unit labour cost gap
Source: SARB

Real wage gap

Productivity

Unit labour cost gap
Forecast
Implied rand/US$ exchange rate

Exchange rate*

Source: SARB
* Dotted lines indicate forecasts

Actual

Sep 2019

Mar 2020

APRIL 2020
exchange rate gap narrows over the forecast period, to restore
equilibrium. The Moody’s downgrade nonetheless suggests
the equilibrium will be more depreciated than it used to be;
the implied rand/dollar exchange rate for the March MPC was
R15.30 by the end of 2022, but an updated estimate puts that
figure at R16.40.
In unpacking the recent inflation surprises, many analysts have
focused on the possibility of lower exchange rate pass-through.
This concept captures the degree to which inflation changes
in response to a movement in the exchange rate. In the QPM,
the pass-through estimate is 0.13 for the peak change in
inflation following an exchange rate shock, which is lower than
the 0.2 rule of thumb used prior to the introduction of the QPM.
It may be that pass-through has declined further, possibly
to less than 0.1. However, there are at least two alternative
explanations available.
The first is that pass-through has seemed low because of a
period of relative stability in the exchange rate trend. Although
the rand/dollar exchange rate was volatile over the 2016 to
2019 period, it appreciated on a net basis, and was almost
unchanged over the course of 2019. Accordingly, pass-through
may have seemed low because importers were not actually
facing a trend depreciation. The test for this hypothesis will be
whether prices (particularly of core goods) start to move higher
following a persistent exchange rate shock.
The second explanation is that exchange rate effects have
been offset by low import prices. Evidence from Stats SA’s
Unit Value Index (UVI) for imports suggests that import prices
have been in deflation over the past half-decade (in rand terms).
The drawback with this measure is that it does not match the
CPI closely, because it includes items that are not purchased by
households (such as mining equipment). However, it is possible
to match specific UVI subcategories to CPI subcategories,
such as clothing and vehicles. This exercise shows substantial
gaps between import prices and related CPI categories. For
instance, while clothing and footwear CPI inflation has averaged
2.4% since 2017, the UVI for this category has deflated by 3.8%
annually. Vehicles CPI has risen by 3.8% on average over the
past three years; the vehicle UVI has gained only 1% annually.
These dynamics should have helped to moderate inflation,
separate from any lower pass-through effect.
Output gap
South Africa’s output gap had already widened to 2% of
potential GDP, a 26-year low, before the COVID-19 pandemic
began affecting demand. The March MPC forecast anticipated
a decline in output in 2020, widening the output gap to
-2.3% of potential GDP by 2020Q3. (This number is now likely
to be nearer -4% of potential GDP.) Weak demand is therefore
expected to exert downward pressure on prices.
Per cent

Real effective exchange rate gap forecasts
-15
-10
-5

Sep 2019

Jan 2020

Mar 2020
Source: SARB
Values <0 imply undervaluations
Percentage change over 12 months

Import and consumer prices, matched items
Sources: Stats SA and SARB


CPI components

Matching UVI components

Average: 3.7%

Average: -1.3%


APRIL 2020
The relationship between inflation and demand, however, is
not straightforward. Historically, there has been little or no
connection between inflation and growth in South Africa.10
More recently, however, slowing growth has coincided with
disinflation. These two contrasting facts may prompt either an
overstatement or an understatement of the price effects of a
negative output gap. Empirical estimates, however, show that
approximately 30–40% of the South African inflation basket
responds to demand pressures, which is comparable to
rates estimated for other economies.11 The demand-sensitive
items tend to be non-tradable, such as housing, which helps
explain why they are most strongly affected by local business
conditions. The output gap is therefore neither the overriding
determinant of inflation outcomes, nor is it irrelevant. It has
been the one factor among several that has reduced inflation
in recent years, and it is likely to support further disinflation this
year, while moderating the inflation rebound of 2021 and 2022.
Inflation expectations
Through much of the past decade, South African inflation
expectations have moved in a narrow band around the
6% upper bound of the SARB’s inflation target range. From
2017, the SARB began offering explicit guidance on where in
the target range it wanted inflation to stabilise, and therefore
where inflation expectations should ultimately settle. Rather
than a de facto target of around 6%, policymakers instead
emphasised the 4.5% midpoint of the target range. Over the
subsequent three years or so, inflation expectations moderated
in line with this guidance. Progress on lowering expectations
has been significant, sustained, and visible across all available
measures of inflation expectations. As of the latest available
data, the BER survey average shows inflation expectations
at 4.8% for two years ahead and at 4.7% over the next five
years (which is the lowest reading on record for this question).
This survey also shows current-year inflation at 4.4%, which is
the first time in 13 years that the survey has reported a sub4.5% average response for any of its questions. Market-based
measures, using the break-even method, have also trended
lower, although the latest data points have been compromised
by volatility in bond markets and should therefore be interpreted
with caution.
10 J Fedderke and Y Liu, ‘Inflation in South Africa: an assessment of alternative
inflation models’, South African Reserve Bank Working Paper No. 16/03,
May 2016, available at
Publications/Attachments/7275/WP603.pdf.
11 Based on the methods discussed in J H Stock and M W Watson, ‘Slack
and cyclically sensitive inflation’, National Bureau of Economic Research
Working Paper No. 25987, June 2019, available at
org/papers/w25987 and T Mahedy and A Shapiro, ‘What’s down with
inflation?’, Federal Reserve Bank of San Francisco Economic Letter
2017–35, November 2017, available at
research/publications/economic-letter/2017/november/contribution-tolow-pce inflation-from-healthcare/. See also Box 6 on p. 34 of the April 2019
Monetary Policy Review.
Per cent

Inflation expectations
Sources: BER and SARB

Midpoint

Current year

One year ahead

Two years ahead

Five years ahead
3–6% inflation target range

APRIL 2020
Given the inflation outlook and the SARB’s continued
communication around the midpoint of the target range, the
forecast assumes that longer-term inflation expectations will
settle at 4.5% during 2021, thereby helping inflation itself to
stabilise at that level. Inflation expectations are comfortably on
track to reach this level, although volatile economic conditions
will test whether they anchor at that point.
Conclusion
Throughout 2019, the SARB’s inflation forecasts looked forward
to inflation converging on 4.5% by the end of 2021. However,
they also had inflation temporarily above 4.5% for 2020 and
part of 2021. This near-term increase in inflation has now been
turned inside out, based on a massive oil price shock as well
as downside surprises to core. As a result, inflation is likely
to average just 3.8% this year, before returning to around the
middle of the target range in 2021 and 2022.
The risks to this forecast, in the MPC’s assessment, are
balanced. This does not mean the risks are small, but rather
that there are risks of roughly equivalent magnitude on both
sides. These include the possibility of more substantial and
persistent currency depreciation (on the upside) and further
intensifications of the COVID-19 outbreak (on the downside, a
risk which transpired with the lockdown announced the week
after the MPC meeting). As usual, as new information appears
the forecast will shift lower or higher in the near term, while
permitting the repo rate to adjust in order to return inflation to
4.5% over the medium term.
Per cent

Break-even inflation rates


5-year break-even rate

10-year break-even rate
Source: Bloomberg

APRIL 2020
Box 6 Measuring public sector inflation

Taxes now represent 60% of pump prices, up from 40% as of 2013.

