With interest rates on the rise in South Africa, and further hikes expected before the end of February 2007, analysts say that this will affect the financial health of firms and individuals at the margin, but will also place a check on irresponsible debt accumulation and inefficient operations.
According to data released by Statistics South Africa on Thursday, the number of insolvencies between January and August 2006 fell by 15,1% compared with the same period last year, while liquidations between January and September 2006 were 13% lower than from January to September 2005.
Over the past number of years, the number of annual insolvencies has decreased significantly from about 4 700 in 2000 to a projected 1 320 in 2006, while the number of liquidations has fallen from about 4 160 in 2001 to a projected 2 970 in 2006.
These trends have coincided with a falling interest-rate cycle and strong growth in domestic consumer spending.
“Consequently, as rates have begun to rise again, firms will come under increasing pressure. Not only do higher rates increase the cost of capital and raise debt-servicing costs, they also reduce consumer demand, at the margin, for credit-financed purchases, while increased consumer debt-servicing costs reduce demand for other goods and services,” say analysts RLJP.
With another 50 basis-point rate hike expected before the end of February next year, insolvencies and liquidations are expected to pick up in 2007.
On the production side, however, there are some positive developments in the economy that will mitigate, to one degree or another, against the effects of higher interest rates.
“Firstly, although private consumption growth is expected to slow in 2007, it should remain relatively buoyant in the 3% to 5% range off the substantially high base of private spending seen in the last number of years,” says RLJP.
“Secondly, as domestic demand growth slows, so international demand for locally produced goods will increase on the back of rand weakness, which is expected to remain trading in the R7,50 to R8,50 a dollar range over the course of 2007.
“Thirdly, a weaker rand will cause local producers to begin looking increasingly to local suppliers for inputs as imported input costs rise, increasing domestic demand for intermediate goods.
“Finally, with oil-market analysts forecasting a more benign oil price over the next year or so, local firms, particularly wholesalers and logistics-oriented companies, will experience some relief in production costs and on margins,” says RLJP.
As interest rates increase, the financial health of certain firms and individuals is therefore compromised at the margin. However, higher rates can also act as an invaluable check on irresponsible debt accumulation among individuals, and on inefficiently run firms, causing a more efficient allocation of productive resources. — I-Net Bridge