Shaun Harris wonders whether South Africans have learned some financial lessons in the past two years of high interest rates and a volatile economy
Let’s face it, we South Africans have some bad habits. We take on too much debt, buy on credit when interest rates are sky high, and don’t save enough.
When we muster enough to invest, we tend to buy when equity prices are high and sell when they are low, and panic at the wrong times for the wrong reasons.
And then we try and blame someone else.
Without looking for excuses, though, Joe Public is not entirely to blame for this sad condition. The authorities do precious little to encourage personal savings, and tax the motivation out of trying to work harder and earn more.
The private sector banks are not much better, being slow to pass the benefits of improving economic conditions on to consumers.
Despite the fairly rapid fall in interest rates over the past few months, they have maintained a comfortable margin between the repo rate they borrow at and the prime rate they charge us, all the way down the cycle.
So, to an extent, the rot starts at the top. It’s like our national rugby team, which seems to go into crisis mode every time an important international tournament looms. Look no further than the coach who behaves like an inexperienced day trader, dropping and promoting players at the wrong times for the wrong reasons. No wonder the team is in a mess. The only debate among KwaZulu-Natal rugby fans is whether to support Wales or France in the World Cup.
We also tend to have parochial views. What remains to be seen is whether our insular outlook has changed after the economic shocks of the past two years, when we saw how our small and recently opened system got battered by the emerging-market crises and attacks on the rand.
A growing number of economists are becoming increasingly upbeat – not wildly enthusiastic, but more confident – about growth prospects for South Africa. Can we show that we’ve learned from the past and plan ahead to get the most benefit from improving conditions?
Optimistic signals have been emerging over the past few months – the downward trend in interest rates, falling inflation, better than expected foreign exchange reserves – but were neatly summed up in presentations from three major local institutions: Board of Executors (BoE), the international arm of Nedcor Investment Bank, and Old Mutual Asset Management.
All point to South Africa following the general global growth pattern, with a few local idiosyncrasies we should exploit.
Interest rates are a good story, even though they remain high in real terms. The last cut in the prime rate, to 16,5%, brings rates down to a level not seen since the mid-1990s, and it is expected to fall further.
Rian le Roux, head of Old Mutual Asset Management’s research unit, believes rates will be down to 15% at year-end, and possibly fall to about 14% next year before kicking back to about 15% by the end of 2000.
This view is supported by Louis Geldenhuys, MD of BoE Securities, who sees the average repo rate consistently at about 13% for the remainder of this year and the first half of 2000, before again climbing to above 14% by the end of next year.
What’s important about these views is not so much the expectation of interest rates going down, but of their being fairly stable next year. That offers us consumers a bit of breathing space and predictability to plan our personal finances.
There could, of course, always be shocks, particularly if an emerging market region goes wobbly again or some of the potential conflict in the East erupts into war. One thing we have to learn to live with now, in our open and democratic economy, is more volatile interest rates. But neither Le Roux nor Geldenhuys expects any international shocks over the short term.
It has been spelt out before but bears repeating: the best we can do in a more benign interest rate environment, and the increased disposable income it implies, is to get rid of debt, the most effective return on capital.
Household debt, however, remains the bad news. Le Roux estimates it to be in the region of R300-billion, nearly 60% of annual after-tax income.
Geldenhuys’s figures to March this year show the cost of servicing household debt – that is just the interest we pay on our debt – to be about 11% of household income. Fortunately, he forecasts this to dip to about 9,5% by March next year.
A lot may depend on how the estimated R6- billion to R7-billion cash released to people who sold their Old Mutual shares before its listing is used. Earlier studies, and they may not be a good guide here, indicate that only about 13% of demutualisation windfalls are spent on consumer items. Let’s hope it’s the case here, though Le Roux bluntly says: “South Africans tend to spend windfalls. That’s just what we do. The question is, has last year’s experience of high interest rates changed this habit?”
If the answer is “yes” it will be a clear sign of our maturing as consumers and savers.
Inflation is interesting, forecast by Old Mutual to perhaps get as low as 2,5% by year- end at the headline level, although Le Roux notes that core inflation (which excludes the effect of interest rates and fresh food prices) remains stubbornly high at 8%.
This, he says, is where our perception problem comes in. To get inflation down and keep it down we cannot expect salary increases in the region of 6,5% (an average of about 8% if promotions and notch increases are included).
If high wage demands persist, inflation has to rise, in the process keeping the unemployed and retrenched out of the job market.
At least we can look forward, with some confidence, to a period of relative stability and some economic growth (probably more than 3% next year) – just what’s needed to sort out the mess from the previous year’s high interest rates – and create a platform to start creating, perhaps even saving, some wealth.
Now, sorting out the rugby team is going to be a much harder job.