Sin tax inflation has been 7.9% over the past nine years, compared
with inflation of 4.1% for the ex-tax portion of these goods. Without
sin taxes, alcohol and tobacco inflation would be below 4.5% rather
than above.
Most components of the consumer price index (CPI) have shown lower
inflation over the past three years, and the headline inflation rate has duly
slowed to about the middle of the target range. (The average inflation
rate for this period is 4.6%.) However, a number of price categories have
shown stubbornly high inflation. On closer inspection, it transpires that
most of these prices are either set or strongly influenced by government.
(The only substantial exception to this rule is medical insurance.)
Formalising this insight with a public sector CPI measure shows that
public sector inflation is running over 6% while private sector inflation is
around 3.5%. This shows that the public sector is an important source
of inflation pressure in this economy.
The standard measure of government prices is the administered price
index published by Statistics South Africa. However, this index omits
some prices that are shaped by public sector decisions. It is also
excessively responsive to international oil prices, given the inclusion of
fuel as an administered price.
The alternative measure shown here differs from the administered
price series in three respects. First, it uses only the tax portion of the
fuel price, and excludes the underlying cost of fuel, which is shaped
by the exchange rate and the international oil market, neither of which
are controlled by government.1 Second, it includes prices which are
unregulated but strongly influenced by the public sector. Of these, the
most significant category is alcohol and tobacco, which attracts sin
taxes.2 Third, this measure includes two tax increases, the April 2018
value-added tax adjustment and the new sugar tax, both of which
exerted upward pressure on consumer prices.
Contrasting the public and private sector CPI measures shows that
private sector inflation has decelerated steadily since 2017, and is
now close to the bottom of the target range. Public sector CPI is more
volatile. Strikingly, it moderated to around 4.5% during 2017, when the
economy began disinflating, mainly because of unusually low electricity
and education inflation. It has picked up again over the past two years,
however, averaging around 6%.
For monetary policy, high inflation in one part of the CPI requires lower
inflation in other parts, to ensure the headline figure is consistent with
the inflation target. It is not appropriate to simply ‘look through’ public
sector inflation and target only private sector inflation, as public sector
prices are then likely to accelerate further to maintain the same real
increases (unless public sector price-setters suffer from money illusion).
However, given that the public sector also incurs costs from higher
CPI inflation, mainly through wage increases for employees as well as
CPI-indexed interest payments on government debt, it may be that high
public sector inflation is suboptimal even for the public sector itself.
A clearer understanding of the public sector’s contribution to inflation
may ultimately promote more efficient price-setting choices, with
benefits including lower inflation.

Public sector inflation

Excluding VAT estimate

Headline inflation

Headline excluding public sector inflation
Percentage change over 12 months

Public and private sector inflation
Sources: Stats SA and SARB

3–6% inflation target range
Midpoint

Administered price inflation

Administered price inflation excluding fuel

Public sector inflation
Percentage change over 12 months

Administered versus public sector inflation
Sources: Stats SA and SARB
-6
-3

3–6% inflation target range
Midpoint

-1

Percentage points
Contributions to public sector inflation

Fuel taxes (11%)

Electricity (17%)

Alcoholic beverages
and tobacco (26%)

Water (5%)


Education (11%)

All communication (11%)

Other (19%)

Public sector inflation* (100%)


Figures in brackets indicate weight in public sector inflation basket
Sources: Stats SA and SARB
* Percentage change over 12 months

APRIL 2020
Box 7 Unpacking the 2019 inflation forecast errors

The core forecasts are actually broken down into separate
projections for core goods and services, but these subcomponents
are combined here to simplify the error analysis charts.
South African inflation averaged 4.1% in 2019. This outcome was
well below most forecasts, including the South African Reserve
Bank’s (SARB). The April 2019 Monetary Policy Review (MPR), for
instance, showed 2019 inflation at 4.8%. The October 2018 MPR
projected 5.7%. This box unpacks the SARB’s forecast errors,
compares the accuracy of the SARB forecasts with those from
other analysts, and offers some lessons to improve the forecasts
in future.
The Monetary Policy Committee (MPC) meets six times a year,
and new forecasts are prepared for each meeting. These forecasts
combine near-term numbers from a disaggregated model, which
relies on statistical trends, with those from the Quarterly Projection
Model (QPM), which takes a more theoretically grounded
approach. Typically, the first quarter of the forecast is drawn from
the disaggregated model, with the QPM taking over for the rest of
the forecast period.
The disaggregated model produces forecasts for all the main
components of the inflation basket. An error decomposition using
these different items shows substantial errors on food, especially
in late 2018 and early 2019, mainly due to unexpected meat price
deflation. Housing inflation also shows up as a major contributor to
forecast mistakes. (Both these factors are discussed in the prices
chapter of this MPR.) Together, food and housing explain roughly
half of the forecast error. However, there were also errors across
other components, and almost all these mistakes were skewed to
the upside. (The main exception was fuel, which had higher inflation
than projected in the January and March 2019 forecasts.) A general
explanation for this pattern is that this model was drawing on too
long a period of inflation history. Arguably, South Africa’s inflation
history is no longer a good guide to future inflation, as the economy
appears to have disinflated from a ‘normal’ level close to 6% to one
nearer 4.5%. By following longer-term average inflation patterns,
the disaggregated model overstated 2019 inflation.
The QPM generates separate forecasts for fuel, electricity, food
and core inflation.1 Drawing on this decomposition, a variety of
errors is visible in late 2018 and early 2019. The exchange rate
projections were too depreciated, in the context of an emerging
market sell-off towards the end of 2018. (Argentina and Turkey
experienced currency crises, but the exchange rates for other
emerging markets recovered.) Inflation expectations were too high,
as the MPC had at the time framed the 4.5% objective only as
a longer-term aspiration rather than a live policy objective: model
expectations were therefore set to prevailing levels, at 5.5% rather
than 4.5%. The output gap estimate was insufficiently negative,
with the growth forecasts well above the 0.2% outcome. The food
projections were also too high, as discussed above.
The November 2018 interest rate increase revealed a clearer
preference by policymakers to achieve the 4.5% objective sooner
rather than later. This prompted adjustments to the model to allow
inflation expectations to converge on that target within a reasonable
time frame (around three years), and to allow inflation to reach 4.5%
by the end of the forecast period, with the endogenous repurchase

Fuel

Electricity

Food

Core goods

Services

of which are housing

Headline inflation

Percentage points
Contributions to 2019 forecast errors
Nov 2018
Mar 2019
Sources: Stats SA and SARB
Jul 2019
Nov 2019
MPC meetings

Food

Fuel

Core import prices

Core real ULC gap

Core residual

Headline inflation

Percentage points
Contributions to 2019 inflation errors
Jul 2018
Nov 2018
Sources: Stats SA and SARB
Jul 2019
Nov 2019

