MONETARY POLICY REVIEW
OCTOBER 2020
OCTOBER 2020
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ISSN: 1609-3194
Produced by the Publishing Section of the South African Reserve Bank
OCTOBER 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 in major centres across
South Africa. However, due to COVID-19, this MPR will be launched virtually. Questions about the document may be directed to
Marlene Hugo at
Errata: subsequent to online publication, two errors were identified on , a literature review table, which have
now been corrected in this version of the MPR.
OCTOBER 2020
Contents
The road to recovery

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
Statement of the Monetary Policy Committee

OCTOBER 2020
The road to recovery
Executive summary and
overview of the policy stance
The Monetary Policy Committee (MPC) has cut rates by
275 basis points since the start of the COVID-19 crisis, one
of the largest responses in the emerging market sphere.
This easing was implemented early on in this crisis to support
rapid policy transmission to the real economy. Inflation,
having fallen below the 3–6% target range during May and
June, is now back inside the target, and is projected to return
to the 4.5% midpoint over the next two years, with the help
of low interest rates. This stimulus is also serving to boost
growth. The recovery is likely to be protracted, however, given
both the severity of the shock and pre-existing constraints,
with the economy only returning to 2019 levels of output in
early 2023.
The COVID-19 pandemic has caused a deep global
recession. The world economy is likely to contract by around
3.9% in 2020, mostly due to sharp downturns in the second
quarter of the year. At the time of writing, the majority of
economies were rebounding, with the data flow tending to
produce upside surprises. Consumption has picked up from
lockdown-enforced pauses, aided by exceptionally supportive
macroeconomic policies. Global output nonetheless remains
well below 2019 levels. The economic effects of COVID-19 are
likely to be persistent, with permanent changes to consumer
tastes and business methods, and the recovery may be
interrupted by subsequent waves of infections.
The global downturn has been highly synchronised, but
recoveries are likely to be more divergent. Some economies,
especially those with high potential growth rates, will surpass
the 2019 levels of output this year. Many countries, perhaps
more than half, will make up this lost ground by 2022.
About a quarter will likely take longer, based on their weak
macroeconomic fundamentals and low underlying growth
rates. A small number of countries have already been thrown
into macroeconomic crisis by the COVID-19 shock, with
Lebanon perhaps the most prominent example. More are
likely to follow, given pre-existing weaknesses which have
been exacerbated by the stress of the pandemic. As always,
the triggers of future crises are difficult to forecast, but some
economies are now clearly in a fragile state.
Most countries are experiencing lower inflation this year,
given the COVID-19 shock to global demand. This has
facilitated widespread monetary policy easing. While South
Africa has long had somewhat higher inflation rates than its
Changes since 31 Jan 2020 in basis points
Sources: Haver and SARB
Emerging market policy rates


Mexico
South Africa
Brazil
Colombia
Peru
Russia
Vietnam
Poland
Chile
India
Turkey
Indonesia
Malaysia
Thailand
China
Hungary
Trillions of rand (constant 2010 prices)
GDP levels
2006 2008 2010
2012 2014 2016
2018 2020

Jan 2020
2020Q2:
2.816
2007Q2:
2.606
Seasonally adjusted and annualised
Sources: Stats SA and SARB
Sep 2020

Percentage share of 88 countries

When will countries return to 2019 GDP levels?

Beyond 2022
Sources: Bloomberg and SARB

OCTOBER 2020
peer group,1 domestic inflation has decelerated comparatively
rapidly this year, and it is now almost exactly at the emerging
market median, just above 3%.
Domestic inflation was below target in May and June, at 2.1%
and 2.2% respectively. The two-month undershoot of the
3–6% inflation target range was driven by fuel price deflation,
which single-handedly detracted 1.4 percentage points from the
headline consumer price index (CPI) in May and 1.1 percentage
points in June. These two months represent the first time the
target has been missed from below since its introduction in
2000. (While the CPI was sometimes below 3% in the mid2000s, at the time the targeted measure of inflation was the
CPIX – measured as the consumer price index for metropolitan
and other urban areas, excluding the interest cost on mortgage
bonds – which bottomed out at 3.1% in February 2005.)
Inflation has since moved back into the target range, given
higher fuel prices. As fuel price deflation fades, headline
inflation is expected to accelerate, peaking slightly above
4.5% in the second quarter of 2021. This effect is temporary,
however, with inflation subsequently easing again, remaining
in the bottom half of the target range until the final quarter of
2022. On average, inflation is expected to average 4.0% in
2021 and 4.4% in 2022, up from 3.3% this year.
Core inflation is well-contained, within the target range,
across the forecast horizon. The forecasts indicate that
core inflation will average 3.4% this year, followed by 3.7% in
2021 and 4.0% in 2022. Recent weakness in core inflation is
partly attributable to missing data, with Statistics South Africa
(Stats SA) unable to record prices for goods that were banned
during the lockdown, such as alcohol and tobacco, leaving these
prices to be imputed using (low) headline inflation numbers.
Over the medium term, however, core inflation is likely to stay
subdued. In part, this reflects weak demand in the economy,
with the disinflationary effect especially strong in housing
inflation (which is based on rentals, not mortgage costs). The
forecast also takes the view that exchange rate depreciation
will not generate substantial or sustained inflationary pressure.
Finally, inflation expectations are now close to the centre of the
target range, having been sticky at around 6% previously.
The South African economy is now expected to shrink by
8.2% in 2020. Output contracted by a record 51% in the
second quarter, in quarter-on-quarter, seasonally adjusted,
annualised terms, or 17.1% in year-on-year terms. Economic
data for the second quarter were almost universally bleak,
with tourism activity falling to zero; only 574 vehicles being
sold (against 43 297 in February); and key industries, including
factories and mines, being required to close or operate at

From 2000 to 2016, the average inflation differential between
South Africa and the emerging market median was 1.1 percentage
points. It was 1.6 percentage points between 2016 and 2019.
Percentage change

Jan
Mar May
Jul
Sep Nov
Jan
Mar May
Jul

Emerging market inflation*
-2

* Sample includes Bangladesh, Brazil, China, Colombia, Egypt,
India, Indonesia, Malaysia, Mexico, Nigeria, Pakistan, Philippines, Poland,
Russia, Saudi Arabia, South Africa, Thailand, Turkey, UAE and Vietnam
Sources: Haver and SARB

+/- one standard deviation

Median

South Africa
-2
-1

Percentage points
Contributions to headline inflation
* Percentage change over 12 months
Sources: Stats SA and SARB
Jan
Feb
Mar
Apr
May
Jun

Jul
Aug

Core

Food

Fuel

Electricity

Headline inflation*

Percentage change over four quarters

Targeted inflation forecast*

* The bands around the central projection show confidence intervals
of 10%, 30%, 50% and 70%
Sources: Stats SA and SARB
3–6% inflation target range

Midpoint

OCTOBER 2020
fractions of capacity. Agriculture expanded, although this was
off a low base, but all other sectors of the economy contracted.
The economy shed 2.2 million jobs in the second quarter,
reducing the number of employed workers to just 14.1 million
out of 39 million working-age people.
The lockdown constituted a massive supply-side shock,
which macroeconomic policy would have been powerless
to prevent: there is no amount of stimulus that can sell a
car if vehicle dealerships are closed, or sell a house if the
deeds office is not processing transfers. But this shock is, in
turn, giving rise to demand-side problems, as lost incomes
and widespread uncertainty prompt spending cutbacks
throughout the economy. Recognising these dynamics,
the forecast has a negative potential growth rate for
2020 (of -3.2%). The rest of the contraction is attributed
to the output gap, however, which therefore widens to
-6.5% of potential gross domestic product (GDP) for the
year – a record low.
Output is on course to rebound off this very low base, with
the third-quarter GDP figure now tracking 45.2% (once again
relative to the preceding quarter, seasonally adjusted and
annualised). Some high-frequency data are back to pre-crisis
levels, including electricity demand and truck traffic. Others
are below but near this mark, such as small business turnover
and the composite Google Mobility Index. There are also
some industries that remain significantly constrained, such as
tourism, which are unlikely to recover to pre-crisis levels in the
foreseeable future. Confidence levels remain subdued, and
private sector investment has contracted sharply.
Over the medium term, growth is expected to average
3.9% and 2.6% for 2021 and 2022 respectively. Although
these growth rates are above recent averages, and therefore
appear optimistic, they are flattered by the low starting point,
with total output still below 2019 levels in each of these years.
The most prominent obstacles to a faster recovery are
electricity shortages and record-high government debt
levels. Load-shedding restarted in July, despite lower
levels of economic activity, and Eskom has warned it will
persist throughout 2021, interrupting economic activity and
disincentivising new investment. Meanwhile, high debt levels
are likely to affect the recovery through several channels.
These include confidence effects and uncertainty, inasmuch
as debt sustainability is in doubt, as well as crowding out via
high long-term interest rates, a lower country credit rating, and
reduced access to foreign savings. The major supports to
growth are record-low short-term interest rates and extensive
opportunities for structural reforms. The terms of trade are
also very favourable at the moment. Furthermore, while South
Africa has had a large number of COVID-19 infections, the
death rate has been unusually low, even when adjusting for
undiagnosed cases.
Percentage change over four quarters

Headline and core inflation*
Sources: Stats SA and SARB

Headline inflation

Core inflation

Midpoint

3–6% inflation target range

* Dotted lines indicate forecast

Percentage change from quarter to quarter

Real GDP growth*
Sources: Stats SA and SARB
-60
-40
-20

Seasonally adjusted and annualised
* Shaded bars indicate
forecast
Percentage change over four quarters

Real GDP growth*


* 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


OCTOBER 2020
Overview of the policy stance
The monetary policy committee has cut rates sharply this
year, bringing the repurchase (repo) rate to an all-time low.
The prime rate, which has a longer history, is now at a 54-year
low. Given that monetary policy takes some time to transmit
to the real economy, the MPC opted to cut rates before the
full force of the shock appeared in the data, so as to provide
maximum support to the economy early on. The same trend
is visible elsewhere in emerging markets: since the start of the
COVID-19 crisis, on average 70% of all rate cuts recorded to
date had already been implemented by the end of April, with
this rising to 90% by late June.
While this stimulus had limited effects in the first stages of the
lockdown, given the restrictions on most forms of economic
activity, it has supported the subsequent recovery. In particular,
low rates have increased household demand for credit,
with mortgage applications and grants, for instance, now at
10-year highs. Low short-term rates have also helped corporates
through a period of stress, while allowing government to fund
emergency spending via cheap short-term debt.
Following the large repo cuts of March, April and May, the
MPC has shifted to a ‘wait and see’ strategy, with rates
either cut by smaller increments (July) or left unchanged
(September). While the initial COVID-19 shock clearly justified
a forceful response, given much lower inflation and growth, it
also created uncertainty over the medium-term outlook. With
incoming data staying close to earlier forecasts so far, it has
not been necessary to make large course corrections. There
are, however, many unsettled questions, such as the shape
of the economic recovery (options include a V, a U, an L, and
even a K)2 as well as the outlook for price drivers, including oil,
the exchange rate and housing market dynamics. In contrast
to the first few months of the crisis, where backward-looking
data were still reflecting pre-lockdown conditions and therefore
were of limited value, policy is now once again more datadependent, as a response to this uncertainty.
This approach of moving fast and pre-emptively, and then
slowing to assess new information, has at times surprised
markets. Forward rate agreements (FRAs), for instance,
underestimated rate cuts through March and April, but then
overstated cuts in May, July and September. Some analysts
and commentators also expected the South African Reserve
Bank (SARB) to cut rates further once inflation fell below the
target range. However, the fact that inflation dipped below
3% in May and June was not in itself a reason to ease policy
further. These low inflation rates were already anticipated in the
April and May forecasts, so they did not come as surprises.
Near-term inflation outcomes are also of limited relevance for
monetary policy decisions, except where they provide new

A V-shaped recovery implies a quick rebound; a U-shape implies
a slow one. An L-shape means more lasting weakness. A K-shaped
recovery is one where outcomes for richer and poorer people diverge.
See P Atwater, ‘The gap between the haves and the have-nots
is widening sharply’, Financial Times, 10 June 2020.

Per cent

South African repo rate
Source: SARB

Percentage of total cuts

Mar
May
Jul
Feb
Apr
Jun
Aug
Sep
Speed of COVID-19 rate cuts
Sources: Haver and SARB


EM average

South Africa


EM average

South Africa

Half of EM
cuts by
30 Mar 2020
90% of EM cuts by
22 Jun 2020
Index: 2010 = 100

2018 2019 2020
Terms of trade*

Sources: Stats SA and SARB
2021 2022
Actual
Mar 2020
* Dotted lines indicate forecasts
Sep 2020

OCTOBER 2020
information about the medium-term outlook. Monetary policy
changes transmit to the economy with lags and therefore must
be forward looking.
This Monetary Policy Review (MPR) covers the six-month
period from April to September, a period which normally
encompasses three MPCs, but this time includes four, counting
the unscheduled meeting in April.
The April MPC meeting took place just 26 days after the March
decision to cut rates by 100 basis points, which had been a
response to the global spread of COVID-19. That decision had
not incorporated the domestic lockdown, however, which was
only announced on 23 March, the week after the March MPC
meeting. This development prompted substantial forecast
revisions, with the 2020 growth projections, for instance,
declining from -0.2% to -6.1% between March and April.
Although, in general, economic conditions do not change
fast enough to warrant more than six MPC meetings a year,
these developments merited a more rapid response. The MPC
therefore met on the Tuesday after the Easter long weekend,
reviewed new forecasts and announced an additional
100 basis point reduction in the repo rate.
This adjustment was consistent with the Quarterly Projection
Model (QPM) repo projections, but the forecast spread the
repo rate change over four quarters, whereas the MPC chose
to frontload the response. As with the March MPC, where the
repo action was also frontloaded, the MPC’s decision reflected
the emergency circumstances brought about by the COVID-19
pandemic. In more normal conditions, monetary policy tends
to move incrementally, but this approach makes less sense
in the context of a sudden, deeply negative shock. The MPC
decision also anticipated some of the downside data surprises
that would lower the starting points for subsequent forecasts.
Between April and May, the outlook deteriorated further,
although the revisions were smaller than for the preceding two
MPC meetings. The 2020 growth forecast dropped to -7.0%,
from -6.1% in April, which was mostly due to the lockdown
being extended beyond the initial 21-day period. The inflation
outlook was also marked down marginally, by an average of
0.1 percentage points for each forecast year. Given these
shifts, the endogenous repo rate projection indicated a further
50 basis points of cuts over the second half of 2020, which the
MPC again implemented directly. In contrast to the previous
2020 repo decisions, which were all unanimous, this move
was not the first preference of all the MPC members, with two
favouring a 25 basis point cut instead.
The July meeting featured relatively little new information. The
inflation forecast was adjusted slightly, mainly to accommodate
Stats SA’s methodology for imputing CPI items which were
banned under the lockdown (such as alcohol). Growth for
2020 was also reduced further, to -7.3%, based on highfrequency data showing a deeper dip in the second quarter
of the year than had been previously estimated. The QPM rate
path proposed an additional 25 basis point cut in the fourth
quarter of the year, which a majority of MPC members chose
to implement immediately, although two preferred no change.
Per cent
Jan

Mar
Apr
May
Jul
Sep
Short-term rates: market expectations versus
actual outcome
Sources: Bloomberg and SARB


Repo rate

FRAs, 1x4 months

-47

Per cent

Evolution of repo rate forecasts*

Source: SARB
* Dotted lines indicate forecasts

Actual

Mar 2020

Apr 2020

May 2020

Jul 2020

Sep 2020

Percentage change over four quarters

Real GDP growth*


Sources: Stats SA and SARB
This chart shows seasonally adjusted data, as used in the QPM
* Dotted lines indicate forecasts

Mar 2020

Apr 2020

May 2020

Jul 2020

Sep 2020

OCTOBER 2020
The September meeting followed the publication of the
second-quarter GDP data, which showed a deeper-thanexpected contraction under lockdown. However, high-
frequency data indicated a faster subsequent recovery in
output than had been previously expected. The QPM, having
previously indicated a fourth-quarter repo cut, now had that
cut built in from the third quarter, per the MPC’s July decision,
and saw no further repo change for the year. Two of the three
MPC members preferred an additional 25 basis cut, but three
favoured keeping the repo at 3.5%.
With domestic interest rates at record lows, and inflation
apparently having bottomed out, it is likely that the repo rate will
move somewhat higher in future. However, this normalisation
of repo is likely to be gradual, with rates staying at low levels for
an extended period. While the MPC has not committed to any
specific path for interest rates, the QPM projections suggest
that the first upward movement in the repo will occur towards
the end of 2021, with rates still not back to pre-crisis levels by
the end of 2022 (the outermost part of the forecast period).
This outlook has the same basic inflection point as market
pricing, from the FRA curve, and analysts’ expectations, as
captured in the Bloomberg survey.
The QPM’s projected repo increases are based on a narrower
output gap and inflation moving closer to the 4.5% target, as
well as a moderate increase in the neutral rate (which rises
from 2.1% this year to 2.2% in 2021 and 2.3% in 2022). This
expected rise in neutral is premised on a slightly higher global
neutral rate. By contrast, the other key driver of the QPM
neutral rate,3 the domestic risk equilibrium,4 is expected to
subside somewhat over the forecast period, from 2020 highs.
This assumption implies some rebuilding of fiscal credibility,
without which there would be more upward pressure on
interest rates, everything else being equal. The neutral rate has
been unchanged over the past four MPC meetings, so while
it remains an important component of the QPM repo path,
it has not been a source of changes for the period covered
by this MPR.
Monetary policy is calibrated to give the economy significant
stimulus over the forecast period, with a repo rate that is
negative in inflation-adjusted terms and well below the QPM’s
neutral rate. In a strictly short-term sense, the real repo rate
remained unchanged between February and March: the
slowdown in inflation, from 4.6% to 2.1%, kept pace with
repo cuts. (In both cases, the change was 250 basis points.)
However, inflation has since begun to accelerate, in line with
forecast expectations, and the repo rate has moved moderately
lower. The real repo was just above zero in the third quarter of
the year, and it is likely to fall further as inflation accelerates.

Foreign neutral is a weighted average of the neutral rate estimates for the
US, the euro area and Japan.

In the QPM, this is derived from the JPMorgan Emerging Markets Bond
Index Plus (EMBI+) spread and incorporated into the neutral rate as a
filtered equilibrium estimate of country risk.
Percentage change over four quarters

Headline inflation*

Sources: Stats SA and SARB
* Dotted lines indicate forecasts
3–6% inflation target range
Midpoint

Mar 2020

Apr 2020

May 2020

Jul 2020

Sep 2020

Per cent

Domestic r*, G3 r* and risk premium

Source: SARB

Equilibrium Country Risk Premium

G3 r*

Domestic r*
Per cent

Repo rate forecasts

Sources: Bloomberg, Reuters and SARB

Actual

QPM (Sep 2020)

Bloomberg (29 Sep 2020)

Reuters (Sep 2020 survey)

OCTOBER 2020
Using a longer-term view of inflation, such as one-year-ahead
inflation forecasts or the Bureau for Economic Research
(BER) inflation expectations, the real repo rate is now around
50–100 basis points below zero, and is likely to remain negative
throughout the coming year (even assuming the projected
increases in the nominal repo rate).
It is also worth considering the beneficial effects of rate cuts,
even in purely nominal terms. Although economists usually
focus on real interest rates, a lower nominal rate directly
improves the affordability of debt. For instance, a household
with a nominal monthly income of R30 000 will spend R9 650
(32.2%) of that amount paying off a R1 million mortgage bond
with the prime rate at 10%, but only R7 753 (25.8%) with the
prime rate at 7% (assuming a 20-year repayment period).
During the early stages of lockdown, monetary policy
transmission was impaired by business restrictions, so the
benefits of lower interest rates mostly accrued to existing
borrowers through lower debt-service costs. As these
restrictions have loosened, however, monetary policy stimulus
has begun to transmit more widely. In particular, housing credit
has rebounded, with the number of new mortgages granted
at 10-year highs in July and August, and realtors reporting
unprecedented demand. (The same pattern is visible in other
economies as a response to very low interest rates.) Similar
dynamics are also visible in installment sale credit, which funds
durable goods, especially cars.
Households are better positioned to take on new leverage
than either government or corporates, making them better
prospects for credit growth. Government has never had such
a high debt-to-GDP ratio, while corporate leverage has also
crept higher in recent years. Households, by contrast, have
reduced indebtedness quite steadily over the past decade,
leaving them relatively better positioned to capitalise on low
interest rates.
In summary, monetary policy confronts inflation that is well
below 4.5%, the midpoint of the target range, as well as
a negative output gap. Historically, the SARB has rarely
experienced low inflation and low growth simultaneously.
Instead, the modern record mostly consists of low growth
and stubbornly elevated inflation, punctuated with a few
boom-time episodes of simultaneously high growth and high
inflation. A distinctive aspect of the current crisis is the extra
scope available to monetary policy, given lower inflation, which
has permitted a forceful rate-cutting response. In turn, lower
interest rates will help return inflation to the middle of the target
range, over time, while supporting the economy’s recovery.
The strength of that recovery, however, will also depend on
factors outside the control of monetary policy, including
sovereign debt sustainability and structural reforms to raise the
economy’s potential growth rate. Monetary policy can provide
low and stable inflation and support demand, but it cannot
single-handedly deliver prosperity.
Per cent

