Batten down the hatches
Insufficient attention has been given to producer price developments over the past eighteen months and thus on the ultimate knock-on effect on consumer prices. Additionally, if recent and expected fuel price trends are factored in, then the outlook for consumer prices - and perhaps interest rates - are set to shock businesses in the months ahead.
At the last meeting of the Monetary Policy Committee, the Consumer Price Index (CPIX) was seen peaking at around 8.5% in the first quarter of 2008 with a 65% likelihood for the fourth quarter 2008 outcome falling within the target 3% - 6% guidelines. Firstly, this peak may now come very close to 10% when the February 2008 result is released on 26 March. Secondly, the aggregated impact of the fuel increases in February and March, together with a potential increase of 55 cents per litre for petrol and over R1 per litre for diesel in April, will push up CPIX by close to 1% on their own. Thirdly, there is zero chance of CPIX falling below the upper target of 6% by year-end, with that target only likely to be attained by mid-2009. As such, after recording 6.5% in 2007, CPIX is set to exceed 8% as a whole for 2008. So firms are likely to face cost pressures as well as steep salary and wage demands.
The weight of fuel and power in the budgets of the poor is almost double that for the consumer price index as a whole. Food, transport, housing, fuel and power account for 72% of the spending of the poor and very poor, while only accounting for 60% of that for the very high expenditure groups. After strong real growth in personal consumption expenditure of 6.7%, 6.6%, 7.3% and 6.3% in 2004 through 2007, we see this halving to 3% this year with a slightly better outcome emerging in 2009.
Therefore, apart from facing increasing strain from the pressures of rising expenses, the demand for goods and services across most of the broad spectrum of industry is set to fall in the months ahead. In the face of CPIX approaching double digits, will the SA Reserve Bank be able to argue convincingly that measures in place are having the desired impact and that additional interest rate hikes are unnecessary? Hopefully that will prove to be the case, otherwise growth could almost halve this year, put many businesses into liquidation and cause many thousands of job losses. Firms financing working capital at current interest rates may thus find it very difficult to increase turnovers or even pass on inflationary increases. For those firms extending credit to buyers, a tightening in lending criteria is strongly advised. Requests for extended terms should be granted only with very strong motivations. It may be advisable to offer discounts and other incentives for early payment, rather than merely sticking to existing term conditions. All credit departments should be on extra time - Eskom permitting - in order to be attentive of the actions of their debtors and to ensure that days outstanding does not stretch unjustifiably.
The view of South Africa as a brand has been tarnished by the charade that passes for politics in this country. This could not have come at a worse time, given the bulging current account deficit, dislocation in global credit markets, financial market volatility and the enormous socio-economic challenges facing the country. The continental way of doing things with a less than ready acceptance of the rule of law requires a drastic overhaul. The manner in which the elections in Zimbabwe will be conducted and the observer opinions thereof, may be crucial to movements in the exchange rate unless performed to mandate and without a blinkered approach.
Article by Luke Doig (pictured right above), Senior Economist at Credit Guarantee Insurance Corporation