Electricity

Core inflation expectations

Core output gap

Core real exchange rate gap

Core intervention
Mar 2019
MPC meeting

APRIL 2020
rate adjusting to get it there.2 These steps reduced the size of the
inflation expectations error. However, through the first six months of
2019 staff applied judgement to raise the forecast, offsetting some of
this decline in expectations. This was done partly because the QPM’s
disinflation trajectory appeared implausibly rapid, and partly because
of a desire to avoid abrupt changes in the forecast. Unfortunately,
in this instance, a naïve model forecast would have been more
accurate.
Towards the end of the year, the size of the errors naturally declined.
The statistical residual remaining at this stage reflects the portion of
inflation unexplained by the model, which largely defies economic
explanation, although some of it may be capturing housing
disinflation.
One lesson of this experience is that disinflationary periods present
difficult forecast challenges, because the old statistical patterns in
the data are beginning to break down but new relationships are
still unclear. In these circumstances, staff judgement is especially
important, to bridge the gap between where the data have been and
where they are going. However, in this case, that judgement missed
a variety of disinflationary shocks, which moved inflation down faster
than anticipated.
This experience also demonstrates the difficulty of making abrupt
forecast changes, especially for a central bank, and particularly when
new projections would mark a large departure from consensus. To
announce in 2018 that inflation would average 4.1% in 2019, even
had that been anticipated, would have made the SARB a major
outlier. It may even have jeopardised disinflation, had the SARB
been perceived as complacent. But forecasters should be wary of
prioritising consistency over accuracy in developing new projections.
The issue of forecast outliers raises the additional question of whether
any analysts correctly anticipated 2019 inflation. The SARB forecasts
for 2019 were generally close to the Reuters median, showing that
the forecast miss was a general rather than a SARB-specific surprise.
That said, there were two individual firms with forecasts consistently,
and substantially, below this median.3 Of these, one was also below
the actual outcome for most of 2019 (falling as low as 2.7% at one
stage). It was also too low for previous years, suggesting either a
persistent downside bias or mistakes in data capturing. The other
forecast (from Capital Economics) was more impressive. It first
moved away from the Reuters median in late 2017 and stayed well
below it, but relatively close to the actual outcome, through 2018
and 2019 (averaging 4.6% and 4.3% in those years respectively).
The relative accuracy of this forecast cannot be attributed to a lower,
more realistic view of growth: the corresponding growth projections
were close to the Reuters median throughout. This firm had also
not been an outlier previously, having been close to the Reuters
median forecasts for 2016, 2017 and 2018 – which suggests it was
not a ‘stopped clock’ forecast that eventually coincided with the
facts. A conclusion is that, while a number of analysts have reported
anticipating lower inflation in 2019, better than the SARB, at least
one has a valid claim.

These adjustments actually permitted lower repo rate forecasts,
as inflation did not remain stubbornly above the Taylor Rule’s 4.5%
target over the medium term. This is the main reason why the
early QPM forecasts envisioned substantial rate increases, which
disappeared in later forecasts.

There were also some analysts who at times had lower forecasts,
but they all revised their forecasts up to around the median
subsequently, implying they had lost faith in their original projections.
A number of them did not enter the survey consistently.

2019 outcome

Reuters median

SARB

Reuters minimum forecast

Best forecast

Percentage change over 12 months
2019 CPI inflation forecasts
Sources: Reuters and SARB

J
M
M

J
S
N
J
M
M

J
S
N

APRIL 2020
Summary
What will inflation be over the medium term – the next two to
three years? One test of a central bank’s success is whether
the most likely outcome is the inflation target. Inevitably,
shocks will arise that push inflation above or below that target.
If these are just temporary surprises, however, then they will
fade with time, leaving the inflation target as the best guide to
future inflation. This is one important sense in which inflation
expectations become well-anchored.
One year ago, the SARB began publishing an inflation forecast
in which inflation converged on 4.5%, the midpoint of the
3–6% range, over the medium term (defined as the end of
the forecast, which was then the fourth quarter of 2021). To
achieve this outcome, the forecast required a specific path
for the repo rate, which was also published. At the time, no
analysts expected inflation to reach 4.5% by the end of 2021,
and neither analysts nor market-based measures matched the
SARB’s repo rate projections either.
One year later, much has changed. Analysts’ medium-term
forecasts have moderated towards the SARB’s projections.
The SARB forecasts continue to show inflation at 4.5% by
the end of 2021, and the latest forecasts, which include 2022,
have inflation at 4.5% by the end of that year. The average of
the Reuters analyst survey indicates inflation of 4.6% in 2021
and 4.5% in 2022. This suggests an emerging consensus that
inflation is likely to be close to the middle of the SARB’s target
range over the medium term.
With inflation well-behaved, the SARB has had space to lower
interest rates. Up to January 2019, this meant incremental
movements to adjust for changes in data. When the COVID-19
pandemic appeared, the SARB changed tactics, providing
substantial, pre-emptive support to mitigate a major demand
shock. In both cases, the SARB has had monetary policy
space to cut rates.
This situation contrasts with much of the historical record,
in which South Africa regularly suffered from stagflation – a
combination of low growth and higher inflation – and typically
had to respond to exchange rate collapses with higher interest
rates, even where that exacerbated growth weakness.
By enhancing clarity around the target and anchoring
expectations near 4.5%, stagflation risks have been significantly
reduced. This leaves policymakers with a better choice than
tolerating higher inflation for the sake of short-term growth.
Indeed, recent MPC forecasts have shown that a lower repo
rate path was required to prevent inflation from undershooting
the 4.5% model objective over the medium term. As the SARB
has repeatedly communicated, lower inflation leads to lower
interest rates.
Percentage change
Jan

Apr
Jul
Oct
Jan
Evolution of the 2021 headline inflation forecast
Sources: Reuters and SARB
Midpoint of the inflation target range


Reuters consensus median

SARB QPM

APRIL 2020
Unfortunately, South Africa’s sovereign risk premium remains a
source of upward pressure on interest rates, in large because of
a deteriorated fiscal position. South Africa is a major borrower
from the world, with one of the largest current account deficits
of any sizeable economy. Openness to the world makes capital
cheaper, as South Africa benefits from access to abundant
foreign savings. But openness also means that domestic
borrowing costs will be affected by changes in world interest
rates and perceptions of South African risk, rather than purely
domestic factors such as potential growth.
The COVID-19 outbreak has prompted a sudden rise in global
risk aversion, pushing up rates for riskier borrowers in general.
These global effects are likely to be temporary, as they were
in 2009–2010. But the South Africa-specific component
of risk will be more persistent, given problematic domestic
fundamentals. For this reason, efforts to de-risk the local
economy are important, over time, for South Africa to enjoy
more of the benefits of ultra-low global rates.
In the near term, the COVID-19 shock has put large portions
of the economy into a policy-induced coma. This is a supply
shock, in the sense that no amount of demand can be satisfied
if industries are closed. As the supply side of the economy
reawakens after the lockdown, however, the demand-side
aspects of COVID-19 will become more pressing. Preliminary
estimates suggest South Africa could lose about 370 000 jobs
this year, on a net basis, with business insolvencies increasing
by roughly 1 600 firms as the economy contracts. The core
macroeconomic problem, therefore, is how best to support the
economy, to mitigate these losses, while remaining cognisant
of South Africa’s pre-existing macroeconomic vulnerabilities,
which make it unrealistic to implement stimulus on the scale
seen in the strongest advanced economies.
Current account balance of 40 largest* countries
* In 2019, as measured in US dollars using current exchange rates
Sources: IMF and SARB
-5

Percentage of GDP
Colombia
UK
South Africa
Indonesia
Iran
US
Philippines
India
Canada
Brazil
Argentina
Mexico
Belgium
Poland
Turkey
France
Australia
Nigeria
Spain
China
Austria
Israel
Sweden
Italy
Malaysia
Korea
Japan
Saudi Arabia
Denmark
Hong Kong SAR
Russia
Thailand
Norway
Germany
UAE
Switzerland
Netherlands
Ireland
Taiwan POC
Singapore