Domestic real interest rate
Source: SARB

Real interest rate

Real neutral rate

Percentage of GDP

Debt burdens

Source: SARB

Government

Households

Corporates
Output gap (percentage of potential GDP)
Growth and inflation over the inflation-targeting era
Inflation rate (percentage change over 12 months)
Low growth,
low inflation
Low growth, high inflation
Overheating economy

2018 2017
2016 2009

Sources: Stats SA and SARB


OCTOBER 2020
Box 1 Is monetary policy transmitting?
1 For instance, see L Donnelly, ‘Reserve Bank’s efforts to boost
borrowing are still to bear fruit’, Business Day, 31 August 2020.

efforts-to-boost-borrowing-are-still-to-bear-fruit/
2 There was also a multinational transaction involving the purchase
of a local company underway at the time, but excluding this amount
from the series does not substantively change its level or trend.
Short-term interest rates have fallen significantly, and average lending
rates have declined with them. It has been argued that this stimulus
is not transmitting to the real economy, however, because firms and
households are too worried about their prospects to borrow, and
banks are too conservative to lend.1 The headline number for growth
in private sector credit growth has also slowed, bolstering the view
that monetary policy is not transmitting effectively.
These arguments contradict other sources, however, which indicate
clear and robust responses to monetary policy. Realtors, for instance,
have reported their best-ever months post-lockdown, primarily due
to first-time buyers capitalising on low interest rates to buy homes.
Mortgage lenders have confirmed additional demand, and even
though rejection rates have risen, the total number of mortgages
granted has increased. Indeed, both mortgage applications and
mortgage grants hit 10-year highs in August. A similar pattern
appears for installment sales, which mostly comprises vehicle
financing. Engagements with the affected sectors confirm that
demand is exceeding expectations and that interest rate cuts are
important for these outcomes, suggesting this is not simply pent-up
demand from the lockdown.
While private sector credit growth has slowed in recent months, from
7.7% in March to 3.9% in August, there is more to this series than
the headline numbers. Private sector credit consists of two broad
categories: lending to businesses and lending to households. In the
initial months of the lockdown, corporates raised borrowing, mostly
to get through lockdown disruptions.2 This credit growth has slowed
since (from 9.3% in March to 4.6% in August).
By contrast, households cut back on borrowing in March and April,
mostly because of lockdown restrictions which made it difficult to
purchase credit-sensitive items such as cars and houses. Credit
growth has since rebounded, but the year-on-year changes continue
to be affected by the lockdown pause. The month-on-month growth
numbers, by contrast, show a V-shaped recovery. The credit
slowdown is more a function of the year-on-year change than recent
developments.
It is also worth considering how monetary policy is affecting
government’s borrowing costs. Government borrowing has increased
sharply this year, and although National Treasury plans to reduce
spending later to stabilise debt, for now government is a major source
of credit demand. In normal times, the fiscus mostly finances itself
with long-term debt. In turn, monetary policy affects these borrowing
costs indirectly, by shaping expectations for future short-term rates
as well as inflation. This year, however, National Treasury has shifted
a larger share of borrowing to the short end of the yield curve, with
around a quarter of new issuance maturing in three years or less,
and the average maturity of debt declining accordingly, to its lowest
level in about six years. In these circumstances, given that monetary
policy works by controlling the short end of the yield curve, cuts in
the repurchase (repo) rate are now being transmitted more directly to
government. This helps explain why government’s interest-to-debt
ratio, a proxy for the effective interest rate, has declined this year,
despite a large increase in long-term rates.3
In summary, low interest rates are supporting household credit
growth. Government borrowing is also benefitting from low shortterm interest rates. The outlook is uncertain, and more borrowing
– especially by corporates – will require greater certainly about future
conditions. Current data are strong enough, however, to conclude
that the credit channel of monetary policy transmission is functional.
3 Interest payments as a share of revenue have increased significantly
this year, but a large part of this effect is due to a collapse in revenue.
Actual number (thousands)
Jan Feb Mar Apr May Jun Jul
Aug Sep Oct Nov Dec
Mortgage advances applied for
Source: SARB

Actual number (thousands)
Jan Feb Mar Apr May Jun Jul
Aug Sep Oct Nov Dec
Mortgage advances granted
Source: SARB

OCTOBER 2020

Actual number (thousands)
Jan Feb Mar Apr May Jun Jul
Aug Sep Oct Nov Dec
Instalment sale agreements applied for
Source: SARB

Actual number (thousands)
Jan Feb Mar Apr May Jun Jul
Aug Sep Oct Nov Dec
Instalment sale agreement granted
Source: SARB

Percentage change over 12 months
Private sector credit extension
Source: SARB
Jan 2019 – Aug 2020 Jan 2019 – Aug 2020 Jan 2019 – Aug 2020

Total
Corporates
Households
Month-on-month percentage change
Private sector credit extension
Source: SARB
-2
-1

Total
Corporates
Households
Jan 2019 – Aug 2020
Jan 2019 – Aug 2020 Jan 2019 – Aug 2020
Per cent

Repo rate and government bond yields
Sources: Bloomberg and SARB

Repo rate

0 to 3 years

3 to 5 years

5 to 10 years

10 years and over
* Dotted line indicates forecast
** Interest-debt ratio
Per cent**

Effective government interest rate proxy*
Source: SARB


OCTOBER 2020
Box 2 How fast do interest rate cuts turn into
credit growth?
The Monetary Policy Committee has cut rates to stimulate the
economy. Box 1 presents empirical evidence that these cuts are
transmitting to the economy through the credit channel. This box
describes typical responses of credit to interest rate changes, based
on impulse responses from the South African Reserve Bank’s (SARB)
Core Macroeconometric Model. Although current conditions are
unprecedented, and the model was calibrated on historical data,
these stylised facts are useful for benchmarking expectations of how
fast interest rate cuts should raise borrowing.
The Core Macroeconometric Model distinguishes two kinds of
credit: long-term credit and short-term credit. In a scenario where
the repurchase (repo) rate is temporarily lowered by 100 basis
points, short-term credit growth accelerates steadily, peaking after
five quarters. Long-term credit moves more slowly and the peak is
reached only after 10 quarters. In both cases, the elasticities are
greater than one, with a 1 percentage point change in the repo
rate raising short-term credit by 1.6%, at the peak, and long-term
credit by 1.3%. The peak for short-term credit is also higher than it
is for long-term credit, consistent with a temporary change having a
smaller effect on long-term borrowing.
Based on the recent rate cuts being concentrated in the first half of
2020, with the repo rate falling by 125 basis points in the first quarter
and 150 basis points in the second, the strongest effects on credit
are likely to arrive around mid-2021.
Finally, repo rate changes affect the economy through a range
of channels besides credit, including the exchange rate, wealth
effects and inflation expectations. As a rule of thumb, in the Core
Macroeconometric Model a 100 basis points repo cut will boost
growth by a maximum of 0.3% after six quarters, working through
all the different channels. The equivalent number for the Quarterly
Projection Model (QPM) is 0.4%. Again, while the growth benefits
of rate cuts are likely active at the moment, they will intensify during
the first half of 2021, with the peak effects falling around the middle
of that year.
Per cent

Response of credit extension to a rate cut
Source: SARB
Long-term credit
Short-term credit
Total credit
Repo rate


Box 3 When last were interest rates this low?
1 The codes provided in the SARB’s Quarterly Bulletin are KBP1401M for the
lowest rate series and KBP1403M for the prime rate series.
The repurchase (repo) rate is currently at 3.5% – an all-time low.
The repo rate has only been used since 1998, however, so this
historical sample is too short to put current policy settings in true
historical perspective.
There are two longer series that provide a better perspective. The first
is the ‘lowest South African Reserve Bank (SARB) lending rate’, which
links up different policy rates back to 1922. The second is the prime
rate, a benchmark for lending to firms and households. This goes back
to 1949.1
According to these measures, the previous trough for the SARB ‘lowest
lending rate’ series was 3.15% in 1973. However, rates only stayed
lower than today’s rate of 3.5% for three months.2 Furthermore, the
prime rate did not decline alongside the SARB rate, instead rising
from 7.5% to 8% during this period. The comparison between 1973
and 2020 is therefore incomplete.
The last time the prime rate was at 7% was in 1966. The year before
it was at 6.5%, meaning the prime rate is now at a 55-year low.
A more remarkable feature of the 1960s, however, is that the prime
rate stayed consistently low. The average prime rate for the decade
was 6.98%, with a low of 5.5% between December 1962 and June
1964. The ‘lowest rate’ series averaged 4.61%.
These interest rates were not a response to crisis conditions. On
the contrary, the economy grew strongly during the 1960s, at an
2 Specifically, the lowest SARB lending rate was 5.5% in August 1973. It
was 3.15% in September 1973, 3.14% in October, 3.30% in November,
3.78% in December and then 5.12% in January 1974.

OCTOBER 2020
average rate of 5.84%, a performance that has not been improved upon in any decade since.3 Inflation nonetheless
stayed moderate, averaging 2.38%, which explains how interest rates could stay in low single-digits, consistent with
the Fisher equation.4
This mix of low inflation, low interest rates and high growth represented an optimal combination, one the South
African economy has yet to reprise in a sustained way. Indeed, from this perspective, the subsequent half-century
resembles a long and unsuccessful experiment with higher inflation. Real (inflation-adjusted) interest rates were
sometimes deeply negative, and inflation occasionally slowed, but on the whole South Africa remained a relatively
high-inflation country, and nominal interest rates never returned to 1960s levels. This precedent demonstrates the
value of low and stable inflation, its compatibility with low interest rates, and the hazards of tolerating higher inflation
as a route to recovering growth.
3 Subsequently, average growth rates were as follows: 1970s: 3.4%; 1980s: 2.1%; 1990s: 1.6%; 2000s: 3.5%; and 2010s: 1.6%.
4 The Fisher equation holds that interest rates are the sum of inflation compensation plus a real premium for the inconvenience and
risk of lending. For a more extensive discussion, see L Kganyago, ‘Monetary policy: why we target inflation’, Address by Lesetja
Kganyago, Governor of the South African Reserve Bank, at the University of KwaZulu-Natal, 25 April 2017.

Graduate%20School%20of%20Business%20and%20Leadership.pdf
Per cent
South African interest rates
Bank rate (lowest rediscount rate at SARB)
Prime lending rate

Source: SARB

Percentage change over 12 months
South African inflation rate
CPI headline
Targeted inflation*

Sources: Stats SA and SARB

* CPIX for all metropolitan and other urban areas until the end of 2008;
CPI for all urban areas thereafter

OCTOBER 2020
Global economy
The COVID-19 shock has produced a large, synchronised
downturn in the global economy. In general, the shock has
been disinflationary, with the effects of weak demand overriding
price pressures from supply disruptions and currency
weakness – the latter mainly in emerging markets. Over the
next two years, recovery paths are likely to diverge, with some
economies rebounding quite rapidly and others remaining
persistently weaker. Pre-existing country characteristics will
play important roles in shaping this post-crisis variation in
country performance. Risks to the global outlook include new
rounds of COVID-19 infections (on the downside) and vaccine
availability (on the upside).
The main economic event of the year has clearly been the
COVID-19 pandemic. In response, many governments have
resorted to lockdowns, accepting sharp reductions in economic
activity as the price for slowing – or in countries such as New
Zealand, stopping – the spread of the disease. On average, the
stringency of the lockdowns peaked in April, for both advanced
and emerging economies. Lockdown regulations have since
been eased, but as of September conditions remained far from
normal, with emerging markets maintaining tighter restrictions
than advanced economies. Indeed, of the world’s 32 largest
economies, which account for 83% of global GDP, it is
generally middle-income countries that have adopted tighter
restrictions. Argentina and the Philippines have maintained the
tightest lockdowns regulations; South Africa is ranked 7th.
In this context, global GDP has fallen sharply. The International
Monetary Fund (IMF) estimates the change in world output will
be -4.9% this year; the World Bank, using somewhat different
weights, puts the figure at -5.2%. The SARB’s projections, based
on Global Projection Model Network numbers and weighted
for South African trade relationships, indicate -4.2% for 2020.5
The median Bloomberg consensus estimate is -3.9%, with a
range of -2.5% to -5.1%. By all these accounts, the current
global recession is therefore likely to be significantly deeper
than the 2009 crisis, where output declined by 0.1% (using IMF
figures). It is also, as the World Bank has demonstrated, the
most synchronised downturn in records going back to 1870,
with 93% of economies contracting, in per capita terms.
Recent evidence suggests that output is rebounding rapidly
from lockdown-induced lows. In part, this simply reflects
low starting points, with many countries having experienced

This projection incorporates South Africa’s major regional trading partners,
which are not directly modelled by the Global Projection Model Network.
Forecast
Percentage change
-6
-4
-2

World real economic growth

Source: IMF
-0.1
-4.9
Lockdown stringency
Sum of stringency scores*
* Since 1 March 2020
Taiwan
Japan
AE average
Poland
Netherlands
Thailand
Malaysia
Germany
France
Turkey
EM average
Indonesia
Spain
Canada
Iran
Australia
Italy
UK
Egypt
Nigeria
US
Russia
Pakistan
Mexico
Vietnam
Saudi Arabia
Brazil
South Africa
South Korea
China
Bangladesh
India
Philippines
Argentina
Sources: University of Oxford and SARB


OCTOBER 2020
their worst-ever quarterly outcomes while under lockdown.
For instance, China, where COVID-19 first spread, recorded
a first-quarter GDP figure of -6.8% – the lowest number in
records dating back 25 years. Second-quarter GDP growth
in the United States (US) was -9.1% – the lowest outcome in
45 years of records. However, preliminary data show activity
has since picked up faster than expected, even considering the
low bases. As a result, Citigroup’s global Economic Surprise
Index, a measure of whether data outcomes are above or
below projections, hit an all-time high as of late August.
The
JPMorgan
Global
Manufacturing
Purchasing
Managers’ Index (PMI) shifted from a low of 39.6 in April to
52.3
in
September,
implying
an
expansion.
Inflation
expectations have also picked up, particularly for advanced
economies, suggesting improved sentiment around the
strength of the recovery.
One driver of the recovery has been stored-up demand, with
households catching up on consumption after the easing of
lockdown regulations. Private sector savings rates rose sharply
in the early stages of the crisis, partly due to precautionary
motives, including a fear of job losses, but also because there
were limited opportunities to spend. This allowed a consumption
rebound as lockdowns eased. Rapid recoveries have also been
supported by expansionary macroeconomic policies, with
record contributions from both monetary and fiscal authorities.
In advanced economies, in particular, governments have raised
borrowing aggressively, with the experience of the previous
crisis providing comfort that low interest rates will keep debtservice costs manageable. Accordingly, the IMF projects that
advanced economy fiscal deficits will widen to a record 17% of
GDP this year, compared to an average of less than 3% of GDP
over the past five years. For emerging markets, the change is
less extreme than in advanced economies, but still substantial,
with average deficits up to about 10% of GDP this year, from
just over 4% previously. As a result, global government debt
is expected to reach 101% of global GDP in 2020, up by
19 percentage points, nearly double the 10 percentage point
increase of the 2009 crisis.
Despite large debt increases, most countries have maintained
their credit ratings at pre-crisis levels. Since the onset of the
COVID-19 pandemic, Standard & Poor’s rating agency, for
instance, has re-affirmed 58% of sovereign credit ratings (as
of July). Only 18% of rating reviews have led to downgrades.
This suggests that while COVID-19 has had widespread
macroeconomic effects, only a minority of countries
are expected to be persistently weaker borrowers as a
consequence. In most cases, interest costs are also not rising
as much as debt totals, given low interest rates in the context
of low inflation.
Index

Jan
Mar May Jul
Sep Nov Jan
Mar May Jul
Sep

Global manufacturing PMI*

Source: Bloomberg
* A reading below 50 represents a contraction
in the manufacturing sector
Index

Citigroup global Economic Surprise Index
Source: Bloomberg
-120
-80
-40

Index
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Average lockdown stringency

Emerging economies

Advanced economies
Sources: University of Oxford and SARB

OCTOBER 2020
In general, inflation rates have declined across advanced
and developing economies, in both cases falling by about
1 percentage point below longer-term averages. As of mid2020, the average inflation rate among the major advanced
economies was 0.8%; the equivalent number for the major
emerging markets was 3.5%. Lower oil prices have had
significant effects on inflation, but core inflation rates have also
declined, consistent with widespread weakness in demand.
As in 2009, however, inflation in advanced economies has
moved less than would have been implied by the traditional
Phillips curve estimates, and inflation rates are mostly expected
to remain positive this year, despite large falls in growth
and employment.6 As before, this inflation resilience is likely
explained by the anchoring of expectations, which has made
prices less responsive to shocks.
A similar dynamic has now become visible in emerging
markets, where inflation has largely remained under control
despite abrupt currency depreciations, in contrast to historical
experience. This has opened up space for countercyclical
policy easing, an option not previously available during
episodes of economic stress and tighter global financial
conditions. The main explanation for this change appears
to be stronger monetary institutions, with the combination
of inflation targeting, central bank independence and freefloating exchange rates proving more resilient to shocks than
alternative frameworks.7
This conclusion is supported by cases where these principles
have not been adopted or effectively institutionalised.
For instance, in Turkey inflation has remained in double
digits (11.8% as of September) and the Turkish lira has hit
record lows against the US dollar, despite massive currency
market interventions. The central bank has recently raised
its benchmark rate to 10.25%, but this is still negative in real
terms, which discourages capital inflows. It is nonetheless
high in nominal terms, which raises short-term debt-service
costs relative to incomes. A more extreme case is Lebanon,
where an unsustainable exchange rate peg has now effectively
broken, leading to hyperinflation and acute shortages of food
and medicine. By contrast, even emerging markets with
otherwise difficult debt dynamics, such as Brazil, have been
able to reduce rates to record lows: the Central Bank of Brazil’s
policy rate is currently at 2.0% against a 10-year average of
9.5%, with inflation at 2.4%. (A comparable claim can be made
for South Africa: the repo rate is at 3.5% against a 10-year
average of 6.0%, with inflation at 3.1%.)

For instance, see M Del Negro, M P Giannoni and F Schorfheide,
‘Inflation in the great recession and new Keynesian models’,
American Economic Journal: Macroeconomics, 7(1): 2015, pp 168–196.


G Gelos, U Rawat and H Ye, ‘COVID-19 in emerging markets:
escaping the monetary policy procyclicality trap’, 20 August 2020.

monetary-policy-procyclicality-trap
Percentage of GDP


Fiscal balances*

Emerging markets

Advanced economies
* Shaded bars indicate forecast
Source: IMF
Percentage change over 12 months

Jan
Mar May
Jul
Sep Nov
Jan
Mar May
Jul

Inflation rate

Sources: Haver and SARB
* Unweighted average of Bangladesh, Brazil, China, Colombia,
Egypt, India, Indonesia, Malaysia, Mexico, Nigeria, Pakistan, Philippines,
Poland, Russia, Saudi Arabia, South Africa, Thailand, Turkey, UAE
and Vietnam
** Unweigted average of US PCE, Japan, euro area and UK

Top 20 EMs excluding Argentina and Iran*

Advanced economies**
Dotted lines indicate the sample median
Percentage of GDP

Global government debt
2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: IMF
* Shaded bar indicates forecast

OCTOBER 2020
Over the medium term, there is likely to be substantial variation
across countries in how rapidly output recovers from the
COVID-19 downturn. Bloomberg consensus forecasts indicate
that a small minority of fast-growing countries – 11 out of 88
countries for which data are available, or 12.5% – will surpass
2019 levels of GDP this year. This group includes China and
small, fast-growing economies such as Côte d’Ivoire. A larger
share of countries, 28%, will regain 2019 levels of output by
2021. A further 47% of countries will require until 2022 to reach
that threshold. Only 25% of countries are expected to take
longer, a group which includes South Africa.
There is considerable uncertainty attached to the outlook,
however, mainly because so little is known about the future
course of the COVID-19 pandemic. If a vaccine were to be
developed and distributed rapidly, the global economy could
return to business as usual quite quickly. However, it is also
plausible that new waves of infections will require additional
lockdown measures, delaying a full economic recovery. A
longer period of COVID-19 disruption is also likely to leave
permanent scars on the economy, particularly in sectors which
are heavily exposed to mobility restrictions, such as tourism
and transport.
Another
area
of
uncertainty
is
the
macroeconomic
consequences of stimulus policies. There is widespread
disagreement over the inflation outlook, particularly in advanced
economies, with investors simultaneously apprehensive
about deflation and high inflation. As long as inflation remains
low, central banks will be able to retain ultra-accommodative
monetary policies, protecting fiscal sustainability. Higher
inflation, however, would present difficult policy choices,
while deflation would raise real interest rates and challenge
central banks to find new tools to deliver on their mandates.
Similarly, sovereign debt levels are now unusually elevated,
and while extra spending was well-justified by emergency
circumstances, extra debt will limit future policy flexibility and
could be hard to bear if economic circumstances change.
It is very difficult to assess the effects of these policies as
there are no modern precedents for them.
Indices: 2019 = 100
+18%
Vietnam
+4.2%
Indonesia
+4.7%
World
+2.1%
US
-3.9%
SA
-13.5%
Lebanon
-28.1%
Venezuela
+2%
China

GDP levels
Sources: Bloomberg and SARB

Per cent
Feb
Jan

Mar
Apr
May
Jun
Jul
Aug
Sep
Five-year break-even inflation rates for major
advanced economies


