Bloomberg News

South Africa’s Risk of Stagflation Rising, Marcus Says

November 16, 2011

(Updates Marcus comments from radio interview in ninth paragraph.)

Nov. 15 (Bloomberg) -- South African Reserve Bank Governor Gill Marcus said there is a risk of stagflation in the domestic economy as price pressures increase and the economic recovery remains weak.

While it’s uncertain how long the global slowdown will last given the European debt crisis, the Monetary Policy Committee isn’t taking into account a “meltdown” in the euro-region in the bank’s growth forecasts, Marcus said in a speech in Johannesburg today.

The central bank held its benchmark interest rate at a 30- year low of 5.5 percent last week to support the economy’s recovery as a weaker rand boosts import costs. Inflation, which reached 5.7 percent in September, is forecast by the bank to exceed the 3 percent to 6 percent target range this quarter and remain outside the band until the fourth quarter of 2012.

“The combination of rising inflation and sluggish domestic growth holds the risk of a stagflationary environment,” Marcus said. “Monetary policy will maintain its focus on achieving the inflation target over the medium term, but will remain sensitive to the domestic economic situation.”

The debt crisis in Europe, which buys about a third of South African manufactured goods, is threatening to derail the global economic recovery. The Reserve Bank lowered its forecast for domestic growth last week to 3 percent for 2011 and 3.2 percent for next year.

‘Challenging Times’

“These are indeed very challenging times, a time of great uncertainty,” she said.

Marcus said there is still underlying support for the rand even though the currency has declined 19 percent against the dollar this year. The rand dropped 1.3 percent to 8.1295 per U.S. dollar today at 4:19 p.m. in Johannesburg.

“These exchange rate developments have implications for monetary policy,” the governor said. “The exchange rate is now seen to impart an upside risk to the inflation outlook.”

South Africa is missing out on a global mining boom as investors raise concerns about a lack of certainty in domestic mining policy, Marcus said in separate comments broadcast on Johannesburg-based Talk Radio 702 today.

African National Congress Youth League President Julius Malema has called for the nationalization of mines and banks to help redistribute wealth. President Jacob Zuma, who is leader of the ruling party, said on Oct. 3 that nationalization of mines is not the government’s policy.

Mining output dropped 5.4 percent in September from a year earlier, while gold production plunged 9 percent, Statistics South Africa said on Nov. 10. A decline in output in the second quarter contributed to the economy expanding 1.3 percent in the second quarter, the slowest pace in about two years.

Even with higher prices for gold and other commodities, “we’re missing that again, because we’re not getting the goods out of the ground,” Marcus said. “If we are in the middle of a boom and mining is declining by almost 5.5 percent then we’ve got to look at our policies.”

--Editors: Nasreen Seria, Hilton Shone

To contact the reporters on this story: Andres R. Martinez in Johannesburg at amartinez28@bloomberg.net; Franz Wild in Johannesburg at fwild@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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