APRIL 2020
Statement of the Monetary Policy Committee
21 November 2019
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria
Since the September meeting of the Monetary Policy
Committee (MPC), global economic indicators have
remained weak and global inflation low. Central banks
in
advanced
economies
provided
more
monetary
accommodation,
helping
to
ease
global
financing
conditions, but further easing appears less likely. Downside
risks from heightened trade tensions and geopolitical
developments remain.
Despite a rebound in local gross domestic product (GDP)
in the second quarter of this year, indicators suggest that
economic activity will remain weak for the rest of the year.
Recent monthly inflation has been lower than the midpoint
of the inflation target range, as owners’ equivalent rent, food
and services inflation remain subdued.
The year-on-year inflation rate, as measured by the consumer
price index (CPI) for all urban areas, was 3.7% in October
(down from 4.1% in September). Goods price inflation in
October was 3.1% (down from 4.0% in September), while
services price inflation remained at 4.2%. Food and nonalcoholic beverage (NAB) price inflation slowed to 3.6%
(down from 3.9%). The South African Reserve Bank’s
(SARB) measure of core inflation, which excludes food, fuel
and electricity, remains unchanged at 4.0%. Producer price
inflation for final manufactured goods decreased to 4.1% in
September (compared to 4.5% in August).
The medium-term inflation outlook has remained largely
unchanged
since
September.
The
inflation
forecast
generated by the SARB’s Quarterly Projection Model (QPM)
is unchanged compared to September, averaging 4.2%
in 2019, 5.1% for 2020 and 4.7% for 2021. Headline CPI
inflation is expected to peak at 5.3% in the first quarter of
2020 and settle at 4.5% in the last quarter of 2021.
The forecast for core inflation is lower at 4.2% in 2019 (down
from 4.3%) and at 4.5% in 2020 (down from 4.7%), and remains
steady at 4.6% in 2021. Food price inflation continues to
surprise to the downside on a monthly basis, and is expected
to peak at about 6.1% in the third quarter of 2020.
Inflation expectations have continued to moderate gradually.
According to the Bureau for Economic Research (BER)
third-quarter survey, expectations for headline inflation are
down slightly for 2019 to 4.6% (from 4.8%). Expectations
for 2020 remain unchanged at 5.0% and have eased from
5.2% to 5.1% for 2021, reaching the lowest levels since
2007. Five-year-ahead inflation expectations also declined
to 5.0% (from 5.1%).
The inflation expectations of market analysts in the
November 2019 Reuters Econometer survey remain
unchanged at 4.3% for 2019, revised lower to 4.7% (from
4.9%) for 2020, and are unchanged at 4.8% for 2021.
Market-based expectations implicit in the break-even
inflation rates (the yield differential between conventional
and inflation-linked bonds) have moderated somewhat
since the previous MPC. Five-year break-even inflation
rates are currently about 4.5% and ten-year break-even
rates are at 5.4%.
Global GDP is expected to average 3.0% in 2019, rising
to about 3.4% in 2020. While trade and manufacturing
indicators continue to be weak, services have remained
more resilient, keeping overall global growth rates up.
However, services have shown weakness in some regions
and a range of downside risks to growth remains. These
include geopolitical developments, trade tensions, further
oil price shocks, and high levels of corporate and sovereign
debt. Across most countries, there is limited policy space to
respond to shocks.
Inflation outcomes and inflation expectations in most
advanced economies remain below targeted levels. Barring
significant shocks, monetary policy in major advanced
economies will remain accommodative over the medium
term. While global financial market sentiment has turned
more positive in recent weeks, the risk of renewed market
volatility remains high.
Since the September MPC, the rand has depreciated slightly
by 0.6% against the United States (US) dollar and by 0.8%
against the euro. The implied starting point for the rand is
R14.94 against the US dollar, compared with R14.88 at the
time of the previous meeting. While the rand has benefitted
from improvements in global sentiment, investors remain
concerned about domestic growth prospects and fiscal risks.
Although GDP growth rebounded to 3.1% in the second
quarter, longer-term weakness in most sectors remains a
serious concern. Based on recent short-term economic
indicators for the mining and manufacturing sectors, the
third-quarter GDP outcome is expected to be weak. Public
sector investment has declined and export growth remains
low, whereas government and household consumption
continue to grow, albeit modestly.
Business confidence remains weak. The Rand Merchant
Bank (RMB)/BER Business Confidence Index fell to

APRIL 2020
21 points (from 28), while the Absa Purchasing Managers’
Index (PMI) rose to 48.1 points in October (from 45.1).
The SARB’s composite leading business cycle indicator
also continued to trend lower, and the coincident indicator
decreased month on month while remaining positive on a
year-on-year basis.
The forecast of GDP growth for 2019 is revised lower at
0.5% (from 0.6%). The forecasts for 2020 and 2021 have
decreased to 1.4% (from 1.5%) and 1.7% (from 1.8%)
respectively, due to lower growth than previously expected
in the third and fourth quarters and downward revisions to
global growth.
The MPC assesses the risks to the growth forecast to
be to the downside. Escalation in global trade tensions,
geopolitical risks, further domestic supply constraints and/
or sustained higher oil prices could generate headwinds to
growth. Public sector financing needs have risen, raising the
prospect of further pressure on the currency and pushing
the borrowing costs for the broader economy higher.
Implementation of prudent macroeconomic policies and
structural reforms that lower costs and increase investment,
potential growth and job creation, remains urgent.
The overall risks to the inflation outlook are assessed to be
balanced, but uncertainty about inflation risks is unusually
high. Demand-side pressures remain subdued and house
rental prices are expected to increase at only moderate
rates. Global inflation should also remain low. Food price
inflation has continued to surprise to the downside, but
rising imported food prices and uncertain domestic weather
patterns raise uncertainty about the future price trajectory.
Further upside risks to the inflation outlook include wage
growth and fuel, electricity and water prices. The risk of
further capital flow volatility has also increased, which could
put pressure on the exchange rate.
The MPC welcomes the sustained moderation in inflation
outcomes and inflation expectations, and would like to see
inflation expectations anchored closer to the midpoint of the
inflation target range on a sustained basis.
Against this backdrop, the MPC decided to keep the
repurchase rate (repo rate) unchanged at 6.5% per annum.
Three members preferred to keep interest rates on hold and
two members preferred a cut of 25 basis points.
Monetary policy actions will continue to focus on anchoring
inflation expectations near the midpoint of the inflation
target range in the interest of balanced and sustainable
growth. In this persistently uncertain environment, future
policy decisions will continue to be highly data-dependent,
sensitive to the balance of risks to the outlook, and will seek
to look through temporary price shocks.
The implied path of policy rates over the forecast period
generated by the QPM indicated one repo cut of 25 basis
points in the third quarter of 2020. This remains a broad
policy guide which could change in either direction from
meeting to meeting in response to new developments and
changing data and risks.
Per cent

2015 2016 2017 2018 2019 2020 2021
Repurchase rate forecast (November 2019)

90%

60%

30%

Repo rate

The uncertainty bands for the repo rate are based on historical
forecasting experience and stochastic simulations in the QPM. The
bands are symmetric and do not reflect any assessment of upside or
downside risk.
Source: SARB

APRIL 2020
Summary of assumptions: Monetary Policy Committee
meeting on 21 November 2019*
1. Foreign sector assumptions
Actual
Forecast

1. Real GDP growth in South Africa’s

2. Output gap in South Africa’s major trading-partner countries


3. Change in international commodity prices in US$

2. Domestic sector assumptions
Actual
Forecast


Notes
1.
Shaded areas indicate forecast assumptions.
2.
The figures in brackets represent the previous assumptions of the Monetary Policy Committee.
* For an explanation of foreign sector assumptions and domestic sector assumptions, see pages 52 and 53.