UK

US

Germany
Source: Bloomberg

OCTOBER 2020
Box 4 High debt in a comparative perspective
1 The sample excludes advanced economies, which are likely to have
higher debt-carrying capacities.
2 Not all countries took this route, but their metrics are missing from the
database. Peru famously opted for stimulus instead of austerity under
Alan García between 1985 and 1990, an experiment which made it a
paradigmatic case for the macroeconomics-of-populism literature. Archival
sources also show that the Soviet Union under Gorbachev opted to avoid
fiscal consolidation in favour of a programme of expanded investment,
a choice contrary to Chairman Gorbachev’s wishes, which led not to
better growth but rather low productivity and ultimately an inflationary
fiscal crisis. On the former, see Ricardo Lago, ‘The illusion of pursuing
redistribution through macropolicy: Peru’s heterodox experience’ in
Dornbusch and Edwards, The macroeconomics of populism in Latin
America; on the latter, see Chris Miller, The struggle to save the Soviet
economy, especially Chapter 7.
According to forecasts by National Treasury, South Africa’s sovereign
debt ratio is likely to pass 80% of gross domestic product (GDP) this
year, and stay above this threshold for seven years. Debt on this
scale is unprecedented in South African history, but not elsewhere in
the emerging market universe. This box identifies some lessons from
the experiences of other high-debt emerging markets.
The International Monetary Fund’s (IMF) World Economic Outlook
Database shows 67 emerging markets that have experienced debt
levels of at least 80% of GDP for at least three years.1 Of these,
53 are weak analogues for South Africa, because they are lowincome countries (e.g. Burundi), very small (e.g. Comoros) or were
involved in wars during the high debt period (e.g. Iraq). Excluding
these cases leaves a sample of 14 countries with high debt episodes.
Countries reach high debt levels in different ways. Some routes
are familiar from the South African experience, including protracted
growth
stagnations
and
excessive
government
spending.
In particular, there are recurring instances of debt being driven up
by public sector wage spending as well as bailouts for state-owned
enterprises. There are also many instances of a debt-trap dynamic
in which growing interest payments drive more borrowing. (Interest
payments have been the fastest-growing line item in the Budget for
most of the past decade.) South Africa has also avoided some pitfalls.
For example, fiscal expenditure has not been driven by subsidies
for items such as fuel and food. South Africa’s relatively low share
of foreign currency debt means exchange rate depreciation has
not produced a debt explosion. High debt also cannot be blamed
on a commodity price collapse, as in some other cases, especially
oil exporters. (In fact, South Africa’s terms of trade are currently at
all-time highs.)
On reaching high debt levels, every country in the sample pursued
fiscal consolidation by cutting spending and raising taxes.2 A majority
(nine) did so with the involvement of the IMF or the World Bank. On
average, primary (non-interest) fiscal deficits became fiscal surpluses
within five years of debt passing 80% of GDP. This consolidation
timeline is consistent with National Treasury’s forecast of a primary
surplus by the 2024/25 fiscal year. South Africa’s starting point is
worse, however, with National Treasury projecting a primary deficit of
9.7% of GDP this year, against an average of 3.5% for this sample.
Of the sample, 8 out of 14 countries had debt back below 80% by
2020. Of these, the median country took 6.5 years to reduce debt
to less than 80% of GDP. The average is much higher, at 10.1 years,
due to two outliers, Syria and Sri Lanka, with debt above 80% for
Percentage of GDP

High debt comparators
Source: IMF
Bahrain
Brazil
Croatia
Dominica
Egypt
Honduras
India
Jamaica
Jordan
Kyrgyz Republic
Lebanon
Saudi Arabia
Sri Lanka
Syria

Percentage of GDP
Standard deviation (+)
Mean
Standard deviation (-)
Primary balances
Source: IMF
t+5
t+4
t+3
t+2
t+1
t


OCTOBER 2020
23 and 24 years respectively. The average, excluding these countries,
is 5.7 years. The remaining six countries in the sample, with debt
still above 80% as of 2020, had, on average, been above 80% for
10.1 years, or a median of 6 years. Again, the large difference between
the mean and median is due to outliers: in this case, Lebanon and
Jamaica stand out with 24 and 20 years of high debt respectively.3
National Treasury’s projection that South African debt will be back
under 80% of GDP by 2027/28, or seven years, is again consistent
with the typical emerging market experience. This sample warns,
however, of the possibility of getting stuck at high debt levels for
a much longer period.
The relationship between debt and growth is complex, as these
case studies attest. Most countries experienced slower growth after
passing the 80% debt mark, relative to their previous averages. In
three cases − Lebanon, Jordan and Saudi Arabia − commodity prices
and regional instability deserve most of the blame. A further eight
cases show clearer evidence of high debt causing growth problems,
with repeated mentions of five specific channels: crowding out of
the private sector, high tax rates, reduced investment, uncertainty
and austerity. By contrast, three countries − Croatia, India and
Egypt – achieved stronger growth despite high debt levels. Croatia
benefitted from a recovery in the euro area. India and Egypt both
undertook significant structural reforms, which contributed to
growth averaging 7.8% and 4.1% respectively in the five years after
debt surpassed 80%.
It is sometimes argued that high debt leads to high inflation, either
because government solvency takes precedence over inflation
control, or because inflation is deliberately used to inflate away debt.
For this sample, however, faster inflation is a minority outcome. In
half these cases, inflation remained under 5% when debt passed
80%, and it stayed below 5% over the medium term. In three cases
– Egypt, Jamaica and Sri Lanka – inflation started in single digits
but shifted to double digits within five years (without solving debt
problems). The other cases experienced higher and more volatile
inflation, with no obvious trend. Overall, this evidence suggests
that for high debt countries, higher inflation is possible but far
from inevitable.
Law-like generalisations about economies are risky, given small
sample sizes, the lack of controlled experiments and the capacity
for economic actors to change behaviour based on past lessons.
Historical comparisons are nonetheless useful for grounding
claims about South Africa’s economic outlook. National Treasury’s
consolidation timeline is in line with sample averages. It is reasonable
to be worried about the growth consequences of high debt, but
there are cases where reforms have lifted growth, underscoring the
importance of such measures. Half of the countries in this sample
kept inflation consistently under 5%, suggesting price stability is a
viable goal even where debt is high. Some countries get stuck with
high debt and low growth for decades, a trap of which policymakers
should be wary.
3 Excluding Lebanon and Jamaica, the average is 4.25 years, but high debt
is ongoing for these countries.
Percentage change over 12 months
Low inflation group (n=6)
Rising inflation group (n=3)
Other countries (n=6)
Inflation variations
Source: IMF

t+5
t+4
t+3
t+2
t+1
t

OCTOBER 2020
Overview of financial
market developments
Asset prices in the advanced economies have rebounded
since the onset of COVID-19 pandemic, buoyed by ambitious
stimulus measures. Emerging markets have also seen asset
price gains, if not all the way to pre-crisis levels. In South Africa,
the rand has recovered somewhat from its March overshoot,
and equity prices have come close to January valuations.
Long-term sovereign bond yields have moderated since April,
given more normal trading conditions, but these yields remain
high due to fiscal risks. With short-term rates at long-term lows,
the yield curve continues to be unusually steep.
The starting point for this chapter is a huge financial shock, with
the COVID-19 pandemic triggering acute stress in the global
financial markets. The ensuing flight to liquidity and safety
drove down prices of risk assets, while the US dollar rose to
a three-year high against a broad index of other currencies.
Major equity markets fell abruptly: the US S&P 500 dropped by
34% between its February peak and March trough, paralleling
declines of 33% in the UK FTSE 100 and 38% in the Euro
Stoxx 50. Emerging market currencies and bond prices also
weakened. The MSCI Emerging Markets Currency Index,
for instance, lost 6% between February and March, while
the Bloomberg Barclays local-currency bond index lost 11%
during March.
The COVID-19 crisis was met with a forceful response from
macroeconomic policymakers, especially the major central
banks. The US Federal Reserve (Fed) cut interest rates back
to zero and embarked on large-scale quantitative easing,
essentially reprising the entirety of the Bernanke Fed’s response
to the global financial crisis in less than a month. The Fed then
expanded its asset purchases beyond government-backed
securities to forestall a credit crunch. In addition, it expanded
swap lines with a select group of central banks and provided
repo facilities to others, permitting countries to borrow US
dollars in exchange for the collateral of US government bonds.
The European Central Bank (ECB) also responded aggressively
to the crisis, despite having little to no room to cut short-term
rates further. Instead, it relied mainly on expanding its asset
purchases and targeted bank lending programmes. Under
the Pandemic Emergency Purchase Programme, the ECB
has committed to buy up €1.35 trillion of assets, mostly
government bonds, but also corporate debt. Meanwhile, an
expansion of the ECB’s existing bank-lending programme (the
third round of targeted longer-term refinancing operations, or
TLTRO-3) has provided banks with cheap funds for lending to
the real economy, with lower rates for larger lending volumes.
The lowest rate currently available is -1%. Given the possibility
of the ECB providing this funding at deeply negative rates,
Cumulative percentage return since 1 Jan 2020
Aug
Sep

Equity performance
Sources: Bloomberg and SARB

MSCI EM

MSCI DM

JSE All-Share Index


Jan
Feb
Mar
Apr
May
Jun
Jul
Cumulative percentage return since 1 Jan 2020
Aug
Sep

Emerging market currencies
Sources: Bloomberg and SARB

US$/rand

JPMorgan EM FX Index


Jan
Feb
Mar
Apr
May
Jun
Jul
Percentage change over 12 months

G4 central bank assets
-10

Sources: Bloomberg and SARB

OCTOBER 2020
without the adverse consequences normally attached to
charging depositors to hold their money, this instrument may
ultimately become a solution to the zero lower bound problem.8
Whereas late in the previous decade it became received
wisdom that central banks in advanced economies had
insufficient ammunition to address new crises, the COVID-19
shock has instead prompted innovative stimulus measures.
As a consequence, the balance sheets of these central banks
have expanded dramatically, reaching 36% of GDP for the US,
37% for the Bank of England, 61% for the euro area, and 128%
for the Bank of Japan, as of mid-2020. In turn, the surge in
liquidity and the promise of ultra-low interest rates well into
the future has lifted asset prices. The S&P 500, for instance,
passed its already-elevated pre-crisis levels in August, although
it has since slipped back. Bond yields have also declined, with
the US one-year Treasury yield collapsing from almost 2% in
2019 to around 0.6% currently, the German equivalent falling to
-0.6%, and even Greek government 10-year bonds returning
just 1% (down from 3.8% in mid-March).
One important asset that has lost value in the post-crisis
period has been the US dollar, which has declined by around
10% from its crisis-level high. The US dollar has been unusually
expensive for most of the past five years, benefitting not only
from its status as the global reserve currency, but also from an
attractive interest rate differential with other major economies.
Easing by the Fed has since eliminated that yield advantage,
however, permitting major advanced economy currencies
to appreciate (including the euro, the Japanese yen, the
Swiss franc, the Swedish krona and the Australian dollar).
By contrast, most emerging market currencies remain relatively
depreciated, with the rand down by around 18% year-to-date,
the Brazilian real down by 27%, and the Russian ruble down
21%. Capital flows into emerging markets have turned positive
again, but new inflows have yet to match the outflows seen
during the crisis. While the precedent of the previous crisis
suggested that very low yields in rich countries would force
capital into emerging markets in a hunt for yield, this dynamic
was not yet operating robustly as of late 2020.
South African asset prices have shared in the rebound from
March and April lows, but the recovery has been limited relative
to advanced economy experiences. The rand, for instance, has
come back from a record nominal low of 19.36 to the US dollar
on 6 April, but remains about 15% cheaper than it was before
the crisis. The JSE All-Share Index has recouped most of its
losses since March, but remains close to early-2019 levels,
with mining and industrial stocks compensating for weakness
in the banking and retail components.

Editorial, ‘Has the ECB found a way around the lower bound on interest
rates?’, The Economist, 13 August 2020.
finance-and-economics/2020/08/15/has-the-ecb-found-a-way-aroundthe-lower-bound-on-interest-rates
Index

US dollar exchange rate
Source: Bloomberg

Debt

Equity

Total
US$ billions
Non-resident portfolio flows to emerging markets

Source: Institute of International Finance


Rand per US$
Aug
Sep

Exchange rate of the rand
Source: Bloomberg

Jan
Feb
Mar
Apr
May
Jun
Jul

OCTOBER 2020
The sovereign yield curve, which was unusually steep before
the crisis, has steepened further. Short-term rates have fallen
to long-term lows, as required by monetary policy objectives,
but long-term rates have climbed further. Some of the initial
upward pressure on bond yields was due to a breakdown in the
sovereign bond market, in conditions of extreme global stress.
This market failure led to price volatility in conditions of very
thin liquidity, until the SARB intervened with a bond purchase
programme aimed at restoring stability. Conditions have since
improved, as evidenced by reduced bid-ask spreads and
higher trading volumes, allowing the SARB to taper its buying
programme from around R11 billion per month initially to
R353 million as of August 2020.
The SARB has not specifically been targeting yields, however,
and the extent to which these have remained elevated despite
more normal trading conditions is explained by a high term
premium, reflecting the compensation demanded by investors
for long-term exposure to sovereign debt.9 Since the COVID-19
shock, South Africa has lost its remaining investment grade
rating as well as its place in the World Government Bond
Index (WGBI). Foreign investors have reduced their exposure
to domestic bonds, from a peak of 42.8% ownership of the
total stock as of March 2018 to 29.9% in August 2020, a level
well below the 35.2% recorded in 2012 when South Africa first
joined the WGBI. In these conditions, high bond yields speak
to the scarcity of capital in South Africa, in turn related to
concerns about the ultimate sustainability of government debt.
The SARB’s balance sheet and
monetary policy implementation
In normal conditions, the SARB’s balance sheet is not an
active tool of policy. Its size fluctuates in response to changing
demand for notes and coin or exchange rate movements that
affect the valuation of the foreign exchange reserves. These
changes are of limited interest for most audiences and are
rarely discussed in the context of monetary policy. During the
current crisis period, however, the balance sheet has been
used as an active policy tool, and these decisions have also
affected monetary policy implementation, making the subject
relevant for this edition of the MPR.
The SARB’s balance sheet has grown to 21.6% of GDP as of
August, the highest level in at least 50 years. On the asset side
of the balance sheet, the single largest factor in this expansion
has been the valuation of the foreign exchange reserves, which
has been boosted by rand depreciation as well as higher gold
prices. This item alone explains 87% of the change from 2019
to August 2020. In addition, the SARB has expanded its assets
by purchasing government bonds (as discussed above),
offering additional accommodation to banks and financing the
COVID-19 Loan Guarantee Scheme, among other initiatives.

See Box 2 of the April 2020 MPR on ‘South Africa’s term-premium shock’.
Cents
Aug
Sep

Rand/US$ trading range: high minus low
Sources: Bloomberg and SARB

Jan
Feb
Mar
Apr
May
Jun
Jul
Basis points
Aug
Sep

Term spreads
Sources: Bloomberg and SARB

Jan
Feb
Mar
Apr
May
Jun
Jul

R2023/R2048

R186/R2048

R2030/R2048
Percentage of total

Government bond holdings

* Year to date
Source: National Treasury
Banks
Local pension funds
Other
Non-residents
Insurers
Other financial institutions
2020*

OCTOBER 2020
These interventions have contributed to balance sheet growth,
but to a much smaller degree than the valuation effects on the
reserves. By expanding the monetary base, however, these
operations have also affected monetary policy transmission.
To give effect to monetary policy decisions, South Africa relies
on a classical cash reserve system. Commercial banks are
required to hold reserves against a portion of their liabilities,
which they borrow directly from the central bank at the
policy rate.10 This means the SARB does not use its open
market operations to control a specific market interest rate.
Rather, these interventions are used to maintain a shortage
in the market’s supply of bank reserves, obliging banks to
refinance the shortfall at the SARB, generally through weekly
repo operations. In turn, the price of this financing serves as
commercial banks’ marginal funding cost, which influences
the pricing of credit to the broader economy.11
For several years prior to the current crisis, the SARB
maintained the shortage at a constant R56 billion. Following
the COVID-19 shock, however, the SARB’s balance sheet
operations have increased the supply of cash to the interbank
market. National Treasury has also drawn down some of its
deposits at the SARB, further increasing market liquidity.
As a result of these factors, the liquidity requirement for banks
has been smaller than usual, falling to less than half its normal
levels at some points in July and September. Since mid-March,
markets have generally been in surplus at the end of the day, in
contrast to what is typically a balanced position.
In normal circumstances, the money market shortage would
have been maintained by liquidity-draining operations, using
instruments such as foreign exchange (FX) swaps, SARB
debentures and shifts in public deposits. The SARB has not
been strictly enforcing the normal shortage, however, mainly
because policy was deliberately providing abundant liquidity
to maintain the stability of the system. In addition, whereas
the SARB normally provides a standing facility for deposits
priced at 100 basis points below the repo rate, during the
crisis this was lowered to 200 basis points below the repo rate.
By charging a more punitive rate for deposits, banks faced a
stronger incentive to provide excess reserves to the interbank
market, instead of placing them back at the SARB. At the same
time, the standing facility lending rate was also lowered, from
the repo rate plus 100 basis points to the repo rate, further
improving the availability of liquidity. However, an implication of
these adjustments was that, where the repo rate had previously
been at the centre of a corridor bounded by the two standing
facilities, it now became the ceiling, with interbank rates free
to fluctuate between the repo rate and a floor 200 basis
points below.
10 Banks are required to deposit 2.5% of the value of their liabilities
at the SARB.
11 For a fuller discussion of this system, see N Brink and M Kock, ‘Central
bank balance sheet policy in South Africa and its implications for moneymarket liquidity’, South African Reserve Bank Working Paper Series No.
WP/10/01, Pretoria: South African Reserve Bank, December 2009.
Percentage of GDP

SARB balance sheet

2010 Aug 2020*
9.4
21.6
* Using 2020 GDP forecast
Source: SARB
R billions

Aug

Source: SARB
SARB assets

1 000
1 200
Other assets
Securities
Accommodation to banks
Loans and advances
Foreign exchange reserves (including SDRs)
Gold
Total assets
R billions

Aug

Source: SARB
* Gold and Foreign Exchange Contingency Reserve Account
SARB liabilities
Other liabilities (including GFECRA*)
Bank deposits
Government’s domestic and foreign deposits
Government’s SDR deposit account
Notes and coins in circulation
Reserve fund
Share capital
Total liabilities

1 000
1 200

OCTOBER 2020
In these circumstances, the effective repo rate declined
relative to the official repo rate set by the MPC. Specifically,
this measure, which is estimated from banks’ borrowing
and deposits with the SARB, averaged 34 basis points less
than the repo rate from mid-March to mid-August.12 Shortterm market rates, particularly the 3-month Johannesburg
Interbank Average Rate (Jibar), also fell, at times trading below
the repo rate. Some of the downward pressure on short-term
rates may have reflected expectations of further repo rate
cuts. These market rates were also affected by higher shortterm savings, combined with limited demand for short-term
borrowing. Given the smaller shortage, the overall effect was
a weaker relationship than usual between the official repo rate
and short-term open market interest rates.
To mitigate this problem, and in the context of reduced
market demand for liquidity now that financial conditions are
normalising, the standing deposit facility rate has been raised
back to the repo rate less 100 basis points. The R56 billion
money market shortage will also be reinstated in time, with
additional sterilisation operations to soak up extra liquidity,
if needed.
The recent crisis has shown up weakness in the shortage
system for transmitting monetary policy, especially during
moments of market stress where there is more demand for
liquidity. This experience bolsters the case for an eventual
transition to a more modern open market system. The ongoing
benchmark interest rate project is an important step towards
this goal, as it will provide a better metric for identifying whether
actual market rates are following MPC decisions. In time, it is
likely that this benchmark will become the operational target for
monetary policy, with open market operations then supplanting
the current shortage system. At the moment, however, market
fragmentation remains a problem, with liquidity not flowing
freely between different pools of short-term funding, making
it difficult to adopt any specific rate as the main policy tool.
As things stand, the existing system has not produced large
deviations of actual rates from the official repo rate, but it is not
working smoothly enough that reforms can be postponed well
past the current crisis.
12 This measure excludes term repos, which are for longer-term (three-
month) funding. Including this form of borrowing narrows the spread.
R billions
Aug
Sep

End-of-day liquidity position
(relative to liquidity requirement)
Source: SARB

Liquidity requirement
Jan
Feb
Mar
Apr
May
Jun
Jul
-25
-15
-5

Per cent
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Money market rates

Effective policy rate

Effective policy rate

(including term repo)

Repo rate

Standing facility lending rate

Standing facility deposit rate
Source: SARB
R billions
Aug
Sep

Liquidity requirement
Source: SARB

Liquidity requirement

Target
Jan
Feb
Mar
Apr
May
Jun
Jul

OCTOBER 2020
Box 5 Average inflation targeting from
a South African perspective
1 J H Powell, ‘New economic challenges and the Fed’s monetary policy
review’, Address by Jerome Powell, US Fed Chair, at a symposium
sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole,
Wyoming, 27 August 2020.

2 J H Powell, ‘Challenges for monetary policy’, Address by Jerome Powell,
US Fed Chair, at a symposium sponsored by the Federal Reserve Bank of
Kansas City, Jackson Hole, Wyoming, 23 August 2019.


3 J C Williams, ‘The view from here: outlook and monetary policy’, FRBSF
Economic Letter No. 2015-08, San Francisco: Federal Reserve Bank of
San Francisco, June 2015.

