/ 8 May 2008

Confidence at five-and-a-half year low

South Africa’s economic confidence fell to a five-and-a-half year low in April, weighed down by expectations of slower growth, higher inflation and a longer cycle of tighter monetary policy, a poll showed on Thursday.

The monthly survey of 20 economists showed the Reuters Econometer, which measures six weighted indicators, dived to 207,50 last month, its lowest since November 2002, from 231,39 in March.

The poll confirms deteriorating sentiment in South Africa, after a separate study, released on Wednesday, put business confidence at a four-and-a-half year low in April.

The Reuters survey showed increasing pessimism about economic growth, with average expansion for 2008 seen at 3,58%nt in April after 3,74% in the March poll, while expectations for 2009 growth had fallen to 3,86% from 4,21%.

A persisting power shortage and higher interest rates are seen strangling industry.

The central bank has raised the repo rate by 450 basis points since June 2006 to 11,5% as it struggles to arrest CPIX inflation which has stayed above its 3% to 6% target range since April 2007.

State utility Eskom is battling to meet demand for power with ageing infrastructure and has cut supply to industry and households. It said last week it would stop load shedding, for now.

“In light of the energy crisis we have downwardly revised our forecasts although that was before the news that there won’t be load shedding,” said Standard Bank economist Danelee van Dyk.

“Growth will still be below 4% this year as the impact of higher rates [from last year] starts kicking in. Rates take time to feed through and the impact will be noticeable in the first and second quarter,” she said.

The central bank briefly halted its monetary tightening in January, resuming again with a 50 basis point rise in April.

Higher for longer

With inflation now in double digits at 10,1% year-on-year in March, economists are increasingly expecting another rate rise in June — at the least.

The survey showed April expectations for the repo rate higher at a mean 11,92 by the end of the year, up from 11,07 in March. It was seen at 10,94 in 2009, from 9,77 percent previously.

Targeted CPIX inflation was also seen staying outside the target for longer, with the April survey showing the average for the year up at 9,58% from last month’s 8,75, and at 6,68% for 2009 from March’s forecast of 5,97%.

“The main thing is the uncertainty about the electricity price hike, but we worked it in and with Eskom wanting high increases for the next few years, inflation will remain high for longer,” Citadel economist Salomi Odendaal said.

Eskom has asked for a 53% real tariff increase to help fund its R343-billion ($45,57-billion) spending over the next five years. The decision is due on June 6.

Odendaal said CPIX would remain above the band until 2010.

Analysts were, however, slightly less bearish on the rand.

The latest survey put it at eight to the dollar by the end of the year, from an expectation of 8,11 in March, and at 8,27 to the dollar by the end of 2009 from a forecast of 8,37 previously.

Brait economist Colen Garrow said the rand has been undervalued and sentiment had improved towards the currency.

“It is undervalued against all other commodity currencies and the current account argument does not hold water. Australia’s deficit is just as big but the [Australian dollar] is not down as much as the rand to the [US] dollar,” he said.

South Africa’s current account deficit stood at 7,3% to the GDP in 2007, and analysts say it makes the rand vulnerable.

At 7,50, the rand is 10% weaker to the dollar so far this year, but has much recovered from a near five year low of 8,2450 hit in mid-March. – Reuter 2008