APRIL 2020
Summary of selected forecast results: Monetary Policy Committee meeting
on 21 November 2019*
Selected forecast results (annual)
Forecast


Notes
1.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the euro area, the US
and Japan). The bilateral exchange rates are weighted by export trade weights.
2.
The real effective exchange rate (REER) is the NEER deflated by the consumer price differential (between South Africa and the trade-weighted CPI of the euro
area, the US and Japan).
3.
The real exchange rate gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an
overvaluation of the currency, and vice versa.
4.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
5.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
6.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (quarterly)
Year-on-year percentage change


1. Headline inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4


2. Core inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Notes
1. Shaded areas indicate the forecasts of the Monetary Policy Committee.
2. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

APRIL 2020
Statement of the Monetary Policy Committee
16 January 2020
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria
Since the November meeting of the Monetary Policy
Committee (MPC), global economic indicators have
improved somewhat and global inflation has remained
low. Central banks in advanced economies provided
more monetary accommodation, helping to ease global
financing conditions, but further easing appears less likely.
While downside risks from trade tensions and geopolitical
developments remain, the global slowdown appears to be
bottoming out.
The domestic economic outlook remains fragile. Despite a
rebound in local gross domestic product (GDP) in the second
quarter of 2019, GDP contracted in the third quarter. The
fourth quarter is expected to show some positive growth.
Recent monthly inflation has been lower than the midpoint
of the inflation target range. The year-on-year inflation rate,
as measured by the headline consumer price index (CPI),
was 3.6% in November (down from 3.7% in October).
Goods price inflation in November was 2.8% (down from
3.1% in October), while services price inflation remained
at 4.2%. Food and non-alcoholic beverage (NAB) price
inflation was stable at 3.5% (down from 3.6%). The South
African Reserve Bank’s (SARB) measure of core inflation,
which excludes food, fuel and electricity, decreased slightly
to 3.9% (from 4.0% in October). Producer price inflation for
final manufactured goods decreased to 2.3% in November
(from 3.0% in October).
The medium-term inflation outlook has been revised
significantly lower compared to the November forecast.
The inflation forecast generated by the SARB’s Quarterly
Projection Model (QPM) averages 4.1% in 2019 (down
from 4.2%), 4.7% for 2020 (down from 5.1%) and 4.6% for
2021 (down from 4.7%). The SARB’s forecast for headline
CPI inflation for 2022 is 4.5%. Headline CPI inflation is now
expected to peak at 4.9% in the final quarter of 2020 and
settle at 4.5% in the third quarter of 2021 (one quarter
earlier). The forecast for core inflation for 2019 is unchanged
at 4.2%, 4.3% in 2020 (down from 4.5%) and 4.4% in 2021
(down from 4.6%). The SARB’s forecast for core inflation
for 2022 is 4.5%. Food price inflation continues to surprise
to the downside on a monthly basis, and has been revised
from 5.8% to 4.7% for 2020.
Inflation expectations have continued to moderate gradually.
According to the Bureau for Economic Research (BER)
fourth-quarter survey, expectations for headline inflation are
down slightly for 2019 to 4.5% (from 4.6%). Expectations for
2020 have declined to 4.8% (from 5.0%), and to 5.0% (from
5.1%) for 2021. Five-year-ahead inflation expectations have
also eased, to 4.9% (from 5.0%).
The inflation expectations of market analysts in the
December 2019 Reuters Econometer survey are generally
lower, at 4.2% (from 4.3%) for 2019, 4.6% (from 4.7%) for
2020 and 4.7% (from 4.8%) for 2021.
Market-based expectations implicit in break-even inflation
rates (the yield differential between conventional and
inflation-linked bonds) have moderated somewhat since
the previous MPC meeting. The five-year break-even rates
are currently about 4.1% and the ten-year break-even rates
are 5.3%.
Global GDP is expected to average 3.0% in 2019, rising
to about 3.4% in 2020. In recent months, global trade and
manufacturing indicators have exhibited signs of stabilisation
and, alongside resilient services, suggest that global growth
rates will hold up. However, a range of downside risks to
growth remains. These include geopolitical developments,
trade tensions, further oil price shocks, and high levels of
corporate and sovereign debt.
Inflation outcomes and inflation expectations in most
advanced
economies
remain
below
target
levels.
Barring significant shocks, monetary policy in major
advanced economies will remain accommodative over the
medium term.
Since the November MPC, the rand has appreciated by
2.6% against the United States (US) dollar and by 1.8%
against the euro. The implied starting point for the rand is
R14.60 against the US dollar, compared with R14.94 at the
time of the previous meeting. While the rand has benefitted
from improvements in global sentiment, high long-term bond
yields reflect concerns about domestic growth prospects
and fiscal risks.
The GDP growth outcome for the third quarter confirmed that
the economy remains weak and vulnerable to idiosyncratic
shocks and poor sectoral performances. While growth in
the fourth quarter is expected to have picked up, electricity
supply constraints will likely keep economic activity muted
in the near term. Public sector investment continues to be
weak and export growth remains lacklustre despite strong
terms of trade. Government and household consumption,
and private investment, continue to grow, albeit modestly.
Business confidence remains weak. The Rand Merchant
Bank (RMB)/BER Business Confidence Index improved to
26 points (from 21), while the Absa Purchasing Managers’
Index (PMI) fell to 47.1 points in December (from 47.7). The
SARB’s composite leading business cycle indicator also
continued to trend lower, while the coincident indicator
increased marginally month on month.

APRIL 2020
The forecast of GDP growth for 2019 is revised lower to
0.4% (from 0.5%). The forecasts for 2020 and 2021 have
also decreased to 1.2% (from 1.4%) and 1.6% (from 1.7%)
respectively, due to lower growth than previously expected
in the third and fourth quarters. The GDP forecast for 2022
is 1.9%.
The MPC assesses the risks to the growth forecast to
be to the downside. Escalation in global trade tensions,
geopolitical risks, further domestic supply constraints and/
or sustained higher oil prices could generate headwinds
to growth. Public sector financing needs have risen,
increasing risk premiums and pushing borrowing costs for
the broader economy higher. Implementation of prudent
macroeconomic policies and structural reforms that lower
costs and increase investment, potential growth and job
creation, remains urgent.
The overall risks to the inflation outlook are assessed to
be balanced. Demand-side pressures remain subdued
and house rental prices are expected to increase at only
moderate rates. Global inflation should also remain low. Food
price inflation has continued to surprise to the downside,
although rising imported food prices create some caution
about the future price trajectory. While the currency has
strengthened relative to the November meeting, the risk
remains that domestic shocks might generate more capital
flow volatility and put pressure on the exchange rate and
inflation. Other upside risks to the inflation outlook remain,
including from fuel, electricity and water prices, and from
nominal wage growth.
The MPC welcomes the lower inflation outcomes and the
continued moderation in inflation expectations. While the
MPC would like to see inflation expectations anchored
closer to the midpoint of the inflation target range on a
sustained basis, the lower inflation forecast and improved
risk profile opens some space to provide further policy
accommodation to the economy.
Against this backdrop, the MPC decided to reduce the
repurchase rate (repo rate) by 25 basis points. The decision
was unanimous.
Monetary policy actions will continue to focus on anchoring
inflation expectations near the midpoint of the inflation
target range in the interest of balanced and sustainable
growth. In this persistently uncertain environment, future
policy decisions will continue to be highly data-dependent,
sensitive to the balance of risks to the outlook, and will seek
to look through temporary price shocks.
The implied path of policy rates over the forecast period
generated by the QPM indicated two repo rate cuts of
25 basis points each in the first and fourth quarters of 2020.
This remains a broad policy guide which could change in
either direction from meeting to meeting in response to new
developments and changing data and risks.
Per cent

2015 2016 2017 2018 2019 2020 2021 2022
Repurchase rate forecast (January 2020)

90%

60%

30%

Repo rate

The uncertainty bands for the repo rate are based on historical
forecasting experience and stochastic simulations in the QPM. The
bands are symmetric and do not reflect any assessment of upside or
downside risk.
Source: SARB

APRIL 2020
Summary of assumptions: Monetary Policy Committee
meeting on 16 January 2020*
1. Foreign sector assumptions
Actual
Forecast

1. Real GDP growth in South Africa’s

2. Output gap in South Africa’s major trading-partner countries


3. Change in international commodity prices in US$

2. Domestic sector assumptions
Actual
Forecast


Notes
1.
Shaded areas indicate forecast assumptions.
2.
The figures in brackets represent the previous assumptions of the Monetary Policy Committee.
* For an explanation of foreign sector assumptions and domestic sector assumptions, see pages 52 and 53.