The United States (US) Federal Reserve (Fed) Chair, Jerome Powell,
recently announced significant refinements to the Fed’s monetary
policy strategy.1 Specifically, the Fed will now aim for an average
inflation rate of 2% over time, with past undershoots to be made up
by a period of higher inflation. This replaces the previous objective
of always aiming for 2% over the medium term, without reference to
historical outcomes.
The context for this policy shift is a persistent inflation target undershoot,
which was exacerbated by the Fed’s decisions to pare back stimulus,
both by winding down quantitative easing (starting in late 2013) and
then by raising interest rates (from late 2015). This policy normalisation
process was guided by two ‘stars’; r*, the neutral rate of interest, and
u*, the natural rate of unemployment.2 The Fed saw interest rates
below neutral and unemployment falling below its natural rate, and
responded by tightening policy to prevent an inflation overshoot. As
John Williams, the then President of the San Francisco Fed, argued
in 2015,3 ‘... policy must be forward-looking. When you’re driving
towards a stoplight, you don’t keep your foot on the accelerator; you
ease off so you’re ready to stop at your target. Otherwise you slam on
the brakes – and probably wind up in the middle of the intersection.’
Having eased off too much, the Fed instead failed to reach the
intersection. It is now trying a new approach.
Given the Fed’s status as the world’s most important central bank, other
countries will now also consider whether average inflation targeting
makes sense for them. In this context, it is worth understanding how
South Africa’s experience has differed from that of the US.
For roughly the first half of the 2010s, South Africa had the mirror image
version of US outcomes. The repurchase (repo) rate was kept very
low (mostly negative in real terms) to reignite growth. The economy
nonetheless slowed persistently, while inflation moved to around the
top of the 3–6% target range. Rather than the slack disappearing faster
than expected and inflation nonetheless undershooting forecasts, as
in the US, South African inflation repeatedly surprised to the upside
and growth disappointed.
In the second half of the decade, the South African Reserve Bank
(SARB) began emphasising the midpoint of the target range as the
medium-term objective of monetary policy. Inflation duly decelerated,
faster than anticipated, and was mostly close to the target midpoint
until the COVID-19 crisis hit. At that juncture, monetary policy had
ample space to slash interest rates, helping to mitigate a major
demand shock.
Comparative inflation averages
Since 2010, US inflation has been below target for 96 out of
127 months, averaging 1.5%. Since 2017, it has averaged 1.7%,
with 32 out of 43 months (nearly three quarters) below target.
Percentage change over 12 months

United States PCE inflation
Source: US Bureau of Economic Analysis


Inflation target
Average:
1.5%

PCE inflation

Average

OCTOBER 2020
By contrast, South African inflation has averaged 5.1% since 2010, with
32 months (one quarter) below 4.5%. Since 2017, it has averaged
4.5%, with 19 of the 43 months (less than half) below the midpoint
target. On balance, and unlike the US, South Africa’s experience has
been of too-high inflation rather than too-low inflation.
The more interesting case for average inflation targeting, however,
is a forward-looking one, given expectations that inflation will be
mostly below 4.5% until late in 2022.4 In these circumstances, would
it make sense to tolerate an inflation overshoot later, to make up
for the undershoot? In fact, the scale of that overshoot would be
small. Based on current forecasts, and starting from 2017 when the
4.5% objective was first communicated, inflation would need to be
4.7% between 2023 and 20265 to bring the average inflation rate for
the whole period up to 4.5%. This is a 0.2 percentage point deviation,
only fractionally higher than the 4.5% objective. The same calculation
for the Fed requires a 2.6% inflation rate between 2022 and 2023,
or a 0.6 percentage point deviation, which is large relative to a
2% objective.
Finally, adopting a higher inflation target under the guise of average
inflation targeting would likely raise rates rather than lowering them.
While the Fed may well get lower medium-term interest rates from its
new strategy, this will come mainly through reassuring markets that
it will not tighten rates prematurely, prolonging the period of sub-2%
inflation. If inflation appears to be moving persistently higher, however,
interest rates are also likely to be higher over the medium term, in
keeping with the Fisher equation (see also Box 3). Average inflation
targeting is an interesting new strategy for combating an extended
period of inflation target undershoots, and therefore restoring credibility,
but it has less application for countries with different circumstances,
including South Africa. The US experience is nonetheless useful in
warning against excessive reliance on unobservable ‘stars’ as well as
the problem of inflation expectations falling too low.
4 This is true of both the SARB MPC forecasts and average analyst
expectations, either from Bloomberg or Reuters.
5 The Fed has not communicated the period over which inflation should
average 2%. A four-year window would correspond with the 2015–2018
rate hiking cycle, the intuition being that rather than tightening policy at
the pace it did previously, the Fed would instead tolerate higher inflation.
Different time frames are also plausible.
Percentage change over 12 months

South African CPI inflation
Sources: Stats SA and SARB

CPI inflation
Average
3–6% inflation target range

Average: 5.1%

Comparative statistics
SA CPI
US PCE


* Percentage points

OCTOBER 2020
Box 6 Broken? Developments in break-even
inflation rates
Break-evens are market-derived measures of inflation expectations.
They are constructed by comparing a normal government bond
with an equivalent inflation-protected version, often called a linker.
The intuition is that yield differences between nominal bonds and
linkers should reflect inflation expectations, so that investors in either
instrument break even, rather than earning a predictably superior
return for one of the two options.
Between 2017 and early 2020, breakeven-implied expectations shifted
steadily lower, in line with the Monetary Policy Committee’s (MPC)
strategy of anchoring inflation expectations nearer the target midpoint.
In 2020, however, these measures have become highly volatile. In
March and April, for instance, 10-year break-evens increased to 7%,
from around 5% in January. Subsequently, break-evens declined
again, sometimes dramatically. Bloomberg’s measure of five-year
break-evens, for instance, fell to 2.9% as of late August, below the
3–6% target range, and also well below the Bureau for Economic
Research (BER) survey result of 4.7% over five years. Break-evens
for three years are even lower at 1.8%. What explains this behaviour?
In March and April, it appears market dislocations were to blame.
During this period, yields on both nominal bonds and linkers rose,
but those of nominal bonds rose more, generating higher breakevenimplied expectations. The volumes of bonds transacted declined and
bid-ask spreads rose sharply, especially for nominal bonds, producing
abrupt movements in yields. As conditions normalised again, aided
by the South African Reserve Bank’s bond-buying programme, yields
declined and break-even rates subsided again. By late May, 10-year
expectations were back at their January levels.
Despite this normalisation of market functioning, the yield curve has
remained extremely steep. This phenomenon helps explain why some
break-even rates are now implying very low inflation – a reversal of the
March−April puzzle. Because there are not always nominal bonds with
equivalent-maturity inflation linkers for the different break-even tenors
normally reported, break-even calculations are made using nearby
maturities as proxies. This technique works well in normal times, but it
breaks down when the yield curve is so steep. For instance, the highly
liquid R186 bond is often used as a benchmark indicator of 10-year
yields, but it matures in six years. Break-evens calculated using the
R186 show 10-year inflation expectations of 3.2% (as of September
2020). The same calculation with the R2030, a true 10-year bond,
gives inflation expectations of 5.2%. Similarly, a five-year break-even
calculated using a blend of the three-year and six-year nominal bonds
gives inflation expectations of 3.3%. The same calculation using
only the six-year nominal bond would give expectations of 4.4%.
However, both calculations are compromised by the absence of a true
five-year bond.
The three-year break-even is more puzzling, however, as this is based
on actual three-year instruments. Three-year nominal bond yields are
currently around 4.6%. Yields on three-year linkers are unusually low,
however, at 2.2%. If analysts are correct and inflation will be around 4%
for this period, then inflation linkers would be returning more than 6%,
a generous yield, and a ‘free lunch’ relative to holding nominal bonds.
The three-year nominals have comparatively large bid-ask spreads
and the inflation linkers are barely trading, however, which may explain
Per cent

Break-even inflation rates
Source: Bloomberg

3-year

5-year

10-year

15-year

20-year

Basis points

Mar
May
Jul
Sep
Jan
Nominal bond bid-ask spreads
Sources: Bloomberg and SARB

3-year

6-year

10-year

15-year

20-year

24-year

28-year

OCTOBER 2020
their anomalous yields. This thin-trading problem is still more extreme
with inflation swaps, for which there is really no functioning market,
although inflation rates of around 2.6% are sometimes quoted.
The single most reliable break-even data point is probably the 10-year
measure, which is underpinned by a true 10-year nominal bond and a
9-year linker, both of which are traded in liquid markets. This measure
is currently slightly above 5%, as it was pre-crisis. It is well below the
recent peak of 7.08% recorded in late March, which was the highest
level reached since November 2016. It is also somewhat above the
4.5% nadir of early June, which was the lowest level on record.
This measure indicates long-run inflation is unlikely to remain in the
bottom half of the target range, where it is now. Furthermore, the risks
implied by this pricing are skewed towards somewhat higher inflation.
This assessment is based on an estimated inflation risk premium,
defined as the difference in term premiums between equivalent
nominal bonds and linkers.1 (Because linkers have no inflation risk,
unlike nominal bonds, any difference in their term premiums should
be due to a non-inflationary component, which can then be removed
to leave only the compensation for inflation risk.) This persistence of
upside risk, on top of 10-year expectations already above 4.5%, is a
reminder that the midpoint objective is still not fully credible over the
long run, despite lower shorter-term inflation expectations.
1 Based on the methods described in L Soobyah and D Steenkamp,
‘Term premium and rate expectation estimates from the South African
yield curve’, South African Reserve Bank Working Paper Series No.
WP/20/03, June 2020.
Publications/Attachments/9998/WP%202003.pdf
Per cent

Mar
May
Jul
Sep
Jan
Inflation risk premium
Source: SARB


OCTOBER 2020
Real economy
South Africa’s economy is likely to fall by 8.2% this year,
with a record contraction of 17.1% in the second quarter, in
year-on-year terms. The recovery is now well underway,
with high-frequency data generally surprising to the upside
in recent months. Getting back to pre-crisis levels of output,
however, is still expected to take several years. Demand will
likely remain subdued throughout the forecast period, while
electricity shortages and a difficult fiscal situation, among
other constraints, will hobble a more robust recovery.
Starting point
The South African economy was underperforming prior to the
COVID-19 shock, contracting for three consecutive quarters
before the lockdown. Indeed, economic growth has been
subdued for an extended period, averaging 0.69% since 2016,
with the tertiary sector generally eking out low but positive
growth and the primary and secondary sectors highly volatile,
sometimes boosting the headline numbers but on other
occasions causing the economy to contract.
This pattern was once again visible at the start of the year, with
the primary and secondary sectors contracting by 1.2% and
1.3% respectively, and the tertiary sector growing by 0.5%.13
The first quarter was marked by intense electricity loadshedding, which tends to affect the electricity-intense mining
and manufacturing sectors in particular. The mining sector also
appears to have suffered from early COVID-19 effects, with
China’s imports of key mining commodities falling in the first
quarter in the context of that country’s lockdown. Improved
growing conditions actually benefitted the agricultural sector,
which had contracted in the previous year, but this was
insufficient to offset declines in the much bigger mining sector,
leaving overall primary sector performance in negative territory.
Aside from these specific shocks, the South African economy
continued to grapple with the effects of low business and
consumer confidence. Private investment contracted sharply
after some surprisingly strong gains in 2019, and public sector
investment fell further.
The COVID-19 shock and the recovery
South Africa entered lockdown late in the first quarter and
stringent lockdown restrictions applied through the entirety
of the second quarter. This predictably had dire effects on
economic output, with Stats SA recording a 51% contraction for
the second quarter, in quarter-on-quarter, seasonally adjusted
and annualised terms, or -17.1% when measured year on year.
The contraction was broad-based, with the largest negative
contribution from the tertiary sector, which accounted for
24.3 percentage points of the total 51% downturn. Only
agriculture delivered positive growth, consistent with a
13 Expressed in quarter-on-quarter terms, seasonally
adjusted and at an annualised rate.
Percentage change from quarter to quarter*

Real GDP growth


* Seasonally adjusted and annualised
Sources: Stats SA and SARB
-51.0
Percentage points
* Percentage change from quarter to quarter at seasonally
adjusted annualised rates.
Sources: Stats SA and SARB
2020Q1
-1.8
-51.0
2020Q2
Contributions to real GDP growth


Taxes and subsidies
Real GDP growth*
Tertiary
Secondary
Primary

OCTOBER 2020
rebound from last year’s bad performances, plus exemptions
from lockdown restrictions for the sector. The contraction was
worse than anticipated in previous MPC forecasts, with the
July MPC projections, for instance, putting the contraction
at -40.1%, in quarter-on-quarter, seasonally adjusted and
annualised terms.
With South Africa’s level of output having fallen so much in the
second quarter, a rebound is inevitable for the third quarter.
The MPC forecasts now anticipate quarter-on-quarter growth
of 45.2% in seasonally adjusted and annualised terms, marked
up from 17.5% for the July forecast, based on strong highfrequency data and a lower starting point. This rebound only
partially reverses the second-quarter fall, however, and the
longer-term recovery is expected to be gradual, with output
only returning to the levels reached at the end of 2019 by the
second quarter of 2023. This contextualises the 2021 and
2022 growth projections of 3.9% and 2.6% respectively, which
would otherwise appear optimistic compared with the sub-1%
outcomes of the past few years.
Both the pandemic and the lockdown are unprecedented in
modern economic history, so it is difficult to forecast the pace
of the recovery with much confidence. This uncertainty has
prompted more attentiveness than usual to high-frequency
data. Some of these indicators have neared or reached precrisis levels quite quickly. For instance, truck traffic through
tolling plazas was, on average, back to 98% of 2019 levels
as of the week ending 4 September. Electricity demand has
also hit pre-crisis levels, and is now close to normal seasonal
demand patterns. According to Yoco Technologies, small
business turnover has shown a similar rebound, with two highly
lockdown-sensitive categories − food, drink and hospitality;
and healthcare, beauty and fitness − surging in late August
to levels last seen at the start of March. BankServAfrica data
for interbank transactions have staged a comparable rebound.
The Absa/BER Manufacturing PMI has been well above 50
− which is the threshold for expansion − since May 2020,
reaching 58.3 in September, an all-time high.
Other indicators, however, speak of more persistent
economic damage. The value of salaries processed through
BankServAfrica is down by about 8%.14 Domestic vehicle
sales are also markedly lower at 37 403 units in September
compared to 43 297 in February, although recent growth rates
are strong given the rock-bottom April starting point of just 574
vehicles sold under lockdown.15 Broader indicators, although
these become available with more of a lag, present a similar
pattern of strong growth off low bases, but still with a large
14 The total number of payments is down by more than a third (-34.8%)
year-on-year, but this metric is distorted by election-related payments
last year, as well as overtime pay for police and army personnel being
processed as separate payments in 2019, among other factors.
15 Including exports, the totals are 54 833 (August), 75 439 (February) and
1 475 (April).
Percentage change over four quarters
* Dotted line indicates forecast

2018 2019 2020
Real GDP growth*


Sources: Stats SA and SARB
2021 2022
Number of trucks

Mar
May
Jul
Sep
Jan
Average daily truck traffic
Sources: SANRAL and SARB


Deviation from baseline*, 7-day rolling average

Mar
May
Jul
Sep
Small business turnover
* Baseline = first two weeks of March
Sources: Yoco Technologies and SARB

Retail

Healthcare, beauty and fitness

Food, drink and hospitality

OCTOBER 2020
wedge between current and pre-crisis levels. This applies, for
instance, to mining and manufacturing output (down 9.1% and
10.6% respectively, in year-on-year terms) as well as wholesale
and retail sales (down 8.8% and 4.9% respectively, also
for July).
Employment data have been lagging more than normal,16 but
it is now clear that broad unemployment has risen sharply.
The Quarterly Labour Force Survey for the second quarter
of the year, released on 1 October, showed a 2.3 percentage
points increase in this metric, to 42%. The damage appears to
be worst in the lower-paid sections of the labour market: the
National Income Dynamics Study−Coronavirus Rapid Mobile
(NIDS−CRAM) Survey data from March and April 2020, for
instance, show the highest probability of job loss for those
earning less than R3 000 a month, and the lowest probability
for those earningover R24 000 a month.17 The retrenchment
data released by the South African Revenue Service (SARS)
also show the number of retrenchments up by 34% in July
and August, relative to those two months in 2019, but with the
value of retrenchment payouts up by a more moderate 7% for
those two months.
A plausible synthesis of the upbeat high-frequency data
discussed above, and these other less encouraging outcomes,
is that the recovery has an easy ‘V-shaped’ start off the
low lockdown base, followed by a more difficult period as
headwinds to growth intensify.
Potential growth and the output gap
In the QPM framework, growth is anchored by an estimate of
potential output and an output gap, which is the accumulated
difference between actual and potential GDP. The model
structure aims to close output gaps over the medium term,
with the help of the interest rate tool, requiring actual growth to
speed up or slow down so that actual output ultimately realigns
with potential output. The COVID-19 shock poses interesting
difficulties for this framework. It requires an apportionment of
the shock into demand- and supply-side factors, with the former
feeding into the output gap but the latter being assigned to the
potential growth rate. It also requires some assessment of the
parts of economic capacity that have become permanently
less productive. For instance, there may have been permanent
changes in consumers’ tastes for cinemas, restaurants and
cruise ships; and firms may never again use office space in the
quantities they did before the lockdown. Both the supply side
and the demand side are affected by the shock, with varying
policy implications.
16 The Quarterly Labour Force Survey, which provides the official
unemployment rate, was originally due for release on 11 August 2020.
The Quarterly Employment Survey is due for release on 15 October 2020,
having previously been scheduled for 29 September.
17 V Ranshhod and R Daniels, ‘Labour market dynamics in South
Africa in the time of COVID-19’, NIDS-CRAM Survey, 15 July 2020.

Labour-market-dynamics-in-the-time-of-COVID-19.pdf
Index, >50 = expansion

Manufacturing PMI
Source: BER

58.3
Million people

Labour market
Source: Stats SA
Total labour force
Employed
Unemployed

Percentage change over 12 months

Jan
Mar May
Jul
Sep Nov
Jan
Mar May
Jul

Selected monthly indicators


Sources: NAAMSA, SARS, Stats SA and SARB

Mining

Manufacturing

Tourism

Retail sales

Domestic vehicle sales

Goods exports

OCTOBER 2020
The forecast estimates of the economy’s potential growth rate
show a sharp fall in 2020 to -3.2%, from 0.3% the year before.
The decline is centred in the second quarter of the year and
is based on the short-term supply-side consequences of the
lockdown: the economy cannot produce as much as it did in
previous years because large portions of its productive facilities
are locked down. Potential growth then rebounds, averaging
1.4% and 0.9% in 2021 and 2022 respectively, but the overall
level of potential output is lower than it was before the crisis.
The forecast interprets the second-quarter growth collapse
as only half attributable to lower potential, so the output gap
also widens in that quarter to an extraordinary -11.94% of
potential GDP. Part of this gap is then removed by the catchup rebound of the third and fourth quarters, as the economy
reopens and firms and households complete spending plans
deferred by the lockdown. The gap narrows further across
the forecast horizon, but it is still around -2% of potential
GDP by the end of 2022, consistent with COVID-19 being an
unusually intense shock.
Percentage of potential GDP

Output gap*


Source: SARB
* Dotted line indicates forecasts
Box 7 New estimates of potential gross
domestic product
1 For a discussion of different estimates, see Box 5 of the April 2020
MPR, p 25.
2 The model responsible for the potential growth estimates attempts to
control for supply-side shocks, such as drought, which are common in
economies with large natural resource sectors. This modelling technology
is useful for an event such as a lockdown, which is a major supply-side
shock, even if it also has demand-side consequences. It is superior to
using a simple statistical trend, which would imply firms were open and
willing to serve customers under the lockdown, but customers somehow
failed to appear. Of course, firms were required to cease operations,
so they were incapable of supply regardless of demand conditions. For
details of the model, see B Botha, F Ruch and R Steinbach, ‘Short-lived
supply shocks to potential growth’, South African Reserve Bank Working
Paper Series No. WP/18/02, Pretoria: South African Reserve Bank, June
2018.
Attachments/8605/WP1802a.pdf
Potential output is an important variable in the Quarterly Projection
Model (QPM) forecasts prepared for the Monetary Policy Committee.
It describes the amount of output the economy can generate each
quarter, employing its productive resources at full capacity. In turn,
the difference between the economy’s actual output and potential
gross domestic product (GDP) is the output gap, which is the
concept used in the QPM to assess the strength or weakness of
demand. This is an important component of the QPM Taylor rule,
which generates the repurchase (repo) rate projections.
Because potential output cannot be observed directly, it has to be
estimated. (By contrast, a variable like inflation can be measured
through price surveys.) Unfortunately, potential growth estimates
are uncertain. They change in response to new or revised
data, sometimes significantly. Different techniques also give
different answers.1
Despite these shortcomings, it is difficult to dispense with the
concept of potential growth altogether. Supply-side and demandside shocks to growth generate different economic responses.
It is also more transparent to base these assessments on a model2
and to publish the quantitative estimates, as the South African
Reserve Bank does, rather than keep these judgements implicit
and qualitative.
The potential growth estimates used in the QPM are revised
periodically, when new data become available, or when a shock
appears that is best modelled through this channel (such as a
strike or lockdown).3 For the current year, potential growth has
been revised three times so far, in March, April and September.
The September re-estimation attracted particular scrutiny because
it narrowed the output gap, on average, relative to where it would
have been using the previous potential growth estimate. This also
affected the repo path.
Despite the uncertainty caused by the September revision, there
were good reasons to implement updates. The existing estimates
dated back to April. They used forecasts for the first- and second-
quarter GDP outcomes, whereas Statistics South Africa had now
published the official outcomes. High-frequency data for the third
quarter were also providing clearer guidance on the economy’s
recovery from the lockdown. Finally, revisions to potential growth
were also implemented in September 2018 and September 2019.
There was no good economic reason to delay updates this year.
The September estimates showed a slower pace of potential growth
before the COVID-19 crisis, with a deeper downturn in the second
quarter of 2020 but also a faster recovery in the third quarter. The
longer-term trend for potential growth was revised down. As a
result, the output gap became less negative pre-crisis (at -1.48%
of potential GDP, from -2.15% previously), but widened more in the
3 For 2019, potential growth was revised in March, May, July and
September. In 2018, revisions took place in January, March, July and
September. In 2017, before the introduction of the current potential
growth model, revisions occurred in July and November.

