Marcus warns of ‘great danger’

Gill Marcus, the governor of the Reserve Bank, warned last week that the global economy was in a “very, very precarious situation” as Europe was heading into a perfect storm and the impact at home would be felt in reduced trade, lower commodity prices and weak growth.

Marcus, addressing the National Union of Metalworkers of SA (Numsa) gala dinner in Durban last week, said: “You are meeting at a time of the greatest danger that the world is facing since 1929.”

But her message appeared to fall largely on deaf ears as delegates continued chatting while she spoke, prompting Irvin Jim, Numsa’s general secretary, to interrupt her in order to ask delegates to be quiet.

Marcus left the dinner without participating in a scheduled question and answer session. The Reserve Bank did not respond on Friday for clarity on this. Marcus did comment, when Jim intervened, on the disrespect she was shown.

But Jim said on Friday that there was no disrespect, as the chatter was because a section of the hall could not hear her.

To those who were listening to her speech, Marcus said the main impact on South Africa of the European crisis, “which is intensifying as we speak”, would be on trade. Although Europe accounted for a declining share of South African manufactured exports at about 29 percent, from 36 percent in 2007, “it is still an extremely important trading partner”.

The impact of lower demand from Europe would be mitigated by the increasing proportion of manufactured exports to other African countries, which rose from 25 percent in 2007 to 34 percent this year.

A further channel of contagion for South Africa could be through commodity prices. While a lower oil price was welcome, declines in other commodity prices were likely to damage the mining sector.

The banking sector had minimal direct exposure to the euro zone and, to the extent that this sector was affected by the global slowdown, the effect was likely to be indirect through slower local growth.

“Without being complacent at all, it is important to recognise that our banks are sound and well capitalised. I wish to stress that, in such turbulent times, a sound banking system is a huge national asset,” Marcus said.

But other parts of the financial markets were reflecting the high current levels of risk aversion, specifically on the foreign exchange market where there was a high degree of volatility. The weaker exchange rate did help to cushion export sectors, particularly mining, which faced falling commodity prices.

“To this extent it acts as a shock absorber,” although the price advantages from a weaker exchange rate might be insufficient to compensate for the decline in demand.

Marcus added that the main risk to the inflation outlook posed by the crisis arose from the depreciation of the rand.

The bank forecast growth to average 2.9 percent this year and 3.9 percent next year, but the risks to the forecast were to the downside, Marcus said. Growth in the first quarter of this year was 2.7 percent from 3.2 percent in the fourth quarter of last year and 3.1 percent for the year as a whole.

Addressing Numsa’s call to nationalise the bank, Marcus said it was incorrect that the bank was technically owned by private shareholders. She said the bank had shareholders, but they did not have the same rights as those in private companies. Of the profits the bank made, 10 percent was put in its reserves, and 90 percent was transferred to the government, not to shareholders, she said.

The board had no say over monetary policy decisions. The government set the inflation target, and the bank had the independence to implement monetary policy to achieve its set mandate.

She said: “The bank will vigorously defend our independence, our ability to act without fear or favour, and to take decisions that are in the interests of all South Africans.”