APRIL 2020
Summary of selected forecast results: Monetary Policy Committee meeting
on 16 January 2020*
Selected forecast results (annual)
Actual
Forecast


Notes
1.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the euro area, the US
and Japan). The bilateral exchange rates are weighted by export trade weights.
2.
The real effective exchange rate (REER) is the NEER deflated by the consumer price differential (between South Africa and the trade-weighted CPI of the euro
area, the US and Japan).
3.
The real exchange rate gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an
overvaluation of the currency, and vice versa.
4.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
5.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
6.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (quarterly)
Year-on-year percentage change


1. Headline inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4


2. Core inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Notes
1. Shaded areas indicate the forecasts of the Monetary Policy Committee.
2. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

APRIL 2020
Statement of the Monetary Policy Committee
19 March 2020
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

The forecast deducts 0.5 percentage points from 2020 GDP for load-shedding at stage 2.
Since the January meeting of the Monetary Policy Committee
(MPC), the South African Reserve Bank’s (SARB) forecast
for inflation has continued to moderate, in line with monthly
inflation data and recent lower oil prices. Globally, a oncehealthy economic growth outlook has been revised down
sharply due to the outbreak and spread of COVID-19. This
coronavirus will negatively affect global and domestic
economic growth through the first half of 2020 and potentially
longer, depending on steps taken to limit its spread.
The COVID-19 outbreak will have a major health and
social impact, and forecasting global and domestic activity
presents significant uncertainty. The Chinese economy,
where the virus originated, is expected to contract by 1% in
the first half of 2020. Economic activity is likely to contract
in the United States (US) and Europe, as governments there
take actions to contain the spread of the virus.
In financial markets, the sustained global bull market in
equities and corporate bonds also ended dramatically last
week, with extensive and deep repricing. Prices for emerging
market sovereign debt and other risky assets also fell sharply.
This will have repercussions for household wealth and
income, impacting further on global economic growth.
In response to all these developments, the US Federal
Reserve (Fed), alongside other central banks, took various
steps to provide further monetary accommodation.
Additional steps have also been taken to provide liquidity
and ensure the smooth functioning of markets. Some
governments have taken fiscal measures to mitigate the
economic effects of the virus.
In light of these considerations, we have marked down
global growth to 1.1% for 2020, rising to around 2.8% in
2021. While a deeper or longer global and domestic
contraction is not in our baseline, the MPC did consider a
scenario featuring that possibility.
Prices for some commodities have fallen as a result of weaker
demand globally, with copper and oil being particularly hardhit. The spot price for Brent crude oil is currently around
US$30 per barrel but is expected to bounce back to higher
levels. For our forecast, the Brent crude oil price is expected
to average US$40.4 per barrel in 2020 and US$44.5 per
barrel in 2021, well below previous assumptions.
The domestic economic outlook remains fragile. At this
point, COVID-19 is likely to result in weaker demand for
exports as well as domestic goods and services, but its
impact on the economy could be partly offset by lower oil
prices. We also expect disruptions to supply chains and to
normal business operations. The SARB now expects the
economy to contract by 0.2% in 2020. Gross domestic
product (GDP) growth is expected to rise to 1.0% in 2021
and to 1.6% in 2022.
Apart from the COVID-19 global pandemic, electricity supply
constraints and other sources of uncertainty are expected
to keep economic activity muted. Public sector investment
has declined, and job creation has slowed. Business and
household confidence has weakened further. Government
and household consumption, and private investment, however,
continue to grow, albeit modestly. While export growth is
expected to decelerate further in the near term, prices remain
high for some export commodities and could be supported
by an early resumption in China’s economic activity.
The technical recession of the latter half of 2019 has
contributed to a lower economic growth forecast. In
addition, COVID-19 and existing constraints such as loadshedding, imply significant downside risk to the forecast.1
With persistently low inflation, and the coronavirus now
hitting economic activity, monetary policy in major advanced
economies and China will likely remain accommodative
over the medium term. Easy global financing conditions
have previously supported the value of the local currency,
but financial volatility and a sharp rise in perceived risk
have caused the rand to depreciate by 17.2% against the
US dollar since January. The implied starting point for the
rand forecast is R15.30 to the US dollar, compared with
R14.90 at the time of the previous meeting. The forecast
shows the currency strengthening over time, recovering
towards its longer-run equilibrium level.
The SARB’s headline consumer price inflation forecast
averages 3.8% for 2020, 4.6% for 2021, and 4.4% in 2022.
The forecast for core inflation is lower at 3.9% in 2020, 4.3%
in 2021, and 4.4% in 2022.
With the downward revision to the forecast, the overall risks
to the inflation outlook at this time appear to be balanced.
Electricity pricing remains an immediate concern, and there
is likely to be higher volatility in prices of other goods and
services as a result of sharp changes in demand and supply.
Risks to inflation from recent currency depreciation are
expected to be muted as pass-through is slow and could be

APRIL 2020
offset by a wider output gap. Food price inflation is expected
to remain low, in part due to better weather conditions.
Expectations of future inflation have moderated further,
on the back of lower services prices, modest food price
inflation, and slower-growing nominal wages. Across the
different surveys we look at, inflation expectations currently
average 4.4% for 2020, 4.6% for 2021, and 4.7% for 2025.2
Market-based expectations have also moderated, with fiveyear break-even rates currently at about 3.90%.3
Heightened risk sentiment in global markets has amplified
domestic and fiscal risks. This has pushed South Africa’s
sovereign bond yields sharply higher and weakened the
domestic currency, increasing risks to monetary policy.
The steep drop in global real interest rates implemented
by advanced economies in recent days has partly offset
those risks.4
Despite the general rise in risk, the significantly lower forecast
for headline inflation has created space for monetary policy
to respond to the rapid deterioration in economic conditions.
Barring severe and persistent currency and oil shocks,
inflation is expected to be well-contained, remaining below
the midpoint of the target range in 2020 and close to the
midpoint in 2021.
Against this backdrop, the MPC decided to cut the
repurchase rate (repo rate) by 100 basis points.
This takes the repo rate to 5.25% per annum, with effect
from 20 March 2020. The decision was unanimous.
The implied path of policy rates over the forecast period
generated by the Quarterly Projection Model (QPM)
indicated three repo rate cuts of 25 basis points each in the
second and fourth quarters of 2020, as well as in the third
quarter of 2021.
Monetary policy can ease financial conditions and improve
the resilience of households and firms to the short-term
economic implications of COVID-19. Our decision and its
magnitude seeks to do this in the near term.
Monetary policy, however, cannot on its own improve the
potential growth rate of the economy or reduce fiscal risks.
Current economic conditions underscore the importance
of implementing prudent macroeconomic policies and
structural reforms that lower costs generally, and increase
investment opportunities, potential growth and job creation.