OCTOBER 2020
second quarter (reaching -11.94%, from 11.28% in July, despite the
less negative starting point). Growth for the third quarter was revised
up, which narrowed the gap further, although it remained deeply
negative (at -7.22% in the third quarter, from -8.07% previously).
The gap was smaller for the rest of the forecast period, given a lower
potential growth rate.
COVID-19 is an unusually large shock. Were potential growth being
estimated using a simple statistical tool such as an HP filter, it is
likely this would give implausible results, especially for the second
quarter. The potential growth model is more sophisticated than
this, however, and the results also benefitted from interventions
by the forecasting staff, guided by a burgeoning literature on the
supply- and demand-side impacts of COVID-19.4 Furthermore, the
4 An example is V Guerrieri, G Lorenzoni, L Straub and I Werning,
‘Macroeconomic implications of COVID-19: can negative supply shocks
cause demand shortages?’, University of Chicago, Becker Friedman
Institute for Economics Working Paper No. 2020-35, 2 April 2020.
pandemic shock had already appeared in the April re-estimation of
potential, so this was not the first attempt at modelling its effects
on potential output.
On the whole, it makes sense to mark down South Africa’s longer-term
growth trend. In particular, the outlook for investment has deteriorated
over the past six months: the core model forecasts, for instance, now
have the investment level expected for the end of 2022 – 10.1% lower
than it was in April. By way of comparison, the level of total GDP has
been revised down by just 1.7%. There has been limited progress
on reforms that would crowd in new investment. Fundamentally,
this is a more consequential fact for the South African economy
than a marginally different repo rate forecast. The headline problem
is an ongoing deterioration in South Africa’s longer-run economic
prospects, which monetary policy would be naïve to ignore.
Potential growth and output gap
Potential GDP growth, percentage change over four quarters
2020Q1
2020Q2
2020Q3
2020Q4
2021Q1
2021Q2
2021Q3
2021Q4
2022Q1
2022Q2
2022Q3
2022Q4
Jul 2020

Sep 2020

Output gap, percentage of potential GDP
2020Q1
2020Q2
2020Q3
2020Q4
2021Q1
2021Q2
2021Q3
2021Q4
2022Q1
2022Q2
2022Q3
2022Q4
Jul 2020

Sep 2020

Source: SARB
R billions (constant 2010 prices)

Potential output
Source: SARB

Jul 2020

Sep 2020

Percentage change

Actual and potential GDP growth*


Sources: Stats SA and SARB

Actual

Potential
* Dotted lines indicate forecasts

OCTOBER 2020
Constraints to growth
Over the medium term, the pace of South Africa’s recovery
will be affected not only by weak demand, but also by more
structural problems. Two stand out: electricity shortages and
the fiscal situation.
South Africa has suffered from periodic electricity shortages
since 2007. These appeared to ease following the 2009
crisis, but this effect was achieved by weaker-than-expected
economic growth, together with a ‘keep the lights on at all
costs’ strategy, which succeeded by deferring maintenance
and therefore increasing the fragility of the system. Loadshedding resumed in 2015 and has persisted since, with
2020 having already become the worst-ever year in terms
of total gigawatt hours shed, passing the 2019 record on
13 August. Although electricity demand collapsed under the
initial lockdown, and some capacity was opportunistically
taken off-line for maintenance, the increase in unplanned
maintenance lasted less than a month, affecting at its peak an
extra 10% of generating capacity. Load-shedding resumed on
10 July due to unplanned outages caused by breakdowns, and
Eskom continues to warn that electricity shortages will persist
through 2021. The proportion of total generating capacity
actually producing electricity has declined quite steadily since
2001 and is now under 70%, from 90% two decades ago.
It is surprising that electricity demand has rebounded as much
as it has, despite depressed levels of output. Nowcasts suggest
GDP is still around 20% below where it was this time last
year, and yet electricity usage is essentially back to pre-crisis
volumes. The electricity-intensive mining and manufacturing
sectors are, however, back to around March levels of output,
which helps explain the resurgence in electricity demand.
The initial return of load-shedding in July also occurred during
very cold weather conditions.
Fiscal dynamics and the
growth outlook
The fiscal situation is a second threat to the economy, along
several dimensions. Over the past decade, South Africa has
added more debt, relative to GDP, than any top 20 emerging
market, except Argentina. Forecasts indicate that South Africa
will also be growing debt by more than any of these countries
over the next two years (although forecasts for Argentina are
not available). While the 2009 starting point for debt was low,
at less than 30% of GDP, a decade of debt accumulation has
raised that number to 63.5% as of 2019/20, which is likely
to become 81.8% this year, pushing South Africa well above
the broad emerging market average of 63.1% (according to
the IMF).
While efforts were made to contain this debt growth, these
initiatives relied more heavily on tax increases than spending
cuts, with minimal contributions from reform initiatives.
GWh

Mar
May
Jul
Sep
Jan
Net energy sent out
Sources: Eskom and SARB

Level 5 lockdown,
weeks 13–18


Nov
GWh
Load-shedding

Source: CSIR
Stage 1
Stage 2
Stage 3
Stage 4
Stage 5
Stage 6
Unknown


Electricity usage by sector
Finance
Construction
Transport
Agriculture
Trade
Electricity, gas and water
Community and commerce
Mining
Manufacturing

Percentage of total usage
Sources: Stats SA and SARB

OCTOBER 2020
The lesson of this experience, also one spelled out in international
studies on fiscal adjustment,18 is that this consolidation mix was
sub-optimal. Accordingly, government proposes to reverse
this approach in future, relying on spending cuts and growthboosting reforms to stabilise debt, with more limited tax action.
Despite this change in strategy, public spending is nonetheless
programmed to rise further this year, on a net basis, consistent
with the demands of a major emergency. Indeed, spending
is likely to reach a record level in 2020, even when excluding
interest payments and adjusting for both population growth
and inflation. According to the ‘active’ scenario laid out in
National Treasury’s Supplementary Budget, the planned
spending adjustment only commences in the following fiscal
year. Thereafter, spending falls quite rapidly, with real spending
per capita declining to around 2008/09 levels by 2022/23,
again excluding interest payments.
The fiscal risk to output is two-sided. In the Supplementary
Budget’s passive scenario, no consolidation steps are taken
and debt passes 140% of GDP by the end of the decade. The
financing needs implied by this scenario would be sharply
higher than at present, raising the risk of a sudden stop in
funding and the potential for severe damage to the economy.19
In these circumstances, it is clearly better to adjust than not
to adjust. However, adjustment itself can also have short-term
growth consequences. Spending cuts will tend to subdue
demand. Additional tax measures, even if limited, will also
weaken growth. These effects will be more severe if cuts are
skewed towards higher productivity spending, such as capital
investment. It is plausible that with smart spending cuts and
strong reform momentum, the adjustment could be relatively
fast and growth-friendly, especially if fiscal policy credibility
is quickly re-established. But historical experiences of fiscal
consolidation are varied. (See also Box 8 on the fiscal multiplier.)
High government borrowing could also have damaging
crowding out effects. Even in the National Treasury’s ‘active’
adjustment scenario, fiscal deficits will remain much larger than
they have been historically, at 9.3% and 7.7% in 2021/22 and
2022/23 respectively, compared with a 1994–2019 average of
2.9% of GDP. As such, government dissaving will rise relative
to previous levels, reducing the pool of domestic savings
available to finance investment. In these circumstances, either
investment has to fall or the supply of savings has to expand,
which can be achieved through more domestic savings or
larger foreign capital inflows.20
18 A recent example is A Alesina and C Favero, ‘Austerity: when it
works and when it doesn’t’, Princeton University Press, 2019.
19 In a March 2020 speech at the University of the Free State,
Governor Kganyago made this point by citing Dornbusch’s law,
that ‘The crisis takes a much longer time coming than you think,
and then it happens much faster than you would have thought.’
See
governor-kganyago-speech.pdf?sfvrsn=9b89921_2
20 The relevant economic identity is that, in an open economy,
investment must equal domestic savings plus foreign savings,
which is the inverse of the current account: I = S + (M - X).
Percentage of GDP
Philippines
Change in emerging market* debt stocks
-20
-10

* Based on the largest 20 EMs (based on PPP)
** Argentina has no debt forecasts for 2020–21
Sources: IMF, National Treasury and SARB
Active
scenario
2009–19
2019–21
Turkey
Bangladesh
Poland
Thailand
Malaysia
Russia
India
Vietnam
Indonesia
Pakistan
Egypt
Mexico
Saudi Arabia
Iran
Nigeria
Brazil
China
South Africa
Argentina**
R thousand (2020/21 prices)

Real non-interest expenditure per capita*

* Main budget expenditure, active scenario, deflated by headline CPI
Sources: National Treasury, Stats SA and SARB
26.4
* Dotted line indicates forecast
22.6
22.0
Percentage of GDP

Gross loan debt projections

Source: National Treasury
Passive scenario
Active scenario

OCTOBER 2020
Over the past five years, South Africa has, on average, achieved
investment rates of 18.9% of GDP. These have been funded
with an average of 15.6 percentage points of domestic savings
and 3.3 percentage points of foreign savings. Although the
economy has been weak during this period and investment
levels have been disappointing, South Africa has still been
one of the world’s biggest users of foreign savings, with the
third-largest current account deficit of the world’s 40 biggest
economies for 2019. (This includes both advanced economies
and emerging markets; South Africa’s rank is similar for
other years.)
In the first quarter of 2020, South Africa recorded a rare current
account surplus, with a large decline in investment plus higher
private savings (mostly corporates) offsetting more government
dissaving. In the second quarter, the current account returned to
deficit territory, while private sector saving rose and government
dissaving deepened. The total increase in consumption was
larger than the increase in saving, requiring investment to fall
to just 13.8% of GDP for the first half of the year, funded by
domestic savings worth 13.2% of GDP and foreign savings of
0.6% of GDP. Both these quarters were unusual in that they
contained a major global crisis, so they should not be taken as
conclusive proof that South Africa is suffering from crowding
out. However, they illustrate the mechanism whereby crowding
out could hamper growth in future, with a low savings rate and
limited capacity to import savings forcing a low investment rate
and therefore low growth.
The clearest local precedent for this is the late-1980s, when
South Africa was shut out of global capital markets. In the
five years after the 1985 crisis, when foreign banks refused
to roll over loans, South Africa ran current account surpluses
averaging 3.6% of GDP, from deficits of 1.8% of GDP for the
previous five years. Between these two periods, the investment
rate fell by 8 percentage points, from nearly 29% of GDP to an
average of 21% of GDP. This occurred despite low real interest
rates, on average around -2% for the policy rate, and a strong
expansion in the money supply (M3), which grew by 17.3%, on
average, during this period. Contrary to some theories,21 South
Africa was not able to achieve high investment through money
growth in the presence of a low savings rate.
The current account outlook
The forecasts anticipate persistent current account deficits over
the forecast period, averaging -1.0% in 2020, -1.9% in 2021
and -2.2% in 2022. As discussed above, this implies continued
capital inflows. Simultaneously, on the trade side, it suggests
the deficit on the services, income and current transfer (SIT)
account will generally outweigh the trade surplus.
21 See for instance United Nations, ‘Central banking, financial
institutions and credit creation in developing countries’,
United Nations Discussion Papers No. 193, January 2009.

Percentage of GDP

Gross savings
-10

Source: SARB
Households
Corporates
General government
Total

Percentage of GDP

Current account balance and gross capital
formation
-15
-10
-5

Sources: Stats SA and SARB

Current account balance

Gross capital formation
1990 1995
2005 2010

OCTOBER 2020
South Africa’s current account surplus in the first quarter of 2020
was the first such surplus since 2003. The forecasts treat it as
anomalous. Dividend outflows slowed sharply (moderating by
1 percentage point of GDP), probably due to firms conserving
cash in the face of a major crisis. South Africa’s terms of trade
hit an all-time high during the quarter, with prices for platinum
group metals rising abruptly and oil prices collapsing. While
South African export volumes were little changed, in nominal
terms their value increased, contributing to a trade surplus.
Finally, imports collapsed, primarily due to a fall in investment
in that quarter.
In the second quarter, exports contracted sharply due to
the lockdown, with both goods (e.g. minerals and cars) and
services (especially tourism) sharply lower. Imports also fell,
but not to the same extent, leaving net merchandise exports
lower by 1.8 percentage points of GDP, while net travel receipts
fell by 1.2 percentage points of GDP (mainly a tourism effect).
Net dividend payments also picked up a bit from the firstquarter low. Combined with some smaller movements in other
current account components, the overall result was a large
(3.6 percentage points) swing in the current account, to a
deficit of 2.4% of GDP.
From the third quarter of 2020 to the end of the forecast period,
the trade account is likely to remain in surplus, averaging 2.7%
of GDP. This surplus will be offset by the deficit on the SIT
account, which averages -4.6% of GDP, keeping the overall
current account in deficit. The persistence of a trade surplus
points to a weak economy with limited investment demand,
constraining imports, as well as some export benefits from
elevated commodity prices and a cheap rand. By contrast, the
ongoing deficit on the SIT account reflects larger outbound
interest payments and persistently weaker tourism exports,
alongside continued dividend outflows and transfers to
Southern African Customs Union partners – although these
last two factors are likely to moderate somewhat in the context
of a weaker domestic economy.
Conclusion
South Africa has just completed its worst growth decade on
record, and is starting the 2020s in a recession. The recovery
underway in the third quarter of the year is proceeding
somewhat more rapidly than expected, but there are still
significant headwinds to growth, including electricity shortages
and an unsustainable fiscal position. The forecasts indicate
a slow return to the levels of economic activity experienced
in 2019. The unusual nature of the current crisis, and the
unprecedented volatility in the data, means there is even more
scope for error in the forecasts than usual.
US$ index: 2015 = 100

2017 2018

Commodity prices

** Weighted average of the energy, non-energy and precious
metals subcomponents
Sources: World Bank and SARB
South Africa*
World Bank Broad
Commodity Index**

2021 2022
* Dotted line indicates forecast
Percentage of GDP

Current account


Source: SARB
Trade balance
SIT account
Current account
Forecast

OCTOBER 2020
Box 8 South Africa’s fiscal multiplier
1 N Batini, L Eyraud and A Weber, ‘A simple method to compute fiscal
multipliers’, IMF Working Paper No. WP/14/93, Washington DC:
International Monetary Fund, June 2014.
pubs/ft/wp/2014/wp1493.pdf
2 L Christiano, M Eichenbaum and S Rebelo, ‘When is the government
spending multiplier large?’, December 2010.
northwestern.edu/faculty/rebelo/htm/multiplier.pdf
3 D Bonam and J Lukkezen, ‘Fiscal and monetary policy coordination,
macroeconomic stability, and sovereign risk premia’, Journal of Money,
Credit and Banking 51 (2–3), March–April 2019, pp 581–616.
4 See for example N Batini, L Eyraud and A Weber, ‘A simple method
to compute fiscal multipliers’, IMF Working Paper No. WP/14/93,
Washington DC: International Monetary Fund, June 2014.


5 G Dell’Ariccia, C Ferreira, N Jenkinson, L Laeven, A Martin, C Minoiu
and A Popov, ‘Managing the sovereign-bank nexus’, IMF Monetary
and Capital Markets Departmental Paper No. 18/16, Washington DC:
International Monetary Fund, September 2018.


Issues/2018/09/14/Managing-the-Sovereign-Bank-Nexus-45133
What happens to the rest of the economy when government
changes its spending? The standard metric for answering this
question is the fiscal multiplier, which summarises in one number
the change in gross domestic product (GDP) from a change in
government expenditure. If a fiscal multiplier is 1, GDP changes
by exactly R1 for every extra R1 of government spending. If it is
more than 1, extra spending by government crowds in even more
domestic output. If it is less than 1, activity does not rise as much
as the spending increase, perhaps because of import leakage or
capacity constraints. In extreme cases, a multiplier might even be
negative, if the adverse reaction by the private sector is so severe
that extra government spending makes the total economy smaller.
There is a substantial body of literature on fiscal multipliers, for South
Africa and many other economies. Given South Africa’s difficult fiscal
situation, and its implications for the macroeconomic outlook, it is
useful to reflect on this literature and to update multiplier estimates
for current conditions.
This literature identifies a range of channels through which
government spending can affect broader GDP. The simplest is that
an increase in spending raises aggregate demand. This impact is
reduced, however, if the extra expenditure pulls in more imports.
Multipliers also vary depending on the composition of spending,
with investment having the most positive multiplier. The size of the
multiplier is further affected by the business cycle: if an economy is
already operating at full capacity, multipliers will be smaller than when
there is a negative output gap.1 Advanced economy estimates also
show much larger multipliers when monetary policy is constrained
by the zero lower bound.2
Financing channels matter too. If government spending is paid for
with higher taxes, multipliers will tend to be low. Funding through
debt can support a higher multiplier where debt is perceived as
sustainable.3 Where sustainability is in doubt, more debt will tend
to reduce capital inflows, raise interest rates for the entire economy,
and undermine confidence in the economic outlook, thereby
lowering the multiplier.4 This effect is stronger where there is a large
financial sector that holds government bonds as safe assets: rising
fiscal risk weakens these balance sheets, in turn negatively affecting
the supply and pricing of loans.5
Given these channels, we should expect multipliers to be timevarying. Estimates should also differ depending on which channels
they incorporate. Of the estimates available for South Africa, the
median multiplier is less than 1. Schröder and Storm (2020) have a
higher multiplier, but that estimate assumes a closed economy and
ignores funding effects. Makrelov et al. (2020)6 have a short-term
multiplier of 2.5, in the presence of a sustainable fiscal outlook, a large
negative output gap and strong positive financial accelerator effects.
Under different conditions (fast-rising debt, downgrades and a smaller
output gap), the multipliers become small and are zero in the long run.
New estimates of fiscal multipliers by South African Reserve Bank
staff, and informed by lessons learnt from previous studies, show
a steady decline in the multiplier over the past decade, from 1.6 at
the start of the decade to less than zero by the end. The decline
in the multiplier reflects the factors discussed above. Rising debt
led to downgrades and higher long-term interest rates. From
2015, there was a shift in the composition of spending away from
investment and towards more consumption, including interest
spending. Government raised taxes to fund higher expenditure,
with the tax-to-GDP ratio increasing from 23.9% in 2010/11 to
26.0% in 2018/19. Tax increases were also accompanied by large
revenue shortfalls, suggesting substantial negative impacts on GDP.
Supply-side shocks such as electricity shortages reduced South
Africa’s potential growth and made measures to increase aggregate
demand less effective.
The multiplier for 2020 is very difficult to judge, given some factors
that suggest a large, positive multiplier (especially a deeply negative
output gap, cheaper government financing from multilaterals and
tax deferrals) and others that suggest a low one (downgrades and
a higher risk premium). It appears to be in a range between 0.6
and 0.8. Looking beyond 2020, it is likely that multipliers will decline
again, to the low levels seen at the end of the past decade, as tax
deferrals end, government borrowing costs rise and crowding-out
effects intensify.
On the whole, low and falling multipliers are discouraging because
they point to weak spending quality. The upside to this finding is
that it implies limited growth costs for National Treasury’s planned
fiscal consolidation. Contrary to the claim that such measures
are invariably self-defeating because of their negative effects on
growth, this is one more piece of evidence that real-world effects
are complex and highly context-dependent.
6 K Makrelov, C Arndt, R Davies and L Harris. ‘Balance sheet changes and
the impact of financial sector risk-taking on fiscal multipliers’, Economic
Modelling 87, May 2020, pp 322–343.
Size of multipier

Fiscal multipliers

Source: SARB

OCTOBER 2020
Author and date
Country
Short-term
expenditure
impact
multiplier
(number
or range)
Comments
Jooste, Liu and Naraidoo
(2013)1
South Africa
0.77
The size of the expenditure multiplier depends on the methodology used,
the business cycle, the import intensity of the economy and the share of
Ricardian households. The multiplier can exceed one. Monetary dynamics
but no fiscal dynamics. Long-run multipliers close to zero.
Jooste and Naraidoo (2017)2
South Africa
0.6
The results are based on closed economy dynamic stochastic general
equilibrium (DSGE) model and depend on the values of the labour supply
elasticity, the foresight of households and the degree of sticky wages.
No monetary accommodation and financial dynamics. The long-term
multipliers are zero.
Mabugu et al. (2013)3
South Africa
0.73 to 0.76
The results are based on computable general equilibrium (CGE) model,
which is supply and savings constrained. No monetary dynamics or
financial dynamics. Results vary depending on the source of funding.
Akanbi (2013)4
South Africa
0.82
The results are based on macro econometric model over the period
1970–2011, and not distinguish between pre and post 1994 structural
differences. Multiplier is in t+1 when the deviation from baseline is 0.6% in
response to a 4% decline in consumption expenditure. Supply constrained
multipliers are smaller. No financial dynamics. Long term multiplier close
to zero.
Makrelov et al. (2020)5
South Africa
2.5
Results based on stock and flow consistent financial CGE model. The
multiplier is large only in the presence of sustainable fiscal outlook, large
negative output gap and low financial frictions. Small multipliers otherwise.
Financial sector dynamics. Long term multiplier close to zero.
Kemp (2020)6
South Africa
0.01 to 0.78
Different VAR models. Varies depending on length of period, the
methodology used, the business cycle and the monetary policy response.
No financial dynamics. Long-term present-value government spending
multipliers range from −0.24 to 1.06.
Kemp and Hollander (2020)7
South Africa
0.31
The results are based on an open economy dynamic stochastic general
equilibrium model (DSGE). Household and Government consumption are
substitutes. No monetary policy accommodation. Differentiation between
low and high debt regimes. No financial dynamics or distinction of different
phases of the business cycle. Long-term multipliers are close to zero.
Schröder and Storm (2020)8
South Africa
1.87
Input-output model, closed economy, no financing channels, no supply
constraints under all economic conditions; authors urge high-quality
spending.

