While many countries are battling stagflationary conditions of high inflation coupled with low growth, global inflation has softened noticeably in recent months, thanks to lower food and oil prices.
In South Africa, however, inflation has remained worryingly persistent. Even as GDP growth slowed to a crawl, the Reserve Bank in March hiked its 2023 inflation forecast to an average of 6% for the year, as prices of food and goods keep rising. South Africa may now only hit the 4.5% midpoint of its inflation target in 2025.
Reserve Bank governor Lesetja Kganyago told an audience at the University of Johannesburg last week that South Africa isn’t benefiting from the fall in global inflation largely due to load-shedding and other factors specific to the country.
As it is, the Bank expects load-shedding to add 0.5 of a percentage point (pp) to consumer inflation in 2023, as firms try to pass the cost of solar energy or diesel generators on to consumers. And the Bank expects this drag to cut real GDP growth by a disturbing 2pp this year to a mere 0.2% year on year. (Last year, load-shedding knocked 0.7pp off growth.)
“We are suffering from largely self-inflicted wounds,” said Kganyago, explaining that factors such as load-shedding, the weak rand and greylisting by the Financial Action Task Force had played “an outsized role” in the country’s current plight.
Debt counselling firm DebtBusters says demand for its services spiked 40% in the first quarter of this year, compared with the same period last year
“We could have had somewhat lower inflation and stronger growth, had structural policy settings been more favourable,” he concluded. It was a polite way of saying things wouldn’t be this bad if the government had acted quicker to implement structural reforms — especially around logistics and electricity.
Instead, after 18 months of relentless interest rate hikes, South African consumers are starting to buckle.
Debt counselling firm DebtBusters says demand for its services spiked 40% in the first quarter of this year, compared with the same period last year.
“As interest rates have risen, credit has become burdensome for many consumers,” says DebtBusters COO Benay Sager. New customers are, on average, using almost 66% of their take-home pay to service debt.
Sager estimates that someone with a R1m bond and R200,000 in vehicle finance is having to cough up nearly R5,000 more a month than they did two years ago — a real burden, especially for young, first-time buyers who rushed to buy homes and vehicles at attractive interest rates during Covid.
Nor is the pain over yet. Next week, South Africa will release its new inflation numbers, followed closely by the Bank’s decision on whether to hike interest rates again — and bad news is likely on both fronts.
In July last year, consumer inflation peaked at 7.8% — the highest in almost 14 years. By January this year it had eased to 6.9% but then the trend reversed, and it edged up again to 7% in February and 7.1% in March.
Economists expect April’s inflation number to remain high, which suggests that, on May 25, we’ll see yet another interest rate hike — possibly as large as 50bp. The forward rate agreement market is even pricing in a 75bp hike next week, compared with just 25bp before the US allegations about arms shipments to Russia arose.
Even one more 25bp hike would bring the total to 450bp since November 2021 — just shy of the last aggressive hiking cycle of 2006-2008, which led to 500bp of hikes as the Bank grappled with an overheating economy and double-digit inflation.
This time, the economy isn’t overheating. Rather, the Bank is trying to shore up the weak rand and subdue sharply rising inflation expectations.
Kganyago is quick to point out that South Africa’s interest rate hiking cycle has been less severe than those of some of our peer countries.
Bank of America economist Tatonga Rusike hopes that next week’s inflation number will be the last at the high end. He expects inflation to decelerate slowly to about 5% by the end of the year, allowing the Bank to impose just one more 25bp hike next week, taking the terminal repo rate to 8%.
Rusike is also positive on the rand, forecasting its return to R16.50/$ by the year-end, driven mainly by dollar weakness as the Fed stops hiking and pivots towards cutting in early 2024. He also expects 100bp of rate cuts in South Africa over the course of next year.
Investec’s Annabel Bishop warns that the Bank could surprise again with another 50bp hike next week. But even then, this would still leave South Africa’s cumulative rate hiking total at 475bp, below that of the US, which has so far hiked by a total of 500bp in the current cycle, she notes.
Gina Schoeman, head of research at Citi, is as hawkish. She fears that not only will the Bank hike again next week — by 25bp but with “a high risk” of a 50bp hike — but that it could do so again at its June meeting.
Schoeman is particularly worried that the sticky persistence of core inflation — which she expects to climb from 5.2% in March to 5.4% in April — may surprise to the upside.
Unlike Rusike, Schoeman doesn’t see any scope for rate cuts over the next 12-18 months. This is based largely on her view that Kganyago is serious about wanting to lower the Bank’s 4.5% inflation target over time.
Whether Kganyago’s ambition is realised hangs on his being asked to serve a third term when his current term expires in November 2024. Schoeman believes he will stay on in the likely event that he is invited to do so.
Absa currency strategist Mike Keenan believes there is still one thing that could stop the rand from entering free fall: regulation 28 of the Pension Funds Act. This is the law that prohibits domestic asset managers from investing more than 45% of their assets offshore.
Right now, the unit trust industry keeps about 34% of its holdings offshore. But when the rand weakens, the industry’s offshore component increases proportionately, since these shares are worth more when translated back into rands.
Absa estimates that the rand would need to weaken to about R22/$ before the unit trust industry would have to repatriate some investments so as not to fall foul of regulation 28. In other words, these capital inflows would provide some support for the rand from about the R22/$ level.
Still, the idea that the rand could find a floor at about R21/$ as in previous blowouts, or at R22/$ once prudential limits kick in, is cold comfort in a country knee-deep in stagflation — a parlous situation where inflation remains high, GDP growth is virtually nonexistent and high unemployment persists.
— PENSIONS TO THE RESCUE?
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