Crunch time for your clients as Eskom and SARB strike
The triple-whammy of inflation; interest rates and loadshedding could leave your clients scrabbling for ‘couch money’ through 2023, searching every nook and cranny of their homes for a few rand or cents to plug their ever-widening household budget ‘gaps’. Those active in the financial and risk advice space can expect an ongoing struggle to keep their clients’ finances on track as monthly debt servicing costs creep up, and Eskom threatens another steep double-digit price increase despite being unable to keep the lights on.
Burning through thousand more per million in loans
In its November 2022 statement, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) noted that “high inflation and weak economic growth would continue to shape global conditions alongside monetary and fiscal policy responses”. SARB governor, Lesetja Kganyago, shared a bleak global economic outlook due to the ongoing Russia-Ukraine war; slowing economic growth out of China and the United States (US); and heightened recession risks in developed market economies, especially in Europe. “Higher than expected inflation has pushed major central banks to accelerate the normalisation of policy rates [and] this has tightened global financial conditions and raised the risk profiles of economies needing foreign capital,” he wrote.
South Africa is among the many emerging market economies that can expect capital market and currency volatility in the coming year. It also looks increasingly likely that the latest 0.75% increase in the Repo rate, the seventh hike since November 2021, will not be the last in this rate hiking cycle. “The market is currently pricing in a cumulative 50 basis points hike by March 2023, which reflects the risk for a quarter percent hike in January,” said Carmen Nel, Economist and Macro Strategist, Matrix Fund Managers, in response to the hike. According to Nel, the November rate hike was a front-loaded move that reflected the MPC’s views that upside inflation risks outweighed the weaker growth outlook. “All else assumed equal, this front-loading should contribute to a stronger recovery in the exchange rate, weaker growth and a lower inflation profile than [anticipated],” she said.
Mortgage repayments significantly higher
The Repo rate has doubled from 3.5% to 7.0% over the last 12 months, adding around ZAR2 200,00 to the monthly repayment on a ZAR1 million mortgage at prime. This means that wads of cash end up being diverted from your clients’ discretionary investment allowances, not to mention difficulties in retaining existing risk policies or selling new policies to potential clients. In fact, it is common knowledge that lapses and surrenders spike when household incomes come under pressure.
Although successive interest rate hikes have caused significant ‘pain’ for consumers, the SARB deserves some credit for fulfilling its monetary policy mandate. “We must commend the SARB for its careful management of South Africa's monetary policy despite the headwinds in markets this year; prudent monetary policy measures to protect our currency’s value while managing inflation remain essential to shielding South Africa against turbulent times,” said FNB CEO Jacques Celliers, in response to the latest MPC decision. He also drew attention to the country’s electricity supply constraints as “a barrier for both consumers and businesses that have not invested in alternative energy sources”.
Economic growth to remain illusive
High inflation and interest rates are coinciding with rather dire economic fundamentals, with the latest International Monetary Fund (IMF) forecast pencilling in a growth rate of just 2.1% for South Africa in 2022, and 1.1% next year. Alexander Forbes’ monthly economic review, published October 2022, singled out loadshedding as a major drag on the domestic economy. They commented on deteriorating manufacturing conditions, with both business activity and manufacturing output falling sharply between August and September of this year, as Eskom’s loadshedding activity went ‘next level’. Excuse the pun, dear reader, but how else would one explain a month that offers up 25 days of electricity cuts totalling 2206GWh? That was for August: and we already know that September, October and November are similar, if not worse.
“Growth in manufacturing output slowed to 1.4% year-on-year in August 2022 from 3.9% in July 2022 as conditions continue to fluctuate, with changes in the global environment owing to geopolitical instability likely to add to the downward pressures posed by slowing global demand and elevated production costs,” wrote Alexander Forbes, before offering up a long list of additional issues, not least of which a Transnet worker strike. Sadly, South Africa’s trade unions are pushing ahead with strike action at a time when employment is struggling to return to pre-pandemic levels. “Formal non-agriculture employment declined by 119 000 workers to 9.95 million in the second quarter of 2022, down from 10.07 million in the previous quarter,” noted the review. “Job losses were reported in community services; business services; construction; manufacturing; and electricity”.
FNB Chief Economist Mamello Matikinca-Ngwenya agreed that the country’s GDP growth prospects were dire, saying that GDP growth was constrained by network industry constraints, including energy and logistics, with mounting consumer headwinds certain to weigh on demand. “Inflation is currently above the SARB’s preferred anchor of 4.5% but is projected to fall towards this anchor within the next year, indicating that the upward pressure to the Repo rate is dissipating; nevertheless, the weaker exchange rate compounds the upside risks to inflation,” she said. “Overall, the MPC’s focus on containing inflation expectations has been key in ensuring that headline inflation remains anchored once the current bout of supply-driven inflation eases”.
Too much doom and gloom, try the OMIG view
This writer turned to a presentation by Old Mutual investment Group (OMIG) to seek out some ‘embers of hope’ in the swamp of doom and gloom. OMIG economist, Johan Els, noted that despite the negatives, and the risks, the country’s outlook was vastly improved from four to five years ago. “To ignore this would risk missing opportunities,” he said, before adding that the abundance of short-term bad news under headings like global growth, inflation, loadshedding and political noise were more than offset by medium-term factors such as energy reform, fiscal improvement and South Africa’s policy shift to the right.
Writer’s thoughts:
We have heard some horror stories about the impact of loadshedding on South Africa’s small, medium and micro-enterprises (SMMEs), with a 32kVA generator burning through around ZAR15 000,00 per month in diesel under the Stage II-IV scenario… How much financial pressure are your clients experiencing due to the triple-whammy of inflation, interest rates and loadshedding? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
