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South Africa Aims to Avoid Recession


South Africa's central bank may take action this week to spur the country's economy and avoid a recession. On Thursday, Reserve Bank Governor Tito Mboweni is expected to announce a cut in a key interest rate, possibly by as much as one percent.

Among those following developments is David Shapiro, vice-chairman of Sasfin Securities. From Johannesburg, he spoke to VOA English to Africa Service reporter Joe De Capua about the likelihood of a major cut in the rate, which current stands at 11.5 percent.

"It's still uncertain. I think the market is discounting one percent. I think half a percent is in the bag. But I think the economic indicators that have come out – if we look at the state of the global economy – there's no reason why…the central bank governor can't accelerate the rate cut and give us one percent," he says.

Shapiro says South Africa's economy has slowed down and there are some risks lying ahead that could prompt Mboweni to act.

"What concerns him," says Shapiro, "is no longer inflation, even though our inflation rate is pretty high, it's going to come down quite dramatically into the future…but the worry is the currency. And I think that he needs to maintain the currency at a reasonable level and not allow it to weaken too much. Otherwise, it is inflationary…. Although it's not his mandate to look at the rand, he's got to keep a fair balance between the currency and the economy."

It's a balance not easy to maintain. Shapiro says, "It's very, very difficult to manage and I think anybody who's in the currency market can quickly lose their reputation by making forecasts. So, I think that there is still a very positive interest rate here for people who are looking for high yield.… It has been one of the attractions for foreign income to flow in here. If he reduces interest rates too much, we could have an outflow of that capital."

While the United States and many other countries are in a recession, Shapiro says, so far, South Africa is not.

"I think that our finance minister…has gone on record as saying that we will not go into a recession," he says.

South Africa's financial institutions did not fall prey to the same practices that damaged or ruined many US financial institutions.

"Our banks have managed themselves considerably better than foreign counterparts. And part of the reason is that we introduced an act called the National Credit Act, which controlled the issuing of credit. Therefore, our banks were much better behaved," he says.

While South African banks will increase the amount of bad debts they have, such as falling property markets, Shapiro says the debt is "manageable and it's not going to throw banks into the red."

South Africa may feel the effects of the global economic crisis in the commodities sector. 'We're a big commodity exporter and commodity prices have halved over the last year. So, we are going to feel strain in that area and we're likely to let go a lot of jobs in that area. Manufacturing has also come down," he says.

Still, his outlook is upbeat. "Where South Africa has an advantage is that about four years ago, we announced an infrastructural development program…. We started to put money aside to spend on infrastructure, not only to increase our productive capacity and industrial efficiency, but also to create jobs. And that's in full swing now," he says.

He also sees some benefit from next year's World Cup, which is being held in South Africa. Shapiro says the World Cup has "fast tracked" a number of infrastructure projects. Also, the influx of football fans is expected to give a short-term boost to the economy next June or July.

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