C Jooste, G Liu and R Naraidoo, ‘Analysing the effects of fiscal policy shocks in the South African economy’, Economic Research Southern Africa Working
Paper 351, May 2013.

C Jooste and R Naraidoo, ‘The macroeconomic effects of government spending under fiscal foresight’, South African Journal of Economics 85(1),
March 2017, pp 68−85.

Mabugu et al., ‘Impact of fiscal policy in an intertemporal CGE model for South Africa’, Economic Modelling 31, March 2013, pp 775−782.


O A Akanbi, ‘Macroeconomic effects of fiscal policy changes: a case of South Africa’, Economic Modelling 35, September 2013, pp 771−785.


K Makrelov, C Arndt, R Davies and L Harris. ‘Balance sheet changes and the impact of financial sector risk-taking on fiscal multipliers’, Economic
Modelling 87, May 2020, pp 322–343.

J H Kemp, ‘Empirical estimates of fiscal multipliers for South Africa’, SA-TIED Working Paper 127, July 2020.


J H Kemp and H Hollander, ‘A medium-sized, open-economy, fiscal DSGE model of South Africa’, WIDER Working Paper Series 2020/92, July 2020.https://
www.wider.unu.edu/sites/default/files/WP2020-92%20Kemp%20and%20Hollander_FINAL.pdf

E Schröder and S Storm, ‘Fiscal policy in South Africa: closed input-output income and employment multipliers’, Institute of Economic Justice Research Note
No 1, 3 March 2020.

OCTOBER 2020
Price developments
Inflation has decelerated sharply this year, primarily due to a
collapse in global oil prices. Some services prices have also
disinflated, especially those for housing. By contrast, food
inflation has returned to more normal levels, having been
unusually subdued for the past three years. Prices for core
goods items, such as cars, are also accelerating, consistent
with exchange rate depreciation. Over the forecast period,
there is likely to be a temporary upsurge in inflation around
mid-2021 due to fuel price base effects. Inflation is otherwise
expected to be contained within the bottom half of the inflation
target for most of the next two years, ultimately stabilising at
the 4.5% target midpoint late in 2022.
The COVID-19 shock has had a marked effect on targeted
inflation. Despite exchange rate depreciation, the shock has
been disinflationary in the aggregate, with global and domestic
demand both sharply weaker. In the near term, the biggest
mover has been fuel prices: inflation for this category fell from
13.7% in January 2020 to -25.9% in May. As a result, domestic
inflation declined to a low of 2.1% in May, before rising again,
returning to the target range in July.
The short-term fall in inflation had been expected, given
lower world oil prices: the May MPC forecast, for instance,
anticipated two quarters of below-target inflation, a projection
later reduced to one quarter as oil prices rebounded. Beyond
the oil shock, however, the MPC forecasts project persistent
downward pressures on inflation due to a negative output gap,
as well as lower inflation expectations and a recovery in the
exchange rate. Accordingly, headline inflation averages 3.3% in
2020, 4.0% in 2021 and 4.4% in 2022. The forecasts indicate
that inflation will only stabilise at 4.5%, the model’s target, by
the end of the forecast period, with the assistance of a very
low policy rate.
Methodological adaptions to lockdown
The lockdown posed some difficulties for Stats SA in collecting
prices, both because field workers could not travel to collect
prices and because some items, such as alcohol and
tobacco, were not available for sale. Stats SA dealt with these
challenges using three techniques. For the many items that
are not surveyed monthly, even in normal times, existing price
data were carried over. This affected around 40% of the basket
in April, which was the monthly survey most affected by the
lockdown. For a small number of items – just over 1% in April
– prices were inferred from comparable items. (An example
is diesel.) Finally, non-available items were effectively dropped
from the inflation basket, temporarily, by assigning them the
same inflation rate as the rest of the basket. This treatment
affected about a quarter of the CPI in April, including items
such as alcohol and tobacco.
Percentage change over four quarters

Headline inflation*

Sources: Stats SA and SARB
* Dotted line indicates forecast
Midpoint
3–6% inflation target range
Stats SA methodology to deal with
lockdown restrictions
Percentage of total basket
0.6*
4.5

25 24

5 4
1 <1 2 0 0
Sources: Stats SA and SARB
Online/direct
collection
Imputed using
other data
Imputed using
average headline
inflation
Carried-forward
zero m-o-m
inflation

Apr 2020

May 2020

Jun 2020

Jul 2020

Aug 2020

OCTOBER 2020
Analytically, this third measure has had implications for core
inflation.22 It reduced the effective size of the core basket.
It also carried over a headline shock to core inflation. By
design, core inflation excludes fuel, food and electricity prices,
which tend to be volatile. By imputing non-available items with
the headline rate, however, the recent fuel price shock was
inserted back into core. For these two reasons, core inflation
was less reflective of underlying inflation than usual.23
Given these imputation effects, core inflation dipped in May
2020, to 3.1%, with prices falling in month-on-month terms.
However, a measure of core which excludes the missing items
outright shows more stability, with inflation rates of 3.8% for
April and 3.9% for May. The forecast is tethered to actual Stats
SA data, for which reason core inflation had to be revised
down in July, in line with these outcomes. In interpreting core,
however, it is important to understand that the recent dip in
core, and subsequent rebound in June and July, was mainly
due to price imputations, not changes in economic conditions.
Core inflation
Looking forward, beyond these short-term methodological
considerations, core inflation is expected to stay close to 4%
through most of 2021 and 2022, averaging 3.7% and 4.0%
respectively. These projections compare with core outcomes
of 4.7% for 2017, 4.3% for 2018 and 4.1% for 2019.
Within core inflation, housing inflation stands out as a large
disinflationary contributor. Housing is the largest single item in
the core basket at 23%, comprising actual rentals and owners’
equivalent rent (OER). (The inflation rate for owner-occupied
housing is proxied by rental inflation for comparable dwellings.)
Housing inflation has been slowing steadily for three years in
the context of a weakening economy and expanding housing
supply. It has declined to new post-crisis lows this year, touching
1.7% in June.
There is evidence, although much of it is anecdotal, that rental
inflation will slow further as landlords forego increases to retain
good tenants and new rental rates fall in an environment of
abundant supply. Interestingly, this disinflationary dynamic may
be reinforced by low interest rates, as mortgage installments
become more competitive with rental rates and existing renters
choose to buy instead.
Some analysts had projected a more rapid decline in housing
inflation than has occurred to date, but rental prices tend to
be sticky, given that leases are usually agreed for prolonged
periods (typically a year, sometimes with annual increases
built in). This means they do not adjust very rapidly to shocks.
The June housing inflation number, at 1.7%, was nonetheless
below the SARB’s short-term projection of 2.1%. In the
September MPC forecasts, services inflation was lowered
22 As Stats SA pointed out in its April CPI Report, ‘Core inflation measures
have diminished meaning as the imputation methods may now cause
some of these indices to include products normally excluded.’
23 April and May were when imputations carried a large weight.
Percentage change over 12 months
Jan

Mar
May
Active core inflation

Sources: Stats SA and SARB


Active core

Core
3.4
Jul
3.2
3.3
3.3

Headline

Total housing (OER and rentals)
Percentage change over 12 months

Headline and housing inflation
Sources: Stats SA and SARB

OCTOBER 2020
to accommodate slower housing inflation. Specifically, the
housing inflation rates for the third and fourth quarters are now
1.5% and 1.1% respectively, from 2.9% and 3.2% previously.24
By contrast, insurance, and specifically medical insurance,
remains a prominent source of inflation pressure. Medical
insurance is surveyed twice a year, in February 2020 and
April, but the April survey only covers medical insurance for
government employees and does not change overall medical
inflation significantly, making the February survey more
important. Medical insurance inflation was at 9.6% in February,
above the SARB expectations of 8.8% and also above the 2019
average (also 8.8%). Over the past decade, medical insurance
has consistently exceeded headline inflation by around
5 percentage points, the only private sector price category at
this level of aggregation to have had a sustained relative price
increase over this period. (Public sector prices such as water
and electricity have consistently outpaced headline CPI.)
Although medical insurance is sometimes interpreted as
acyclical, meaning it does not respond to the economic cycle,
its behaviour may better be described as countercyclical,
meaning it accelerates when the economy is weak and
subsides when it booms. For instance, it averaged 6.4% in
the 2000s when the economy grew strongly, compared with
9.9% in the 2010s, which was a period of underperformance.
The underlying logic appears to be that in expansion phases,
employment picks up and more families become eligible for
cover through employee schemes. By contrast, when the
economy is underperforming, participation in these schemes
is reduced. At the same time, younger and healthier individuals
downgrade or forego health care, to limit expenses, leaving an
older, sicker and therefore more expensive pool of covered
individuals. This dynamic in turn necessitates larger tariff
increases. In this context, medical insurance inflation is likely
to stay elevated over the medium term. In the near-term,
however, there is a chance of lower inflation given medical aid
surpluses built up during the lockdown period, when scheme
members avoided hospitals except for urgent treatments.
Core goods inflation is another area of special interest. It is
the focal point of exchange rate pass-through into consumer
prices, reflecting its high proportion of traded goods (either
imports or import-competing products, such as cars and
clothing). For this reason, the rand’s 2020 depreciation is
most likely to appear here. Over the past 12 quarters, core
goods inflation has averaged just 2.5%, consistent with the
rand’s recovery from its 2016 overshoot. By contrast, for the
preceding 12 quarters, core goods inflation averaged 5.3%.
In the second quarter of this year, core goods inflation averaged
1.2%, but this number is unreliable as it is distorted by Stats
SA’s zero-weighting of unavailable goods. It is expected to
pick up to 2% for the third quarter and then accelerate further,
24 The QPM forecasts are fixed to the projections from the disaggregated
model for the third and fourth quarters of 2020, which explains why
a precise housing inflation number is in the MPC forecasts, even
though the QPM does not specifically include a housing projection.

Health insurance

Headline inflation
Percentage change over 12 months

Health insurance survey months
5.3
6.3
Health insurance versus headline inflation
Sources: Stats SA and SARB

Feb
Apr

Feb
Apr
Feb
Apr
Feb
Apr


Output gap (right-hand scale)

Medical aid inflation

Pre-crisis average (6.4%)
Post-crisis average (9.9%)
Percentage change over
four quarters
Percentage of
potential output

Medical aid inflation and output gap
Sources: Stats SA and SARB

2005 2007

Percentage change over four quarters

Core goods inflation*
Sources: Stats SA and SARB
* Dotted line indicates forecasts


OCTOBER 2020
peaking at 3.7% in the second quarter of 2021. The core goods
projections were previously lower, based on a more muted view
of exchange rate pass-through, but high-frequency data show
significant increases in vehicle prices, justifying the upward
revisions to the September forecasts.25
Food prices
Food inflation has accelerated over the past two years, reaching
4.3% in the second quarter of 2020, up from a trough of 3%
in the first quarter of 2019. This steady increase in food price
inflation followed forecasts quite closely, in contrast to previous
years where food price forecasts had to be revised lower by
substantial margins. The current-year forecasts, for instance,
have moved within a narrow range of 4.3% to 4.5% so far in
2020, whereas in 2019 current-year forecasts started at 4.2%
and ended at 3.4%.
Food inflation has been low in recent years due to supply-side
shocks, and the recent pick-up in food inflation has more to do
with conditions normalising than new supply-side pressures.
Meat prices, in particular, have been recovering from an
episode of deflation a year ago, related to an outbreak of footand-mouth disease.26 Bread and cereals inflation has also been
recovering from deflation, which explains steady increases for
this category from early-2018 through to early-2020.
25 The model coefficient for the exchange rate is 0.1, so a 10%
depreciation in the rand gives 1% inflationary pressure.
26 This outbreak caused export bans, which raised domestic
meat supplies and therefore lowered prices.
Consumer food price inflation (September 2020 forecasts)
Percentage change over four quarters, March 2020 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight
2010–19*
2019*
2020*
2020Q1
2020Q2
2020Q3
2020Q4
2021Q1
2021Q2
Food and non-alcoholic beverages


* Annual average percentage change
Sources: Stats SA and SARB
Percentage change over four quarters

Food and non-alcoholic beverages inflation*

Sources: Stats SA and SARB
* Dotted lines indicate forecasts

Actual

Mar 2019

Sep 2019

Mar 2020

Sep 2020
Percentage change over four quarters

Meat inflation*
-2

Sources: Stats SA and SARB
* Dotted lines indicate forecasts

Actual

Mar 2019

Sep 2019

Mar 2020

Sep 2020

OCTOBER 2020
Food inflation is expected to remain quite stable over the
medium term, at relatively low levels, given expectations for
positive rainfall conditions in South Africa this year. The latest
forecast is for 4.2% food inflation this year, followed by 4.0%
and 4.2% in 2021 and 2022 respectively. While these numbers
are higher than the 2018 or 2019 outcomes, they are still well
below the longer-run average: since 2000, food inflation has
averaged 7.1%.
Fuel prices
Fuel prices are generating significant volatility in headline
inflation. Brent crude cost US$71 per barrel as of 6 January; as
of 22 April, the price had collapsed to US$12.50, as COVID-19 hit
demand and inventories filled up with surplus stocks. Given this
shock, domestic fuel prices fell sharply to a low of R12.22 per
litre in May (for Gauteng 95 unleaded petrol), the sharpest drop
on record, despite a simultaneous depreciation of the exchange
rate. In turn, this rapid decline pushed CPI inflation below
the 3% lower bound of the target, with fuel prices detracting
1.4 percentage points from headline inflation in May when that
series hit a trough of just 2.1%. (This effect was reinforced by
Stats SA’s imputation method, as discussed above.)
Oil prices have since recovered somewhat faster than
previously expected, requiring the assumptions for the rest
of 2020 to be revised upwards by around US$6 per barrel.
For instance, the third-quarter assumption moved from US$33
for the May meeting of the MPC to US$43 for the September
MPC. For the longer-term, the latest MPC forecast assumes
Brent crude oil will average US$47 per barrel for 2021 and
US$52 for 2022, more or less in line with global analysts’
expectations.
These
assumptions
have
not
changed
significantly since the COVID shock – the average change over
the past six months has been about US$2 per barrel – and
prices remain below the 2019 average of US$64 per barrel.
Nonetheless, given more expensive oil as well as a large base
effect, fuel prices will lift headline inflation next year, with
headline temporarily overshooting the 4.5% target midpoint in
the second and third quarters of 2021. Fuel inflation is expected
to slow to 6.3% in 2022, still somewhat below pre-COVID-19
averages (8.1% for 2017–2019, for instance).
Electricity
Electricity inflation was at 7.7% in July, and 6.2% in August,
continuing a pattern of increases well above headline inflation.
Electricity prices are now 177% above their level at the start
of the previous decade, whereas consumer prices as a whole
are 68% higher. The MPC forecasts indicate further large
increases in electricity prices, averaging 8.2% for 2021 and
10% for 2022. (This equates to tariff increases of 10% in both
years, but these increases are applied in July rather than at the
start of the calendar year, so the annual numbers are different.)
Percentage change over four quarters

Bread and cereals inflation*
-6
-4
-2

Sources: Stats SA and SARB
* Dotted lines indicate forecasts

Actual

Mar 2019

Sep 2019

Mar 2020

Sep 2020

Rand per litre
Gauteng unleaded petrol price*
Source: Central Energy Fund

* Unleaded 95 octane

US$ per barrel

Jan Mar May Jul Sep Nov Jan Mar Apr May Jul Sep Nov

Evolution of oil price forecasts
Source: SARB

MPC meeting dates

OCTOBER 2020
The outlook for electricity prices is complicated by a range
of court challenges affecting past regulatory decisions. Final
decisions on these matters are still pending, but initial court
judgments have favoured Eskom, and the risks therefore lie
in the direction of electricity inflation rates exceeding current
assumptions. The current National Energy Regulator of South
Africa (NERSA) baseline implies electricity inflation will average
8% in 2021 and 5% in 2022. If all Eskom’s challenges succeed,
electricity inflation will likely average 14.1% in 2021 and 25.9%
in 2022. The current electricity assumptions take a middle path
through these scenarios.
High electricity price inflation tends to reduce household
usage. In recent years, this volume effect has dominated the
price effect, so households’ total expenditure on electricity
has fallen. For this reason, the weight of electricity in the CPI
fell from 4.13% to 3.75% at the start of 2017.27 However, CPI
weights are only revised periodically, typically with no more
than five years between re-weightings. It is uncertain, but
plausible, that continued rapid electricity price inflation will have
depressed electricity consumption further. For this reason, the
most significant downside risk to electricity inflation is that the
weight of electricity in the CPI basket will decline further.
Model determinants of inflation
In the forecasting framework, the COVID-19 event appears as
a large shock which throws the determinants of inflation out
of equilibrium. Over the medium term, these drivers return to
equilibrium, and this allows inflation to stabilise at 4.5%, the
inflation target midpoint, which is also where inflation was
preceding the shock. (Specifically, headline inflation was 4.5%
in January 2020 and 4.6% in February 2020).
In the QPM, the four main factors affecting inflation are the
exchange rate, unit labour costs, the output gap and inflation
expectations.
The exchange rate is a source of immediate inflationary
pressure, given the large and sudden rand depreciation. For the
QPM, the exchange rate affects model outputs inasmuch as it
deviates from its estimated equilibrium value. An undervalued
exchange rate raises inflation, both by boosting import prices
and by encouraging growth through exports. By contrast, an
overvalued exchange rate acts as a brake on foreign demand
and brings down the cost of foreign goods and services,
thereby lowering inflation.
27 By contrast, the price effect dominated between 2008 and 2012, with
electricity’s share in the CPI basket increasing from 1.7% to 4.1%.
Percentage change over 12 months

Electricity prices*
Sources: Stats SA and SARB

Actual

Jul 2020

Sep 2020
* Dotted lines indicate forecasts

R billions
Electricity price risks
* The sum of RCA and court disputes, spread over three years
(maximum impact).
Allowable revenue: 2021/22 based on MYPD4 decision; 2022/23 is an
estimate based on average growth over the prior four years.
Sources: NERSA and SARB


NERSA allowed revenues

Adjustments

2018/19 RCA (reviewed in 2020)

NT bailout

Disputed RCAs
Per cent

Electricity weight in CPI basket

Sources: Stats SA and SARB


OCTOBER 2020
In the model, the rand’s rapid depreciation in March and April of
2020 is interpreted as a large departure from equilibrium, in the
mould of past rand overshoots (2001, 2008/09 and 2015/16).
This excessive depreciation is then reversed as fundamentals
reassert themselves, allowing the rand to recover its equilibrium
over the forecast period. Accordingly, the implied rand/dollar
exchange rate appreciates during the second half of 2020 and
throughout 2021, from a low of R17.93 in the second quarter
(and a daily low of R19.07 for 24 April).
There are two important caveats to this account. The first is
that the rand does not regain its pre-crisis nominal value of
around R14 to the US dollar. The QPM equilibrium is measured
against a weighted basket of currencies, adjusted for inflation
differentials. As South Africa remains a relatively high inflation
country, the nominal exchange rate, consistent with equilibrium,
is always rising. Second, the exchange rate equilibrium also
reflects economic fundamentals, such as commodity prices
and sovereign risk, which change over time. The estimated
exchange rate equilibrium has depreciated quite sharply over
the past six months (down 23%), mainly due to South Africa’s
more adverse risk profile. Accordingly, a portion of the rand’s
nominal weakness is taken to be consistent with fundamentals,
and should not be unwound over the forecast period.
Headline inflation (September 2020 forecasts)
Percentage change over four quarters, March 2020 forecasts in brackets
Actual
Forecast
Actual
Forecast
Weight 2010–2019*
2019*
2020*
2020Q1
2020Q2
2020Q3
2020Q4
2021Q1
2021Q2

