The latest economic data show that consumers are suffering and a further rate hike would just be flogging a dead horse while having a negative impact on a corporate sector already dealing with power shocks.
Higher rates could be the death-knell for small- and medium-sized businesses, resulting in job losses — which, even more than higher interest rates, are the biggest threat to the financial stability of the country.
Although the money markets are pricing in a rate hike for April, based on the ever-rising inflation numbers, South Africans will be looking for the Reserve Bank to hold rates this time round.
There is growing evidence that the interest rate cycle, which has seen a 400 basis point hike over 18 months, has knocked consumers off their feet. Vehicle sales have fallen by 15%, retail sales have officially contracted with negative numbers, especially for household goods.
Anecdotal evidence supports these numbers.
Last month Amap, a major supplier of electronic equipment, announced a 120% fall in earnings due to lack of consumer demand. Credit retailers such as JD Group have shown a significant fall in earnings and Massmart in its latest results stated that it has seen a switch from credit cards to cash payments in its stores.
Standard Bank’s property gauge shows that house prices are flat for the third consecutive month. There are growing concerns that this will move sharply negative once sellers who have been holding out for higher prices feel the pressure and start to sell at reduced prices. Developers of higher end clusters are struggling to sell new units.
Standard Bank released its results this week, which showed a 100% increase in its bad debt provision for mortgages, indicating that it is increasingly concerned about whether homeowners will be able to continue to service their loans.
On credit cards it is expecting a default of more than 7%.
High interest rates are taking their toll with debt servicing at 10,5% of disposable income — its highest level in just over eight years.
According to Nigel MacKenzie, head of financial research at Stanlib, the latest set of bank results have shown that small- and medium-sized businesses are starting to take strain, with increased bad debts and less lending activity.
MacKenzie says smaller businesses, which typically have several vehicles, are facing an interest rate crunch at the same time as higher petrol prices. Petrol prices in March will increase by 72c a litre once the additional 11c of tax announced in the budget is applied.
MacKenzie says the major financial crisis faced by South Africa in 2002 was not driven so much by higher interest rates but job losses.
Higher real incomes and a growing economy have allowed small businesses and consumers to offset the higher interest rates however, if someone does not have a job he or she cannot repay debts.
On the upside, the JSE is going against world market trends by posting gains and the all-share index is now close to its all-time high.
However, the sector driving the JSE is resources, which are responding to a weakening rand.
In December the rand was R6,80 to the dollar. It is now flirting with R8 against a very weak dollar. Analysts say a currency is the share price of a country. In that case our share price has fallen 18% in three months.
Banks and industrial shares have fared badly, still off about 15% from their highs. The most worrying number, however, is inflation, which hit 8,8% in January. Our economy is still growing, albeit at a slower rate. The government is expecting the economy to grow at about 4%, but some economists see this at closer to 3,5%.
Considering that the government is closer to the numbers and the surprisingly positive GDP figures for the fourth quarter make 4% seem realistic. But inflation is continuing to climb and is expected to reach 10% by March. The energy crisis, apart from an impact on economic growth, is also adding to the cost base.
Diesel generators are a great deal more expensive than electricity and once the electricity rate hike of 14% combined with the 2c KWh comes into affect, it will be inflationary along with the 10% increase in the cost of petrol.
Although a weaker rand is beneficial for exporters, our country is experiencing one of its greatest infrastructure booms ever, which requires imported goods and services. A weaker rand makes these imports more expensive.
Exporters who could be making hay are finding themselves hampered by the power crises.
There are signs that manufacturing is under pressure in the first quarter, with the Investec purchasing managers index slipping to 46,4 in February, well below the key 50 level that divides expansion from contraction.
According to Ian Cruickshanks, economist at Nedbank, electricity rationing will put this sector, as well as the mining sector, at a disadvantage during at least the first half of the year.
Financial services are also likely to lose steam as consumer credit eases and housing activity eases. Given all of these factors, what would an interest-rate hike achieve?
Electricity a crisis?
The electricity crisis may not be as bad as we think. Research by Stanlib economist Kevin Lings showed that when compared with countries with similar economic structures we are by far the least efficient user of electricity.
He calculated that if South Africa improved efficiency, we could maintain our current economic growth at half our current electricity usage. He concludes that South Africa is in a position “to save at least 10% to 15% of electricity consumed without having a material impact on economic performance”.
The key, however, is how best to do this and how to make sure that this is done on a sustained basis without any significant disruption to the economy.
Stagflation fears
Questions have started to be asked about whether we could enter a period of stagflation. This requires a unique set of economic data last seen in the 1970s when oil price shocks created inflation scares, while world economic growth declined.
According to Wikipedia, stagflation can occur when an economy is slowed by an unfavorable supply shock, for example our current power crisis, which tends to raise prices at the same time that it slows the economy by making production less profitable.