3 Min Read
* South Africa fell into recession in Q1
* Cbank cautious due to economic, political instability
* Fresh corruption allegations pile pressure on Zuma
* Ratings agencies worried about political schisms (Adds background, Fitch comment, finance minister, treasury director general)
By Mfuneko Toyana
JOHANNESBURG, June 8 (Reuters) - Cutting interest rates is not the answer to dragging South Africa's economy out of recession because deep economic weakness and political turmoil need to be addressed first, a member of the central bank's monetary policy committee said on Thursday.
Africa's most developed economy fell into recession for the first time in eight years in the first quarter, piling pressure on scandal-plagued President Jacob Zuma, whose leadership has been challenged within the ruling African National Congress.
Markets partly priced in an interest rate cut after the rand and inflation remained largely stable despite S&P Global Ratings and Fitch downgrading South Africa's credit rating to "junk" in April.
But MPC member Brian Kahn said the central bank needed to act cautiously because further downgrades caused by political uncertainty may have a more severe impact on markets.
"We would not want to reduce rates and then be forced into a premature reversal of policy," Kahn told a banking conference, adding the bank was likely to cut its growth forecast in July.
Moody's is expected to announce its ratings decision this week.
If all three agencies cut their rating of local currency debt to "junk" it could knock one percent off economic growth and send inflation up by 0.6 percent, Kahn said.
Fitch said on Thursday it sees South Africa missing the revenue and deficit forecasts set out in a February budget and that infighting within the ANC remained a key risk to its sovereign credit rating.
"Politics have weakened business confidence substantially and this will continue for some time," Fitch director Jan Friederich said.
Backroom rifts within the ANC have been thrust into the open this week after more than 100,000 emails leaked to local media allegedly showed improper dealings in lucrative government contracts by business friends of Zuma.
Political instability is expected to continue up to and beyond an ANC conference in December when a successor to Zuma as party leader will be chosen, Fitch's Friederich said.
Zuma can remain head of state until a 2019 election but the ANC's secretary general Gwede Mantashe told Reuters on Wednesday that he could be removed next year.
Finance Minister Malusi Gigaba told parliament on Thursday he was focused on growing the economy and aims to trim the budget deficit to 3.3 percent from 3.8 percent in three years.
Growth in South Africa's key mining sector slowed sharply in April while manufacturing contracted much more than expected, data showed on Thursday. (Additional reporting by Wendell Roelf in Cape Town; Writing by TJ Strydom and Joe Brock; Editing by Gareth Jones)