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
Per cent

2018 2019 2020 2021 2022
Real effective exchange rate gap forecasts


May 2020

Jul 2020

Sep 2020
Source: SARB
Values <0 imply undervaluations

OCTOBER 2020
For inflation, exchange rate pressure is most intense early
in the forecast period, fading over time as the gap closes.
Although the forecasts anticipated an exchange rate recovery
starting in the second half of 2020, the recovery to date has
been somewhat more robust than projected. For instance, the
May forecast had the rand at R18.40 per dollar in the second
quarter; the actual outcome was R17.93. Offsetting pressure
from the output gap has also served to counter near-term
inflationary pressure.
Unit labour costs measure wage pressures on inflation,
correcting for changes in productivity. The intuition is that
higher wages exert inflationary pressure, but only if they run
ahead of output gains and vice versa. The COVID-19 shock
was unusual in that it initially caused a large increase in unit
labour cost growth, as output declined under lockdown,
falling more than total workforce remuneration. This reversed
almost immediately, however, as output started to recover but
firms moved ahead with cost-saving measures, affecting both
employment and pay. The initial inflationary impulse therefore
gave way to a disinflationary impulse. For this reason, the unit
labour cost gap is negative through 2021 and 2022, driven
by below-inflation growth in the total wage bill, implying a net
disinflationary effect, except in the short term.
If this projection is realised, it would be unusual for South Africa,
where wage agreements have been largely unresponsive to
domestic demand conditions. For instance, in 2009, total
remuneration rose by 8.4% (2.2% adjusted for inflation) despite
a major recession and job losses. By contrast, at present,
neither private nor public sector finances are in a position to
fund further wage growth.
This is consistent with a prolonged negative output gap, which
is the concept in the model which captures weak growth – a
subject discussed in more detail in the real economy chapter.
The September MPC forecasts, in common with other recent
forecasts, show a deeply negative output gap in mid-2020,
which narrows gradually over the rest of the forecast period,
remaining slightly negative at the end of the forecast period.
The initial widening of the output gap is sufficient to override
other short-term inflationary impulses (higher unit labour costs
and a more depreciated exchange rate), and keeps inflation
relatively subdued over the rest of the forecast period.
Inflation expectations play a central role in the QPM. Ultimately,
it is expectations that determine the inflation rate, once the
gaps described above have closed, and so both negative and
positive cost-push pressures are released from the economy.
In South Africa, inflation expectations have been falling since
2017, in line with the MPC’s strategy of steering them closer
to the midpoint of the 3–6% target range. Actual expectations
are now very close to the target midpoint, with current-year
expectations below that target at 3.6% – an all-time low.
Implied rand/US$

Nominal exchange rate*

Source: SARB
* Dotted lines indicate forecasts

Actual

May 2020

Jul 2020

Sep 2020

-4
-2

Forecast
Percentage points

Contributions to unit labour cost gap

Real wage gap

Productivity

Unit labour cost gap

Source: SARB
Percentage of potential GDP

Output gap estimates*
Source: SARB


May 2020

Jul 2020

Sep 2020

OCTOBER 2020
Conclusion
The COVID-19 shock has depressed domestic inflation, bringing
headline inflation below the target band. The shock has been
highly disinflationary relative to previous crisis episodes, and
its main inflationary aspect, currency depreciation, is likely to
be contained. The MPC has responded with significantly lower
interest rates, which will help guide inflation back to the target
over the forecast period.
Per cent

Inflation expectations*

Sources: BER and SARB

Midpoint
3–6% inflation target range

Current year

One year ahead

Two years ahead

Five years ahead
Box 9 Short-term inflation forecasts
Each Monetary Policy Review (MPR) contains an analysis of
forecast accuracy, both as a matter of transparency and to promote
learning from past errors. The COVID-19 shock, however, has
compromised the accuracy of any forecasts older than about March
2020, producing errors that are all too easily explained. Given these
considerations, this box deals instead with the accuracy of the
near-term inflation forecasts. These matter because they shape the
Monetary Policy Committee’s (MPC) policy space: the more inflation
is going to fall, the more leeway there is to ease policy. Furthermore,
it is reasonable to expect short-term inflation projections to cope
with ‘black swan’ events such as COVID-19, at least once they
happen, given frequent data updates and substantial inflationmodelling capacity.
Reviewing the 2020 forecasts, there were of course large errors
in the pre-lockdown period. As of January, inflation for 2020 was
expected to average 4.7% versus current expectations of 3.3%.
Once the COVID-19 shock hit, the South African Reserve Bank’s
(SARB) forecasts fell significantly, as did those of all other analysts.
It now appears they moved too low, at least in the short term:
the lowest point reached for any forecast was 1.8% for the May
consumer price index (CPI), which was 0.3 percentage points below
the actual outcome.
The most important source of error in the forecasts has been oil
prices, both given the initial collapse and the subsequent rebound.
This is the main reason the May forecasts had inflation below the
lower bound of the 3–6% target range for two quarters, whereas in
fact the undershoot lasted only two months: May at 2.1% and June
at 2.2%. The average oil price assumption for 2020 was lowered
from US$66 per barrel (in January) to US$37 (in May) and then
raised to US$42 (in September).
A second significant driver of forecast errors was Statistics South
Africa’s (Stats SA) technique for dealing with prices that were
unobserved or missing under the lockdown. Stats SA imputed these
prices using the headline inflation rate calculated for all other prices.
Given that headline inflation was very low due to the oil price shock,
this created a temporary downturn in core inflation. Core inflation
then rebounded as imputations were scaled back, from 25% of the
basket in April to 4% by August.
Comparison with analysts’ forecasts
Compared with other analysts, there have been some small headline
disagreements recently. The July CPI (3.2%) surprised analysts
(3.0%) somewhat more than it did the SARB (3.1%), while August
(3.1%) was slightly below both SARB (3.2%) and analyst (3.2%)
expectations. The divergence in core inflation has been starker, with
analysts’ expectations below the SARB’s, and also below the June,
July and August outcomes. Based on analysts’ reports, this may
reflect expectations for a more rapid slowdown in housing than has
occurred to date. It is also possible that reduced imputation is to
blame, given the volatility it has created in what is usually quite a
stable series.
For the third and fourth quarters, the SARB’s projections are now
close to those of analysts, with the SARB at 3.2% for the third
quarter and 3.3% for the fourth quarter, compared to the analysts’
projections at 3.1% and 3.3% respectively. For the 2020 annual
inflation outcome, the SARB’s forecasts started the year at 4.7%,
pre-COVID-19, falling to 3.4% by May, and are currently at 3.3%.
The average for analysts has followed a similar trajectory: the
median is now at 3.3%.
In summary, the accuracy of the SARB’s recent near-term forecasts
has been the same as the analyst median, with an identical root
mean square error of 0.12 for the SARB and the analysts median.
The SARB’s near-term forecasts for 2020 have actually been more
accurate than those for the past three years, despite COVID-19
being an unprecedented shock.1 Over the next two years, the
SARB forecast is for slightly faster inflation than is expected by
analysts. The distribution of analyst expectations is skewed to the
bottom half of the target range, with nearly two-thirds of analysts
expecting inflation below 4.5% in 2022; the SARB 2022 projection
is also just below the midpoint at 4.4% for the year. Analysts mostly
do not anticipate target misses in 2021 or 2022, with no forecasts
above 6% for these years, and only one analyst projecting sub-3%
inflation in 2021 (at 2.8% for the year).

The root mean squared error for the near-term forecasts is
0.12 for 2020 year-to-date, compared with 0.15 for 2019, 0.16
for 2018 and 0.14 for 2017. For a more detailed analysis of the
accuracy of recent forecasts, see Box 7 of the April 2020 MPR.

OCTOBER 2020

Jan 2020

Feb 2020

Mar 2020

Apr 2020

May 2020

Jun 2020

Jul 2020

Aug 2020
Per cent

Headline CPI forecasts

Actual

Jan 2020

Feb 2020

Mar 2020

Apr 2020

May 2020

Jun 2020

Jul 2020

Aug 2020

Actual

Jan 2020

Feb 2020

Mar 2020

Apr 2020

May 2020

Jun 2020

Jul 2020

Aug 2020
Per cent

Core inflation forecasts

Jan 2020

Feb 2020

Mar 2020

Apr 2020

May 2020

Jun 2020

Jul 2020

Aug 2020
Percentage points
Headline inflation forecast errors 2020
Percentage points
Core inflation forecast errors 2020

Jan
Feb
Mar
Apr
May
Jun
Jul
Aug


Jan
Feb
Mar
Apr
May
Jun
Jul
Aug


Bloomberg*

SARB

Actual

Bloomberg

SARB
Per cent
Headline CPI forecasts

Percentage points
Headline inflation forecast errors
Per cent
Core inflation forecasts

Bloomberg*

SARB
Percentage points
Core inflation forecast errors

Jan
Feb
Mar
Apr
May
Jun
Jul
Aug

Jan
Feb
Mar
Apr
May
Jun
Jul
Aug

Jan
Feb
Mar
Apr
May
Jun
Jul
Aug

Jan
Feb
Mar
Apr
May
Jun
Jul
Aug


Actual

Bloomberg

SARB
* One-month ahead Bloomberg and Reuters median forecasts have been identical since Jan 2020
Sources: Bloomberg, Stats SA and SARB

OCTOBER 2020
Conclusion
South Africa is recovering from a major global crisis. Although
the COVID-19 shock has been nearly universal, the secondquarter decline in domestic GDP was extremely large,
with South Africa ranking in the bottom seven of the major
economies. (The median for this sample was -35.6%.) South
Africa’s weak performance mainly reflects a hard lockdown,
exacerbated by limited fiscal leeway or capacity to deliver
income support. The economy has since rebounded from this
low base, with high-frequency data showing a better recovery
than was initially anticipated. The most important question now
is whether this recovery can be sustained.
South Africa has several advantages. COVID-19 deaths have
been substantially lower than expected, and also low relative to
other countries’ experiences. On the whole, prices for export
commodities have risen this year and, given a simultaneous
decline in world oil prices, South Africa’s terms of trade have
reached all-time highs.
Furthermore, inflation has slowed significantly in a short
space of time, dropping below the target range despite rand
weakness. In contrast with previous growth slowdowns,
this has left monetary policy with ample scope for lower
interest rates. Accordingly, the MPC has lowered the repo
rate by 275 basis points since March, one of the largest
adjustments in the peer group. In turn, lower borrowing
costs have supported firms, households and government
during a period of intense stress, and are now also driving
new borrowing, particularly by households. The majority of
professional analysts expect domestic inflation to average
less than the 4.5% target midpoint through 2020, 2021 and
2022, implying no urgent need to normalise repo rate settings.

These advantages should not be discounted. The headwinds
to growth, however, are also severe. Electricity shortages
have returned sooner than expected, with load-shedding
resuming in July despite a much lower level of economic
activity. Eskom’s aging generation fleet is producing steadily
less electricity, while requiring more maintenance. Meanwhile,
new capacity remains behind schedule. Load-shedding
is therefore likely to interrupt economic activity for at least
another year.
Percentage change from quarter to quarter
Real GDP growth: second quarter of 2020
Seasonally adjusted and annualised
Sources: Bloomberg, Haver and SARB
-35.6
* 2020Q1, for lockdown
-51.0
Peru
India
UK
Spain
Mexico
Malaysia
South Africa
Argentina
Philippines
Colombia
Hungary
Greece
Portugal
France
Chile
Singapore
Italy
Romania
New Zealand
Belgium
Euro area
Malta
Cyprus
Canada
Turkey
China*
Austria
Median
Brazil
Germany
Thailand
Slovenia
US
Poland
Czech Republic
Netherlands
Russia
Uruguay
Sweden
Slovak Republic
Israel
Japan
Nigeria
Luxembourg
Australia
Indonesia
Latvia
Norway
Ireland
Estonia
Finland
South Korea
Taiwan POC
Hong Kong SAR


OCTOBER 2020
A second obstacle to growth is the strained fiscal position.
Sovereigns have seen debt climb to uncomfortable levels
during this crisis, but South Africa is an outlier, both for the
scale of its borrowing and for its weak starting point. Debt is
now expected to pass 80% of GDP this year and to stay above
this threshold for most of the coming decade, even under an
active consolidation scenario. Reducing debt is rarely easy, but
permitting the fiscal position to deteriorate much further will
sooner or later provoke a crisis. South Africa has little of value
to show for the past 10 years of rapid debt accumulation, and
the contribution of further borrowing to growth should not be
overstated, given the country’s high debt levels.28 Changing
course will nonetheless take a sustained effort.
It is clear that output collapsed under lockdown, and it is more
or less inevitable that it will rebound. How far it will rebound is
unclear. The MPC forecasts show it will only recover to end2019 levels by mid-2023. It could recover faster if constraints
to growth are addressed and confidence improves. Monetary
policy is providing significant support, but low rates would
provide even more stimulus if there were greater certainty
about the economy’s medium-term direction.
28 On this point, see also P Burger and E Calitz, ‘COVID-19: economic
growth and South African fiscal policy’, Stellenbosch Economic Working
Papers WP15/2020, August 2020.

Excess deaths, from COVID-19 or other causes
Source: The Economist

Number of people per 100 000 people
Denmark
Germany
Switzerland
Austria
South Africa
France
Sweden
Portugal
Netherlands
US
Belgium
Chile
Italy
Spain
UK
Ecuador
Peru
Number of analysts

Consensus inflation forecasts*
* Blend between Bloomberg and Reuters forecasts
Sources: Bloomberg, Reuters and SARB
3–6% inflation target range
<3%
6%<

<2.5
<3.0
<3.5
<4.0
<4.5
<5.0
<5.5
<6.0
<6.5
Median:
4.1%
Median:
3.3%
Median:
4.4%
Target
Inflation rate (percentage change over 12 months)

OCTOBER 2020
Statement of the Monetary Policy Committee
14 April 2020
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Global growth in the QPM is a trade-weighted average. This is now at -2.6% for 2020 and 4% for 2021.
Since the March meeting of the Monetary Policy Committee
(MPC), the COVID-19 pandemic has spread globally, with its
impact being felt in all economies. Current estimates from
the International Monetary Fund (IMF) show global growth
contracting by about 2.9% this year.1 Economic contractions
are expected to be deepest in the second quarter of 2020,
with some recovery expected in the third quarter of the year.
The strength of the recovery into the fourth quarter and
2021 will depend on how quickly countries are able to open
up for economic activity safely, requiring sustainable social
distancing rules, safety processes put in place by businesses
and public institutions, and the capacity of hospitals to
accommodate those in need. Current indications from
the World Health Organization are that the pandemic is
unlikely to end quickly, with shorter, less virulent waves
hitting over time.
The uncertainties of the crisis have led to extremely high
volatility in financial asset prices, with sharp and deep
market sell-offs followed by a partial recovery. At this stage,
the sustainability of that recovery remains uncertain, and
global markets remain in risk-off mode. This has implications
for emerging markets and South Africa in particular, as
investor appetite for rand-denominated equities and bonds
is expected to remain weak.
Policy responses to the crisis have generally been robust, with
the magnitudes dependent on the degree of policy space
available to countries. The United States Federal Reserve has
taken further steps to expand its balance sheet. The European
Central Bank (ECB) has made similar commitments. Emerging
and developing economies generally have less policy space
available and credit is more expensive, and for this reason,
the International Financial Institutions (the IMF, the World
Bank) and others have made available extraordinary levels of
emergency financial support.
The COVID-19 outbreak will have a major health and
social impact, and forecasting domestic economic activity
presents unprecedented uncertainty. With that in mind, the
South African Reserve Bank (SARB) expects gross domestic
product (GDP) to contract by 6.1% in 2020, compared to the
-0.2% expected just three weeks ago. GDP is expected to
grow by 2.2% in 2021 and by 2.7% in 2022.
South Africa’s lockdown has been extended by an additional
14 days, bringing the total lockdown period to 35 days.
Both the supply and demand effects of this extension reduce
growth and deepen it in the short term, as businesses
stay closed for longer and households with income spend
less. This will likely also increase job losses, with further
consequences for aggregate demand. The impacts will be
particularly severe for small businesses and individuals with
earnings in the informal sector.
Some factors will support growth, including where
businesses are able to open under the current rules, new jobs
being created to service more needs under the lockdown,
and sustained government spending, both through normal
operations and crisis-related spending and programmes.
The faster the global economy recovers from the crisis, as
China appears to be gradually doing now, the more positive
growth spillovers will strengthen for South Africa, including
healthy price levels for commodity exports.
Nonetheless, prices for many commodities have fallen as a
result of weaker demand globally. The spot price for Brent
crude oil is currently around US$31 per barrel, despite a new
agreement reached by the Organization of the Petroleum
Exporting Countries (OPEC) and other producers to make
large oil production cuts. According to the SARB’s forecast,
the Brent crude oil price is expected to average US$42 per
barrel in 2020 and US$45 per barrel in 2021, very close to
the March forecast.
As noted earlier, while advanced economies conduct
exceptionally accommodative policies, global financing
conditions are no longer supportive of emerging market
currency and asset values. Credit risk has risen back to
2008 levels and about R100 billion of local assets have been
sold by non-resident investors. The rand has depreciated
by 22.6% against the US dollar since January and by
17.3% since the March meeting of the MPC. The implied
starting point for the rand forecast is R17.80 to the US dollar,
compared with R15.40 at the time of the previous meeting.
Slightly lower oil prices and sharply lower domestic growth
pulls down on the inflation forecast, while negative global
sentiment and fiscal risks have led to equally aggressive
currency depreciation and upside pressure on inflation. The
timing and size of these contradictory impulses suggests
that they are not perfectly offsetting, with weaker inflation in
the near term likely to give way to higher inflation later in the
forecast period.

OCTOBER 2020
The Bank’s headline consumer price inflation forecast
averages 3.6% in 2020, 4.5% in 2021 and 4.4% in 2022.
The forecast for core inflation is lower at 3.8% in 2020, 4.0%
in 2021 and 4.2% in 2022.
The overall risks to the inflation outlook at this time appear
to be to the downside. Electricity pricing remains a concern
but has moderated somewhat. Risks to inflation from
recent currency depreciation are expected to be muted as
pass-through is slow. Global producer price inflation has
decelerated. Lower oil prices will reduce petrol prices in the
near term. International food prices have eased and local
food price inflation is expected to remain low, in part due to
higher domestic production levels.
Expectations of future inflation broadly remain around the
midpoint of the band, although market-based expectations
have recently ticked up in response to the depreciation of
the currency.2
Weaker domestic growth and greater fiscal risks have
resulted in a downgrade by credit rating agency Moody’s
Investors Service and the confirmation of a negative outlook
by Fitch Ratings, as well as a weaker currency and higher
borrowing costs for government, banks and firms. South
Africa’s risk profile has increased.
Despite this rise in country risk, the Committee notes that
the more prolonged lockdown and slower recovery creates
downside risk to inflation and allows further space for
monetary policy to respond to the virus-induced demand
shock to the economy. Barring severe and persistent
currency and oil shocks, inflation is expected to be well
contained, remaining below the midpoint of the target in
2020 and close to the midpoint in 2021.
Against this backdrop, the MPC decided to cut the
repurchase (repo) rate by 100 basis points. This takes the
repo rate to 4.25% per annum, with effect from 15 April
2020. The decision was unanimous.
The implied path of policy rates over the forecast period
generated by the Quarterly Projection Model (QPM) indicates
five repo rate cuts of 25 basis points extending into the first
quarter of 2021.
Monetary policy can ease financial conditions and improve
the resilience of households and firms to the economic
implications of COVID-19. In addition to the continued
easing of interest rates, the SARB has taken steps to ensure
adequate liquidity in money and government bond markets,
and to ease capital requirements to free capital for onlending

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%) in
2020, 4.6% (from 4.7%) in 2021 and 4.5% (from 4.6%) in 2022. Market-based rates are calculated from the break-even inflation rate, which is the yield
differential between conventional and inflation-linked bonds. These are at 4.7% for the 5-year and well over 6% for the 10-year break-even inflation rate.
by financial institutions. Each of these steps makes more
capital available to households and firms.
Monetary policy, however, cannot on its own improve the
potential growth rate of the economy or reduce fiscal risks.
These should be addressed by implementing prudent
macroeconomic policies and structural reforms that lower
costs generally and increase investment opportunities,
potential growth and job creation. Such steps will further
reduce existing constraints on monetary policy and its
transmission to lending.
Global economic and financial conditions are expected
to remain highly volatile for the foreseeable future. In this
highly uncertain environment, future 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. 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 (April 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

OCTOBER 2020
Summary of assumptions: Monetary Policy Committee
meeting on 14 April 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 66 and 67.

OCTOBER 2020
Summary of selected forecast results: Monetary Policy Committee meeting
on 14 April 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.

OCTOBER 2020
Statement of the Monetary Policy Committee
21 May 2020
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Global growth in the QPM is a trade-weighted average. This is now at -3.4% for 2020 and 4.3% for 2021.

About 57 countries have been granted funds from the IMF’s Rapid Financing Instrument and the Rapid Credit Facility.

