ECON­OMY WATCH

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With­out any ma­jor dis­rup­tion mi­nus the cur­rent bout of load shed­ding, South African eco­nomic growth may well meet and quite pos­si­bly out­strip fore­casts of be­tween 2% and 2.5%. But there’s a caveat, as in all things South African.

Gov­ern­ment needs to cre­ate an en­abling en­vi­ron­ment, busi­nesses need to start in­vest­ing and cre­at­ing jobs and work­ers need to boost pro­duc­tiv­ity and avoid strike ac­tion at all costs.

Granted, some of SA’s eco­nomic growth is linked to what hap­pens to global eco­nomic growth and de­mand, but a lot of how SA has per­formed eco­nom­i­cally over the past two years has been the do­ing of South Africans.

Then there are the forced power cuts or load shed­ding. Those that have not ac­cepted this as a way of life should do so im­me­di­ately and find an al­ter­na­tive while they’re at it.

Load shed­ding is a nec­es­sary evil. Rather a few hours of no elec­tric­ity than a com­plete na­tion­wide black­out. Imag­ine the con­se­quences.

The South African Cham­ber of Com­merce & In­dus­try re­cently joined oth­ers in call­ing for an elec­tric­ity sum­mit.

Not that peo­ple gath­er­ing to talk so­lu­tions is a bad idea, but re­ally, how much more talk­ing can be done?

Busi­nesses al­ready know that so­lu­tions in­clude in­vest­ing in al­ter­na­tive sources of en­ergy such as gen­er­a­tors.

Other than that, there won’t be much to do un­til the Medupi power sta­tion is up and run­ning and starts adding power to the grid. What is dis­cour­ag­ing are the end­less post­pone­ments of the dead­line.

It is, how­ever, wel­come that power provider Eskom lets SA know when power cuts will oc­cur and how long they will last, though some ar­eas have ex­pe­ri­enced de­lays in re­con­nec­tion.

Power out­ages will def­i­nitely con­strain eco­nomic growth po­ten­tial, though the ex­tent is un­clear.

Cap­i­tal Eco­nomics econ­o­mists say they do not think power out­ages in the fourth quar­ter of 2014 pre­vented the econ­omy from ex­pand­ing rapidly. “So an­other few months of dis­rup­tions would not be a dis­as­ter for the econ­omy,” says Cap­i­tal Eco­nomics as­sis­tant econ­o­mist Jack Allen.

There could be some truth to this sen­ti­ment. A strike in a key eco­nomic sec­tor is far more dam­ag­ing.

The South African con­sumer has en­joyed some re­lief in dis­pos­able in­come. In­ter­est rates have re­mained un­changed for some time, pro­vid­ing breath­ing space to those in debt to pay off ex­ist­ing debt. Fig­ures show that a no­table share of dis­pos­able in­come still goes to­wards ser­vic­ing debt.

In­fla­tion has also slowed since Septem­ber last year, boost­ing dis­pos­able in­comes.

In­fla­tion eased from around 5,9% year on year in Septem­ber to 5,3% year on year in De­cem­ber, with fore­casts for fur­ther de­cel­er­a­tion.

Lower in­fla­tion is the main rea­son be­hind the Re­serve Bank’s de­ci­sion to keep in­ter­est rates un­changed in Jan­uary. The repo rate has been on hold at 5,75% since Septem­ber last year.

Food prices have come off their highs, with the lat­est UN Food & Agri­cul­ture Or­gan­i­sa­tion’s food price in­dex con­tin­u­ing its decline in Jan­uary amid strong pro­duc­tion ex­pec­ta­tions.

It av­er­aged 182,7 points for the month, or 1,9% be­low its De­cem­ber 2014 level. The in­dex has been on a down­ward path since April 2014.

Fuel prices have also fallen sharply since Au­gust last year from R14,33 a litre to R10,31 in Fe­bru­ary.

The benefits of lower fuel prices are be­ing felt by mo­torists but not those who use public trans­port. Public trans­port

Con­sumers still have to face up­com­ing steep elec­tric­ity tar­iff hikes

op­er­a­tors are quick to hike fares when fuel prices rise strongly but hardly ever re­duce them when fuel prices fall.

All the above fac­tors will give the con­sumer some breath­ing space, though this does not mean it will be easy go­ing.