The latest Bureau for Economic Research (BER) survey has expectations for 2020 down by 0.4 percentage points to 4.4% and to 4.6% (from 5.0%) for
2021. Five-year-ahead inflation expectations also eased to 4.7% (from 4.9%). Market analysts (Reuters Econometer) expect inflation to be 4.2% (from
4.4%) for 2020, 4.6% (from 4.7%) in 2021 and 4.5% (from 4.6%) for 2022.

Calculated from the break-even inflation rate, which is the yield differential between conventional and inflation-linked bonds.

The risk premium starting point increased from 3.2% to 3.8% since January, driving up the neutral real rate by 20 basis points and currency contribution
to the neutral by 10 basis points. The weighted global neutral real rate estimated in the QPM fell by 50 basis points, resulting in an overall decline in the
neutral by 20 basis points.
Global economic and financial conditions are expected to
remain highly volatile for the foreseeable future. The MPC
will continue to assess risks to inflation, including from
weaker economic growth and those arising from wage and
price pressures, as well as currency depreciation.
As usual, the repo rate projection from the QPM remains
a broad policy guide which can change from meeting to
meeting in response to changing data and risks.
Per cent

2015 2016 2017 2018 2019 2020 2021 2022
Repurchase rate forecast (March 2020)

90%

60%

30%

Repo rate

The uncertainty bands for the repo rate are based on historical
forecasting experience and stochastic simulations in the QPM. The
bands are symmetric and do not reflect any assessment of upside or
downside risk.
Source: SARB

APRIL 2020
Summary of assumptions: Monetary Policy Committee
meeting on 19 March 2020*
1. Foreign sector assumptions
Actual
Forecast

1. Real GDP growth in South Africa’s

2. Output gap in South Africa’s major trading-partner countries


3. Change in international commodity prices in US$

2. Domestic sector assumptions
Actual
Forecast


Notes
1.
Shaded areas indicate forecast assumptions.
2.
The figures in brackets represent the previous assumptions of the Monetary Policy Committee.
*
For an explanation of foreign sector assumptions and domestic sector assumptions, see pages 52 and 53.

APRIL 2020
Summary of selected forecast results: Monetary Policy Committee meeting
on 19 March 2020*
Selected forecast results (annual)
Forecast


Notes
1.
The nominal effective exchange rate (NEER) is based on the bilateral exchange rates of South Africa’s three largest trading partners (the euro area, the US
and Japan). The bilateral exchange rates are weighted by export trade weights.
2.
The real effective exchange rate (REER) is the NEER deflated by the consumer price differential (between South Africa and the trade-weighted CPI of the euro
area, the US and Japan).
3.
The real exchange rate gap signifies the extent to which the real exchange rate deviates from its estimated equilibrium level. A positive gap shows an
overvaluation of the currency, and vice versa.
4.
The forecast of the current account balance is obtained from the SARB’s Core Macroeconometric Model.
5.
Shaded areas indicate the forecasts of the Monetary Policy Committee.
6.
The figures in brackets represent the previous forecasts of the Monetary Policy Committee.
Selected forecast results (quarterly)
Year-on-year percentage change


1. Headline inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4


2. Core inflation
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Notes
1. Shaded areas indicate the forecasts of the Monetary Policy Committee.
2. The figures in brackets represent the previous forecasts of the Monetary Policy Committee.

APRIL 2020
Foreign sector assumptions
1. Trading-partner gross domestic product (GDP) growth
is broadly determined using the Global Projection Model
(GPM), which is adjusted to aggregate the GDP growth
rates of South Africa’s major trading partners on a tradeweighted basis. Individual projections are done for the
six largest trading partners, namely the euro area, the
United States (US), the United Kingdom (UK), Japan,
China and India. Other countries considered, although
with small weights, are Brazil, Mexico and Russia. The
remaining trading partners are grouped into the ‘Rest
of Countries’ bloc. Since sub-Saharan Africa is also a
major trading region for South Africa (but does not have
a bloc in the GPM), it is modelled separately and then
combined with the aggregate of all the countries in the
GPM to make up total trading-partner growth.
2. As with GDP growth, the output gap is determined using
the GPM and is adjusted in a similar way. The output gap
is driven by a combination of country-specific domestic
factors, external factors, and financial-real linkages
(beyond interest rate and exchange rate effects).
Domestic factors include expectations of future demand
and medium-term interest rates. External factors include
exchange rate impacts on demand, direct spillovers
through trade with trading-partner countries, and
foreign demand.
3. The commodity price index is a weighted aggregate
price index of the major South African export
commodities.
4. The Brent crude oil price is expressed in US dollars
per barrel. The assumption incorporates supply and
demand dynamics as well as oil inventories (of all grades).
The assumption is also informed by projections from the
US Energy Information Administration, the Organization
of the Petroleum Exporting Countries (OPEC) and
Reuters.
5. World food prices is the composite food price index
of the United Nations (UN) Food and Agriculture
Organization (FAO) in US dollars. It is weighted using
average export shares, and represents the monthly
change in the international prices of a basket of five
food commodity price indices (cereals, vegetable oil,
dairy, meat and sugar). World food price prospects
incorporate selected global institution forecasts for
food prices and imbalances from the anticipated trend
in international food supplies relative to expected food
demand pressures.
6. International consumer prices are also broadly
determined using the GPM. The index is an aggregate
of the consumer price indices of the euro area, the
US and Japan, weighted by their relative trade shares.
Consumer prices are determined for each of these
economies by accounting for inflation expectations,
demand pressures, and pass-through from changes in
the relevant exchange rate. Other institutional forecasts
for international consumer prices are also considered.
7. International policy interest rates are again broadly
determined using the GPM. Interest rates are a weighted
average of the policy rates of the euro area, the US and
Japan. They are individually determined by a ‘Taylortype’ monetary policy rule. The communications of the
relevant central banks and other institutional forecasts
are also considered.

APRIL 2020
Domestic sector assumptions
1. The electricity price is an administered price measured
at the municipal level with a weight of 3.75% in the
headline consumer price index (CPI) basket. Electricity
price adjustments generally take place in the months of
July and August of each year, and the assumed pace of
increase over the forecast period reflects the multi-year
price determination agreement between Eskom and the
National Energy Regulator of South Africa (NERSA), with
a slight adjustment for measurement at the municipal
level.
2. Fuel taxes and levies are the total domestic taxes and
costs included in the price of fuel paid at the pump. They
include the Road Accident Fund (RAF) levy, the fuel levy,
retail and wholesale margins, the slate levy, and other
minor levies. The two major taxes, which are set by the
Minister of Finance in the annual national Budget, are the
RAF levy and the fuel levy. The income generated by the
RAF levy is utilised to compensate third-party victims of
motor vehicle accidents, while the fuel levy is used to
provide funding for road infrastructure.
3. Potential growth is derived from the South African
Reserve Bank’s (SARB) semi-structural potential output
model. The measurement accounts for the impact of the
financial cycle on real economic activity, and introduces
economic structure via the relationship between potential
output and capacity utilisation in the manufacturing
sector (SARB Working Paper Series No. WP/14/08).
4. The midpoint of the inflation target range is 4.5%.
The official inflation target range is 3–6%.
5. The neutral real interest rate (NRIR) is the interest rate
consistent with stable inflation and output in line with
the economy’s potential. This variable is the basis for
judging whether a given policy stance is expansionary,
contractionary or neutral.

