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Strikes, wage hikes may weigh on SA economy

An annual round of strikes and inflationary pay hikes could not have come at a worse time for a South African economy strained by the global recession, soaring unemployment and spending before next year’s Soccer World Cup.

Wage increases of more than 10% will likely stoke inflation, with lost work days hitting company profits and tax revenues, compounding budget and current-account headaches.

Yet with high joblessness endemic and social unrest escalating, poor South Africans are unlikely to let up in their demands for better living standards.

Officials hope they may have seen the last round of a familiar winter wave of unrest after workers at power monopoly Eskom appeared set to accept a wage offer, but the negative impact on the economy may be more lasting.

With the budget deficit already seen widening as growth falters, the state sector faces a 13% jump in wages for the municipal workers who empty the country’s bins and provide other vital services.

Corporate tax revenue is also likely to be hit by double-digit pay awards at some of the country’s biggest companies in the annual round of pay disputes.

By forcing through inflation-busting pay increases — versus current CPI of 6,9% — unions may also have scuppered any chances of the central bank meeting their demands to keep interest rates low and helping the country grow out of trouble.

”The central bank has to be managed by people who don’t have elections in mind. We must do so based on technical analysis and not what’s in the interest of the unions,” outgoing central bank Governor Tito Mboweni, criticised by unions for not cutting rates further, said as the Eskom strike erupted late last week.

”Our responsibility is to the people as a whole. You must stand your ground and be prepared not to have very many friends around.”

The central bank is widely expected to keep the repo rate at 7,5 %on Thursday, due to worries about inflation, although the argument is growing for a cut after a string of weak data.

Higher taxes
Interest rates remain high by international standards, with the central bank’s easing cycle stalled at a time when many other major developing economies have cut borrowing costs much further to stave off recession.

Economists estimate the pay rises could ultimately add between 0,5 and 1,25 percentage points to inflation, adding to worries over future prices.

The unions, emboldened since their champion, Jacob Zuma, rose to the presidency in May, have secured average increases of about 10%.

Eskom has offered 10,5%, while gold and coal miners also accepted a raise of up to 10,5%.

The pay rises may also add to pressure on the budget through higher state wages and lower company profits, with the tax take already seen about R60-billion below an original estimate for 2009/10.

”Pressures lie ahead, either government has to go and borrow funds or it has to tax people … high net-worth individuals,” said Colen Garrow, an economist with investment group Brait.

Markets shrugged off initial strikes but the rand weakened sharply last week as yet another industry threatened industrial action.

”The disruption to an already weak economy posed by the strike action can only sit negatively with investors,” Razia Khan, head of Africa research at Standard Chartered, said.

”There are both the immediate growth consequences, and the longer-term price stability effects that need to be thought through.”

The Treasury’s 3,8% of GDP budget deficit forecast now looks unattainable. Morgan Stanley estimates borrowing needs will have to leap to fund a budget shortfall of 6,3% of GDP. JP Morgan forecasts a gap of 7,4% of GDP.

Michael Kafe, Morgan Stanley’s Pan-African Economist, said big twin deficits — current account and budget — place South Africa in one of the worst positions among emerging markets.

South Africa’s current-account deficit stood at 7% of GDP in the first quarter of this year.

It has, so far, been financed by capital inflows but higher budget financing needs could strain sources, and large current-account deficits have been at the heart of crises in other emerging economies like Hungary, Romania and Latvia that have forced governments to seek International Monetary Fund aid.

Job losses
The strikes and settlements could also impact jobs.

”The big impact of inflation-beating wage increases in a weak demand environment will be on job losses, either through formal cuts or attrition,” said Chris Hart, economist at Investment Solutions.

”It is very possible that we can see another 100 000 to 150 000 [jobs lost] in the last quarter [Q2],” he said.

The official jobless rate already stands at a dangerously high 23,6%, but only a slight rise in the first quarter masked a jump in people giving up looking for work.

Adding ”disgruntled job seekers”, unemployment is more than 30%.

”Expectations might be running higher than any government in the world could meet,” Econometrix economist Tony Twine said. — Reuters

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