Staggering increase in company failures

The current inflation data (September Consumer Price Index of 6.7%) certainly does not bode well for the possible course of monetary policy.

Political tension as well as speculation is held to be causing oil prices to spike towards $90 per barrel and, were it not for the strength of the rand to below R6.70 to the US dollar, another sizeable domestic fuel price increase would be on the cards.

"If hawkish comments from Governor Mboweni are anything to go by, South Africans are set to feel more pain in the form of possible further interest rate hikes - yes, note plural," comments Luke Doig, senior economist at Credit Guarantee.  "In our opinion, a very real chance of overkill exists if rates are increased into 2008," he says.

Firstly, as producer inflation figures have shown, a plateauing in such pressures may be emerging from that front and the strong exchange rate will cushion imported price pressures.  Secondly, a degree of distress borrowing may be emerging as consumers battle to service debt and make day-to-day ends meet.  Furthermore, the South African Reserve Bank runs the risk of being behind the curve in reacting to price pressures.  Notwithstanding the fact that liquidation figures have been adversely affected by backlogs from the June civil service strike, the fact remains that closures of businesses in the first nine months of 2007 are 10.6% up on levels of a year ago, with company failures up a staggering 36.5% in this period.

"Certainly, some dampening is necessary, but we believe that the full extent of the recent hikes requires time to work through the system and that excessive tightening is ill-advised. Debt judgments, personal sequestrations and liquidations may well spiral in excess of 20% and the pain for many is going to be acute," concludes Doig.