This is measured by the spread between the R2036 and R2048 to the R186 bonds.
Since the April meeting of the Monetary Policy Committee
(MPC), the COVID-19 pandemic has continued to spread
globally, with wide-ranging and deep social and economic
effects. Current forecasts from the International Monetary
Fund (IMF) show global gross domestic product (GDP)
decreasing by about 3.0% this year.1 Economic contractions
are expected to be deepest in the second quarter of 2020,
with gradual recoveries in the third and fourth quarters of
the year. The strength of the global economic recovery will
depend in part on how quickly countries are able to open up
for economic activity safely, and in particular how effectively
societies comply with social distancing rules. The World
Health Organization advises that further complications from
the virus are being identified and the pandemic is unlikely to
end quickly, with the virus coming in waves over time.
The crisis has caused extreme volatility in financial asset
prices, with sharp and deep market sell-offs followed
recently by a partial recovery. Investor interest in higher-
yielding assets has improved somewhat in recent days,
but the general environment reflects pronounced levels of
risk aversion, in particular for emerging market currencies,
equities and bonds. Uncertainty about future global
economic prospects, trade relationships and supply chains
has increased again.
Policy responses to the crisis have generally been robust,
with the magnitudes dependent on the degree of policy
space available to countries. The United States Federal
Reserve has taken further steps to expand its balance
sheet and the European Central Bank (ECB) has made
similar commitments. Emerging and developing economies
generally have less policy space available and credit is more
expensive. The International Financial Institutions (IFIs) have
made available extraordinary levels of emergency financial
support to respond to COVID-19.2
The COVID-19 outbreak has major health, social and
economic impacts, presenting challenges in forecasting
domestic economic activity. The compilation of accurate
economic statistics will also remain severely challenged.
The South African Reserve Bank (SARB) currently expects
GDP to contract by 7.0% in 2020, compared to the 6.1%
contraction forecast in April. Even as the lockdown is relaxed
in the coming months, for the year as a whole, investment,
exports and imports are expected to decline sharply. Job
losses are also expected to be widespread.
Easing of the lockdown will support growth in the near term
and some high frequency activity indicators show a pickup
in spending from extremely low levels. However, getting
back to pre-pandemic activity levels will take time. GDP is
expected to grow by 3.8% in 2021 and by 2.9% in 2022.
South Africa’s terms of trade remain robust. Commodity
export prices have eased in recent weeks, but are still at
healthy levels. Oil prices remain generally low. The spot price
for Brent crude oil is currently around US$34 per barrel, and
is expected to remain around these levels in the coming
months, contributing to reduced petrol price inflation. For
the SARB’s forecast, the Brent crude oil price is expected
to average US$37 per barrel in 2020 and US$45 per barrel
in 2021.
Exceptionally accommodative policies and the relaxation of
lockdowns in many advanced economies have supported
a partial recovery in global financial markets, but financing
conditions for emerging markets remain uncertain.
Domestically, credit risk associated with public borrowing
needs remains very high, contributing to non-resident
investors’ sales of about R149 billion of local currencydenominated assets.
The rand has depreciated by 22.9% against the US dollar
since January and by 0.7% since the April meeting of the
MPC. The implied starting point for the rand forecast is
R18.40 to the US dollar, compared with R17.80 at the time
of the previous meeting. Resident investors have increased
purchases of long-term bonds, helping to ease yields in
recent days, but the yield curve remains exceptionally
steep.3
The SARB’s headline consumer price inflation forecast
averages 3.4% in 2020 and 4.4% in 2021 and 2022. The
forecast for core inflation is lower at 3.5% in 2020, 3.8% in
2021 and 4.1% in 2022.
The overall risks to the inflation outlook at this time appear
to be to the downside, but less clearly so compared to
conditions in March and April. Global producer price and
food inflation appear to have bottomed out. Oil prices remain
low but have recovered somewhat. Local food price inflation
is also expected to remain contained. Risks to inflation from
currency depreciation are expected to stay muted, while
pass-through remains slow. However, electricity and other
administered prices remain a concern. Upside risks to

OCTOBER 2020
inflation could also emerge from heightened fiscal risks and
sharp reductions in the supply of goods and services.
Expectations of future inflation continued to soften,
but remain broadly around the midpoint of the band.
Market-based expectations for short- and medium-term
inflation have fallen, while long-term inflation expectations
remain higher.4
Despite sustained higher levels of country financing risk,
the Committee notes that the economic contraction and
slow recovery will keep inflation well below the midpoint
of the target range for this year. Barring the inflation risks
outlined earlier, inflation is expected to be well contained
over the medium term, remaining close to the midpoint in
2021 and 2022.
Against this backdrop, the MPC decided to cut the
repurchase (repo) rate by 50 basis points, taking it to 3.75%
per annum, with effect from 22 May 2020. Three members
preferred a cut of 50 basis points and two preferred a cut of
25 basis points.
The implied path of policy rates over the forecast period
generated by the Quarterly Projection Model (QPM)
indicates two repo rate cuts of 25 basis points in the next
two quarters of 2020.
Monetary policy can ease financial conditions and improve
the resilience of households and firms to the economic
implications of COVID-19. In addition to the continued
easing of interest rates, the SARB has eased regulatory
requirements on banks and taken important steps to ensure
adequate liquidity in domestic markets. These actions are
intended to free up more capital for lending by financial
institutions to households and firms.
Monetary policy, however, cannot on its own improve the
potential growth rate of the economy or reduce fiscal risks.
These should be addressed by implementing prudent
macroeconomic policies and structural reforms that lower
costs generally and increase investment opportunities,
potential growth and job creation. Such steps will further
reduce existing constraints on monetary policy and its
transmission to the broader economy.
Global economic and financial conditions are expected
to remain volatile for the foreseeable future. In this highly
uncertain environment, future decisions will continue to be
data-dependent and sensitive to the balance of risks to
the outlook.

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 3.5% (from
4.2%) in 2020, 4.1% (from 4.6%) in 2021 and to remain unchanged at 4.5% in 2022. Market-based rates are calculated from the break-even inflation rate,
which is the yield differential between conventional and inflation-linked bonds. These are at 2.5% for the 5-year, 5% for the 10-year and 6.4% for the 15year break-even inflation rate.
The MPC will seek to look through temporary price shocks
and focus on second-round effects. As usual, the repo rate
projection from the QPM remains a broad policy guide,
changing from meeting to meeting in response to new data
and risks.
Per cent

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

OCTOBER 2020
Summary of assumptions: Monetary Policy Committee
meeting on 21 May 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 66 and 67.

OCTOBER 2020
Summary of selected forecast results: Monetary Policy Committee meeting
on 21 May 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.

OCTOBER 2020
Statement of the Monetary Policy Committee
23 July 2020
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Global growth in the QPM is a trade-weighted average of South Africa’s trading partners. This is now at 4.7% for 2020 and 4.3% for 2021. The IMF
expects global growth of 5.4% in 2021.

About 72 countries have been granted funds from the IMF’s Rapid Financing Instrument and the Rapid Credit Facility.

This is compared to 3.8% and 2.9% respectively in May.

This is measured by the spread between the R2036 and R2048 to the R186 bonds.
Since the May meeting of the Monetary Policy Committee
(MPC), the COVID-19 pandemic has continued to
spread globally, with wide-ranging and deep social and
economic effects. Current forecasts from the International
Monetary Fund (IMF) show global gross domestic product
(GDP) contracting by about 4.9% this year.1 Economic
contractions are expected to be deepest in the second
quarter of 2020, The deepest contractions are expected in
the second quarter of 2020, with gradual recoveries in the
third and fourth quarters of the year. The strength of the
global economic recovery will depend in part on the control
of new virus outbreaks, the extent of supply and demand
losses, and expectations of future growth in investment and
productivity.
The crisis has caused extreme volatility in financial asset
prices, with sharp and deep market sell-offs followed by a
partial recovery. Investor appetite has generally improved,
reflected in a weaker US dollar and stronger capital flows
to emerging markets. However, the general environment
continues to reflect pronounced levels of risk aversion due
to uncertainty about future global economic prospects.
Policy responses to the crisis have generally been robust.
This week the European Union agreed to a large, targeted
stimulus package primarily to support investment. Other
monetary and fiscal authorities continue to provide
accommodation and support. Emerging and developing
economies are generally constrained by less policy space,
currency risk and tight global financial conditions. The
International Financial Institutions (IFIs) continue to make
available extraordinary levels of emergency financial support
to respond to the pandemic.2
The COVID-19 outbreak has major health, social and
economic impacts, presenting challenges in forecasting
domestic and global economic activity. The compilation
of accurate economic statistics will also remain severely
challenged.
The South African Reserve bank’s (SARB) second-quarter
estimate for output has been revised lower. The SARB
currently expects GDP to contract by 7.3% in 2020,
compared to the 7.0% contraction forecast in May. Even as
the lockdown is relaxed in the coming months, for the year
as a whole, investment, exports and imports are expected to
decline sharply. Job losses are also expected to rise further.
Easing of the lockdown has supported growth in recent
weeks and high frequency activity indicators show a pickup
in spending from extremely low levels. However, getting
back to pre-pandemic activity levels will take time. GDP is
expected to grow by 3.7% in 2021 and by 2.8% in 2022.3
South Africa’s terms of trade and commodity export prices
remain high. While oil prices are generally low, they have
increased since the May MPC meeting. The Brent crude
oil price is expected to average about US$40 per barrel in
2020, rising to US$45 per barrel in 2021 and US$50 per
barrel in 2022.
Exceptionally accommodative policies and the relaxation of
lockdowns in many advanced economies have supported
a partial recovery in global financial markets. However,
financing
conditions
for
emerging
markets
remain
uncertain, contributing to currency weakness. The rand has
depreciated by 15.2% against the US dollar since January
and appreciated by 8.8% since the May meeting of the
MPC. The implied starting point for the rand forecast is
R17.93 to the US dollar, compared with R18.40 at the time
of the previous meeting.
Resident investors have increased purchases of long-term
bonds, helping to ease yields in recent weeks. However,
the yield curve is exceptionally steep, reflecting credit risk
associated with high public borrowing needs.4
The SARB’s headline consumer price inflation forecast
averages 3.4% in 2020 and is marginally lower than
previously forecast at 4.3% in 2021 and 2022. The forecast
for core inflation is lower at 3.3% in 2020, and remains
broadly stable at 3.9% in 2021 and 4.1% in 2022.
The overall risks to the inflation outlook at this time appear
to be balanced. Global producer price and food inflation
appear to have bottomed out. Local food price inflation is
expected to stay contained. Risks to inflation from currency

OCTOBER 2020
depreciation are expected to be muted, while pass-through
remains low. However, electricity and other administered
prices continue to be a concern. Upside risks to inflation
could also emerge from heightened fiscal risks and sharp
reductions in the supply of goods and services.
Expectations of future inflation continued to soften for this
year but are broadly stable around the midpoint of the target
band for 2021. Market-based expectations for short- and
medium-term inflation have eased slightly, while long-term
inflation expectations are higher.5
Despite sustained higher levels of country financing risk, the
Committee notes that the economic contraction and slow
recovery will keep inflation well below the midpoint of the
target range for this year. Barring the risks outlined earlier,
inflation is expected to be well contained over the medium
term, remaining close to the midpoint in 2021 and 2022.
Against this backdrop, the MPC decided to cut the
repurchase (repo) rate by 25 basis points, taking it to 3.50%
per annum, with effect from 24 July 2020. Three members
preferred a cut of 25 basis points and two preferred to keep
rates on hold.
The implied path of policy rates over the forecast period
generated by the Quarterly Projection Model (QPM) indicates
one repo rate cut of 25 basis points in the fourth quarter of
2020, remaining unchanged in the first quarter of 2021.
Monetary policy can ease financial conditions and improve
the resilience of households and firms to the economic
implications of COVID-19. In addition to the continued
easing of interest rates, the SARB has relaxed regulatory
requirements on banks and taken important steps to ensure
adequate liquidity in domestic markets. These actions are
intended to free up more capital for lending by financial
institutions to households and firms.
As indicated previously, monetary policy cannot on its own
improve the potential growth rate of the economy or reduce
fiscal risks. These should be addressed by implementing
prudent macroeconomic policies and structural reforms that
lower costs generally and increase investment opportunities,
potential growth and job creation. Such steps will enhance
the effectiveness of monetary policy and its transmission to
the broader economy.
Global economic and financial conditions are expected
to remain volatile for the foreseeable future. In this highly
uncertain environment, future decisions will continue to be

The latest Bureau for Economic Research (BER) survey has expectations for 2020 down by 0.5 percentage points to 3.9% and to 4.5% (from 4.6%) for
2021. Five-year-ahead inflation expectations also remained at 4.7%. Household inflation expectations rose from 4.8% to 6.2%. Market analysts (Reuters
Econometer) expect inflation to be 3.4% (from 3.5%) in 2020, 4.1% (unchanged) in 2021 and 4.3% in 2022 (from 4.5%). Market-based rates are calculated
from the break-even inflation rate, which is the yield differential between conventional and inflation-linked bonds. These are at 2.5% for the 5-year, 4.8%
for the 10-year and 6% for the 15-year break-even inflation rate.
data-dependent and sensitive to the balance of risks to
the outlook. The MPC will seek to look through temporary
price shocks and focus on second-round effects. As usual,
the repo rate projection from the QPM remains a broad
policy guide, changing from meeting to meeting in response
to new data and risks.
Per cent

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

OCTOBER 2020
Summary of assumptions: Monetary Policy Committee
meeting on 23 July 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 66 and 67.

OCTOBER 2020
Summary of selected forecast results: Monetary Policy Committee meeting
on 23 July 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.

OCTOBER 2020
Statement of the Monetary Policy Committee
17 September 2020
Issued by Lesetja Kganyago, Governor of the South African Reserve Bank,
at a meeting of the Monetary Policy Committee in Pretoria

Global growth in the QPM model is a trade-weighted average of South Africa’s trading partners. For 2020 this is now at -4.2% (up from -4.7% in July)
and revised up to 4.7% in 2021. Based on the June update of the World Economic Outlook, the IMF expects global growth of 5.4% in 2021.

Compared to -7.0%, 3.8% and 2.9% respectively in July.

This is measured by the spread between the R2036 and R2048 to the R186 bonds.
Since the July meeting of the Monetary Policy Committee
(MPC), the COVID-19 pandemic has abated in South Africa.
A range of other countries, however, continue to experience
a rapid spread of the virus. The economic effects of the
crisis have been extensive and a recovery to pre-pandemic
levels will take several years. Current forecasts from the
International Monetary Fund (IMF) show global gross
domestic product (GDP) contracting by about 4.9% this
year, although the general economic outlook has improved
somewhat.1 Second-quarter GDP outcomes for most
economies have been massively negative, as expected. At
this stage, third- and fourth- quarter recoveries for 2020 are
expected to be robust. However, the pace of growth into
2021 could be modest, depending on control of new virus
outbreaks, the extent of supply and demand losses, and
future growth in investment and productivity.
Volatility in financial asset prices remains high, as virus
developments and geopolitical events continue to impact
heavily on market sentiment. While capital flows to emerging
markets have generally picked up compared to the outflows
experienced in March and April, the global environment
continues to reflect pronounced levels of risk aversion.
Policy responses to the crisis have generally been robust
across countries. In recent months, many fiscal and
monetary authorities have opted to wait for new data to
gauge conditions and assess the speed of economic
recovery before making further adjustments.
The COVID-19 outbreak has had major health, social and
economic impacts, presenting difficulties in forecasting
domestic and global economic activity. The compilation of
accurate economic statistics has and will remain severely
challenged. On 8 September 2020, Statistics South Africa
released its estimate of second-quarter growth in GDP
and revised the first-quarter figure slightly. As expected,
output was severely negative, with seasonally adjusted and
annualised quarterly GDP contracting by 51% across all
sectors except agriculture, which expanded.
The South African Reserve Bank (SARB) now forecasts a
GDP contraction of 8.2% in 2020, compared to the 7.3%
contraction forecast in July. The lower second quarter is
followed by revised projections of a stronger expansion in
the third and fourth quarters of 2020.
Further easing of the lockdown has supported economic
growth. High-frequency indicators generally show a pickup
in economic activity from extremely low levels in April and
May. However, getting back to pre-pandemic output levels
will take time. With a sharp decline in investment, potential
growth estimates have been lowered, resulting in a smaller
output gap over the forecast period. GDP is expected to
grow by 3.9% in 2021 and by 2.6% in 2022.2
South Africa’s terms of trade remain robust. Commodity
export prices are high, while oil prices remain generally
low. The Brent crude oil price increased between July
and September, and is expected to average about
US$42 per barrel in 2020, rising to US$47 per barrel in 2021
and US$52 per barrel in 2022.
The rand has depreciated by 14.5% against the US dollar
since January and remains below its estimated long-run
equilibrium value, despite considerable appreciation since
June. The implied starting point for the rand forecast is
R17.07 to the US dollar, compared with R17.93 at the time of
the previous meeting.
Risks to the growth outlook are assessed to be balanced,
but this is tentative and open to adjustments given the wide
range of shocks hitting the economy, uncertainties involving
the effectiveness of policy, and the sensitivity of sentiment
to news flow.
The exceptionally accommodative policies in many
advanced economies and improved economic outlooks
have supported a partial recovery in global financial markets.
But this has so far resulted in only a trickle of fresh capital
flows to emerging markets, and financing conditions remain
uncertain.
The sharp rise in South Africa’s public financing needs arising
from falling tax revenue and higher spending has been
financed by higher private sector savings and borrowing
from international financial institutions. Alongside the SARB’s
liquidity-management
operations,
resident
investors,
including banks, have increased purchases of sovereign
bonds, helping to ease yields in recent weeks. However, the
yield curve remains exceptionally steep, reflecting ongoing
credit risk associated with high public borrowing needs.3
The SARB’s headline consumer price inflation forecast
averages 3.3% in 2020 and is lower than previously forecast

OCTOBER 2020
at 4.0% in 2021 and at 4.4% in 2022. The forecast for core
inflation is lower at 3.4% in 2020, and remains broadly stable
at 3.7% in 2021 and 4.0% in 2022.
The overall risks to the inflation outlook at this time appear
to be balanced. Global producer price and food inflation
have bottomed out. Oil prices remain low. Local food price
inflation is expected to remain contained. Risks to inflation
from currency depreciation are expected to stay muted while
pass-through remains low. While there are no demand-side
pressures evident, electricity and other administered prices
remain a concern. Additional exchange rate pressures could
result from heightened fiscal risks.
Importantly, expectations of future inflation continued to
soften this year and have shifted slightly below the midpoint
of the target band for 2021. Market-based expectations for
short- and medium-term inflation have eased slightly, while
longer-term inflation expectations remain higher.4
Despite a higher-than-expected inflation outcome in July
and elevated levels of country financing risk, the Committee
notes that the economic contraction and slow recovery will
keep inflation below the midpoint of the target range for this
year. Barring the risks outlined earlier, inflation is expected to
be well contained over the medium term, remaining below
but close to the midpoint in 2021 and 2022.
Against this backdrop, the MPC decided to keep rates
unchanged at 3.5% per annum. Two members of the
Committee preferred a 25 basis point cut and three preferred
to hold rates at the current level.
The implied policy rate path of the Quarterly Projection
Model (QPM) indicates no further repurchase (repo) rate
cuts in the near term, and two rate increases in the third and
fourth quarters of 2021.
Monetary policy has eased financial conditions and
improved the resilience of households and firms to the
economic implications of COVID-19. The SARB has taken
important steps to ensure adequate liquidity in domestic
markets. Regulatory capital relief has also been provided,
sustaining lending by financial institutions to households
and firms.
Monetary policy, however, cannot on its own improve the
potential growth rate of the economy or reduce fiscal risks.
These should be addressed by implementing prudent
macroeconomic policies and structural reforms that lower
costs generally and increase investment opportunities,
potential growth and job creation. Such steps will enhance
the effectiveness of monetary policy and its transmission to
the broader economy.

The latest Bureau for Economic Research (BER) survey has expectations for 2020 down by 0.3 percentage points to 3.6% and to 4.2% (from
3.9% and 4.5%) for 2021. Five-year-ahead inflation expectations eased from 4.7% to 4.5%. Household inflation expectations are down from 6.2% to
5.9%. Market analysts (Reuters Econometer) expect inflation to be 3.3% (from 3.1%) for 2020, 4.2% (from 4.0%) in 2021 and 4.4% (from 4.3%) in 2022.
Market-based rates are calculated from the break-even inflation rate, which is the yield differential between conventional and inflation-linked bonds.
These are at 3.3% for the 5-year, 5.5% for the 10-year and 6.4% for the 15-year break-even inflation rate.
Global economic and financial conditions are expected
to remain volatile for the foreseeable future. In this highly
uncertain environment, future decisions will continue to be
data-dependent and sensitive to the balance of risks to the
outlook. The MPC will seek to look through temporary price
shocks and focus on second-round effects. As usual, the
repo rate projection from the QPM remains a broad policy
guide, changing from meeting to meeting in response to
new data and risks.
Per cent

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

OCTOBER 2020
Summary of assumptions: Monetary Policy Committee
meeting on 17 September 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 66 and 67.

OCTOBER 2020
Summary of selected forecast results: Monetary Policy Committee meeting
on 17 September 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.

OCTOBER 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.

OCTOBER 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.

OCTOBER 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

OCTOBER 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.

OCTOBER 2020
Abbreviations
AE
advanced economy
BER
Bureau for Economic Research
CPI
consumer price index
COVID-19 coronavirus disease 2019
CSIR
Council for Scientific and Industrial Research
DM
developed market
ECB
European Central Bank
EM
emerging market
Fed
United States Federal Reserve
FRA
forward rate agreement
FX
foreign exchange
G3
Group of Three (United States, euro area, Japan)
G4
Group of Four (United States, euro area, Japan, United Kingdom)
GDP
gross domestic product
GPM
Global Projection Model
IMF
International Monetary Fund
MPC
Monetary Policy Committee
MPR
Monetary Policy Review
MYPD4
Fourth Multi-Year Price determination
NAAMSA National Association of Automobile Manufacturers of South Africa
NERSA
National Energy Regulator of South Africa
NT
National Treasury
OER
owners’ equivalent rent
PCE
personal consumption expenditure
PMI
Purchasing Managers’ Index
PPP
purchasing power parity
QPM
Quarterly Projection Model
RCA
regulatory clearing account
repo
repurchase [rate]
SANRAL South African National Roads Agency Limited
SARB
South African Reserve Bank
SARS
South African Revenue Service
SIT
services, income and current transfer
Stats SA
Statistics South Africa
UAE
United Arab Emirates
UK
United Kingdom
US
United States
WGBI
World Government Bond Index