Con­sumers still have to face up­com­ing steep elec­tric­ity tar­iff hikes, as well as pay more for such things as med­i­cal bills and mu­nic­i­pal levies.

Un­like last year when Eskom raised elec­tric­ity tar­iffs by 8%, the in­crease this year will be 12,7%. The en­ergy reg­u­la­tor al­lowed Eskom this tar­iff in­crease be­cause of the fi­nan­cial woes the en­ergy provider is fac­ing.

The chal­lenge with eco­nomic in­di­ca­tors is how fast they change. The benefits from lower oil prices ap­pear to be dis­si­pat­ing as the cost of this com­mod­ity has risen slightly over the past few days.

The ef­fect on do­mes­tic fuel prices is that the sharp drops in prices ex­pe­ri­enced in re­cent months could dis­si­pate. This shows just how much con­sumers need to take ad­van­tage of lower prices while they still have them.

The rand con­tin­ues to be un­re­li­able given its volatil­ity. Just when it ap­pears it has set­tled within a firmer band, the next day some­thing hap­pens in the US and it weak­ens un­der se­vere pres­sure.

There are sev­eral fac­tors that could boost the rand: a nar­row­ing of the cur­rent ac­count and bud­get deficits, cer­tainty re­gard­ing power pro­vi­sion, and a quick res­o­lu­tion to public-sec­tor wage talks.

In­vestec chief econ­o­mist Annabel Bishop says in a rand out­look re­port that the trade-weighted rand is ex­pected to strengthen this year and in the long term re­gain its pur­chas­ing power par­ity val­u­a­tion against the US dollar.

Gov­ern­ment’s fis­cal con­sol­i­da­tion looks set to con­tinue, as ex­plained by Fi­nance Min­is­ter Nh­lanhla Nene in the re­cent bud­get.

Still on fis­cal con­sol­i­da­tion, the fi­nance min­is­ter, as the per­son re­spon­si­ble for the gov­ern­ment purse, would do well to ad­vise Pres­i­dent Ja­cob Zuma and the en­tire ANC lead­er­ship to avoid cre­at­ing more de­part­ments. The ex­ist­ing ones need to im­prove their de­liv­ery. The ad­di­tion of the small busi­ness devel­op­ment min­istry, for in­stance, af­ter the May 7 gen­eral elec­tions last year, was not nec­es­sary as th­ese du­ties could have been car­ried out by the Trade and In­dus­try Depart­ment.

Spend­ing pru­dently will help bring down bud­get deficits over time, lead to a firmer rand and help SA avoid sovereign credit down­grades.

If the coun­try man­ages its fi­nances well enough, some agen­cies might even up­grade the rat­ings, which are dan­ger­ously close to junk sta­tus.

In­vestors are never too keen on in­vest­ing in a coun­try whose bonds are rated junk.

Global eco­nomic growth should pro­vide some tail­winds to the lo­cal econ­omy. World eco­nomic growth is ex­pected to be higher this year than last year — which im­plies higher de­mand. SA is an open econ­omy that benefits from sell­ing to global mar­kets.

The only un­cer­tainty is where oil prices will end up. It is safe to as­sume that oil prices are un­likely to fall to lev­els of around $45 a bar­rel given that global de­mand should gain some mo­men­tum go­ing into the sec­ond half of the year. In­stead fore­casts are for the oil price to re­cover to around $60 by year-end.

It can only be hoped that those re­spon­si­ble for buy­ing the oil that SA uses have been us­ing this op­por­tu­nity to stock up on the com­mod­ity.

What is im­por­tant for SA over the com­ing months is not just where oil prices go, but when the US Fed­eral Re­serve starts rais­ing in­ter­est rates.

If higher rates in the US cause emerg­ing-mar­ket cur­rency weak­ness, in­clud­ing the rand, and this causes de­te­ri­o­ra­tion in the in­fla­tion out­look, chances are the Re­serve Bank will raise rates in the fi­nal quar­ter of this year.

Higher in­ter­est rates are in­evitable and must be done if SA is to com­pete suc­cess­fully for thou­sands of in­vestors around the world who are look­ing for higher re­turns on in­vest­ments.

What is im­por­tant for SA over the com­ing months is not just where oil prices go, but when the US Fed­eral Re­serve starts rais­ing in­ter­est rates

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