APRIL 2020
Glossary
Advanced economies: Advanced economies are countries
with high gross domestic product (GDP) per capita,
diversified exports, and close integration into the global
financial system.
Balance of payments: This is a record of transactions
between the home country and the rest of the world over a
specific period of time. It includes the current and financial
accounts. See also ‘Current account’ below.
Brent crude: Brent crude is a light and sweet blend of oil
from five different fields in the North Sea. The price of Brent
crude is one of the benchmark oil prices in international
markets.
Budget deficit: A budget deficit indicates the extent to which
government expenditure exceeds government revenue.
Business and consumer confidence: These are economic
indicators that measure the level of optimism about the
economy and its prospects among business managers and
consumers.
Commodities: Commodities can refer to energy, agriculture,
metals and minerals. Major South African-produced
commodities include platinum and gold.
Consumer price index (CPI): The CPI provides an indication
of aggregate price changes in the domestic economy. The
index is calculated using a number of categories forming
a representative set of goods and services bought by
consumers.
Core inflation: Core generally refers to underlying inflation
excluding the volatile elements (e.g. food and energy prices).
The South African Reserve Bank’s (SARB) forecasts and
discussions refer to headline CPI excluding food, nonalcoholic beverages (NAB), fuel and electricity prices.
Crude oil price: This is the United States (US) dollar price
per barrel of unrefined oil. See also ‘Brent crude’ above.
Current account: The current account of the balance of
payments consists of net exports (exports less imports)
in the trade account as well as the services, income and
current transfers.
Emerging markets: Emerging markets are countries with
low to middle income per capita. They are advancing rapidly
and are integrating with global (product and capital) markets.
Exchange rate depreciation (appreciation): Exchange rate
depreciation (appreciation) refers to a decrease (increase) in
the value of a currency relative to another currency.
Exchange rate pass-through: This is the effect of exchange
rate changes on domestic inflation (i.e. the percentage
change in domestic CPI due to a change in the exchange
rate). Changes in the exchange rate affect import prices,
which in turn affect domestic consumer prices and inflation.
Forecast horizon: This is the future period over which the
SARB generates its forecasts, typically between two and
three years.
Gross domestic product (GDP): GDP is the total market
value of all the goods and services produced in a country.
It includes total consumption expenditure, capital formation,
government consumption expenditure, and the value of
exports less the value of imports.
Gross fixed capital formation (investment): The value of
acquisitions of capital goods (e.g. machinery, equipment
and buildings) by firms, adjusted for disposals, constitutes
gross fixed capital formation.
Headline consumer price index (CPI): Headline CPI refers
to CPI for all urban areas, as measured on a monthly basis
by Statistics South Africa (Stats SA). Headline CPI is a
measure of price levels in all urban areas. The 12-month
percentage change in headline CPI is referred to as ‘headline
CPI inflation’ and reflects changes in the cost of living. This
is the official inflation measure for South Africa.
Household consumption: This is the amount of money
spent by households on consumer goods and services.
Inflation (growth) outlook: This outlook refers to the evolution
of future inflation (growth) over the forecast horizon.
Inflation targeting: This is a monetary policy framework
used by central banks to steer actual inflation towards an
inflation-target level or range.
Monetary policy normalisation: This refers to the unwinding
of an unusually accommodative monetary policy. It could
also mean adjusting the economy’s policy rate towards its
real neutral policy rate.
Neutral real interest rate (NRIR): The NRIR is the level at
which the real interest rate will settle once the output gap is
closed and inflation is stable.
Nominal effective exchange rate (NEER): The NEER
is an index that expresses the value of a country’s
currency relative to a basket of other (trading-partner)
currencies. An increase (decrease) in the NEER indicates
a strengthening (weakening) of the domestic currency with
respect to the selected basket of currencies. The weighted
average exchange rate of the rand is calculated against
20 currencies. The weights of the five major currencies are
as follows: the euro (29.26%), the Chinese yuan (20.54%),
the US dollar (13.72%), the Japanese yen (6.03%), and the
British pound (5.82%). Index: 2010 = 100. See also ‘Real
effective exchange rate’ below.
Output gap/potential growth: Potential growth is the rate
of GDP growth that could theoretically be achieved if all
the productive assets in the economy were employed

APRIL 2020
in a stable inflation environment. The output gap is the
difference between actual growth and potential growth,
which accumulates over time. If this is negative, then the
economy is viewed to be underperforming and demand
pressures on inflation are low. If the output gap is positive,
the economy is viewed to be overheating and demand
pressures are inflationary.
Policy rate: A policy rate is the interest rate used by a central
bank to implement monetary policy.
Productivity: Productivity indicates the amount of goods
and services produced in relation to the resources utilised
in the form of labour and capital.
Real effective exchange rate (REER): The REER is the
NEER adjusted for inflation differentials between South Africa
and its main trading partners. See also ‘Nominal effective
exchange rate’ above.
Repurchase rate (repo rate): This is the policy rate that is set
by the Monetary Policy Committee (MPC). It is the rate that
commercial banks pay to borrow money from the SARB.
Real repo rate: This is the nominal repo rate, as set by the
MPC, adjusted for expected inflation.
Terms of trade: This refers to the ratio of export prices to
import prices.
Unit labour cost (ULC): A ULC is the labour cost to produce
one ‘unit’ of output. This is calculated as the total wages
and salaries in the non-agricultural sector divided by the real
value added at basic prices in the non-agricultural sector of
the economy.

APRIL 2020
Abbreviations
Alsi
All-Share Index
BER
Bureau for Economic Research
BoE
Bank of England
Capex
capital expenditure
CDS
credit default swap
CPB
Centraal Planbureau (Netherlands Bureau
for Economic Policy Analysis)
CPI
consumer price index
CSI
composite slack index
DAFF
Department of Agriculture, Forestry and
Fisheries
EAF
Energy Availability Factor
ECB
European Central Bank
EM
Emerging Market
EMBI+
Emerging Market Bond Index plus
FAO
Food and Agriculture Organization
Fed
Federal Reserve
FIM
fiscal impulse measure
FNB
First National Bank
FRA
forward rate agreement
FTSE
Financial Times Stock Exchange
FX
foreign exchange
G3
Group of Three (United States, euro area, Japan)
GDP
gross domestic product
GPM
Global Projection Model
GVA
gross value added
Haver
Haver Analytics
HP
Hodrick-Prescott filter
IMF
International Monetary Fund
JSE
JSE Limited
Moody’s Moody’s Corporation
MPC
Monetary Policy Committee
MPR
Monetary Policy Review
MTBPS
Medium Term Budget Policy Statement
NAB
non-alcoholic beverages
NEER
nominal effective exchange rate
NERSA
National Energy Regulator of South Africa
NRIR
neutral real interest rate
OECD
Organisation for Economic
Co-operation and Development
OPEC
Organization of the Petroleum Exporting Countries
PMI
Purchasing Managers’ Index
POC
Province of China
QE
quantitative easing
QES
Quarterly Employment Statistics
QPM
Quarterly Projection Model
RAF
Road Accident Fund
REER
real effective exchange rate
repo rate repurchase rate
RMB
Rand Merchant Bank
SAR
Special Administrative Region
SARB
South African Reserve Bank
SARS
South African Revenue Service
SIT
services, income and current transfers
S&P
Standard & Poor’s Global Ratings
SSA
sub-Saharan Africa
Stats SA Statistics South Africa
UAE
United Arab Emirates
UK
United Kingdom
ULC
unit labour cost
UN
United Nations
US
United States
UVI
Unit Value Index
VAT
value-added tax
VIX
Chicago Board Options Exchange Volatility Index
WHO
World Health Organization