ECONOMY WATCH

Alot of changes, most of which will not delight consumers at all, await South Africans in the coming few months. Inflation may breach the 3%-6% target band before the end of the year, fuel prices will rise again, and interest rates may go up sooner than expected after remaining on hold since July 2014. Everyone is also waiting with bated breath to see what the National Energy Regulator’s decision will be on a request by state-owned electricity provider Eskom to hike electricity tariffs by even more than was originally granted.

South African consumers should be grateful that the country has an energy regulator, which on many occasions has come to the rescue by granting Eskom lower-than-requested electricity tariff increases. That said, it also cannot be an easy time for authorities at the energy regulator. On the one hand they need to ensure that consumers are not paying more than they need to for electricity while also making sure that Eskom is receiving enough revenue from electricity users. Eskom wants an additional 12,61% increase in electricity tariffs on top of the 12,69% that the regulator has already granted for the 2015-16 year. Eskom needs R32,9bn for open-cycle gas turbines and R19,9bn for the short-term power purchase programme.

All interested parties have until late next month to give their views on why Eskom should or should not be granted the kind of tariff hikes it has requested. The regulator will hold a public hearing on Eskom’s application on the 23rd and 24th of next month before announcing its decision on the 29th. This will be a public hearing to rival all public hearings this year. It is no secret how passionate energy users, be it consumers or business, get when it comes to all things electricity, including higher tariffs and load-shedding.

Though the following is not what many want to hear, the truth is that it may be necessary for South Africans to start paying more for electricity in order to use it sparingly and more efficiently. People use things much better when they know they are paying a lot for them. An example is how the owners of two cars that differ in value handle them. The owner of a car that is not worth a lot may leave it in the sun, unlocked; may not wash it frequently; and may not even service it on time. But the owner of an expensive German car is likely to do the opposite: build a garage for the car to park in; not drive around frequently to avoid wear and tear; and have the car serviced as scheduled.

If it comes to a point where tariffs have to rise steeply, this is the view users need to take. Eskom may even be able to provide electricity on a stable basis if it does get the money from users. Besides, higher electricity tariffs make it more beneficial to try other sources which may be cheaper. Many households are already making the transition to other energy sources such as gas stoves and heaters, generators, and solar panels.

The windfall that consumers have had from low oil and fuel prices earlier this year is dissipating. Oil prices are now higher at around $64/bbl from lows of $45/bbl at the start of the year. The petrol price has risen by a cumulative R2,58/litre since March and looks set to rise again by around 46c/litre next month (June). A weak rand makes oil imports more expensive.

The consequence of factors such as higher electricity and fuel prices will be slower growth in household spending, which implies consumers will only support economic activity to a limited extent. This is also backed by the fact that consumer confidence remained low in the first quarter, with indications of not much of an improvement in the second quarter. A First National Bank-sponsored consumer confidence index put together by the Bureau for

Next month is also extremely important because Fitch and Standard & Poor’s will review their sovereign credit ratings for SA

Economic Research fell to -4 in the first quarter of 2015 from zero in the last three months of 2014.

A concern heading into the next few weeks is whether SA will again experience strikes to the extent seen last year. At least a major strike has been avoided in the public sector as government and 1,3m public servants have reached a wage settlement agreement for the next three years. The agreement was reached on May 19 after seven months of what must have been gruelling and testing negotiations, particularly for the state, which has to contain growth in spending, especially on the wage bill. Civil servants will receive a 7% increase back-dated until April, and will receive inflation +1% increases in the subsequent two years of the three-year deal.

The gold sector is more likely than other sectors to experience a strike. The Association of Mineworkers & Construction Union (Amcu) plans to demand basic wages of R12 500 per month when negotiations get under way. It is not the first time that Amcu has made such a call and it seems unfazed by indications from employers that job cuts loom. Mining in general has been struggling under tough operating conditions such as higher labour costs and weak commodity prices.

Not only does economic growth suffer due to lost production during strikes, the spending ability of striking workers is also limited as they are not being paid. Reserve Bank data shows that the number of workdays lost due to industrial action has increased noticeably in recent years. The average annual number of workdays lost between 2008 and 2014, excluding 2010 due to a public-sector strike, amounted to 5,1m compared with an annual average of only 1,8m for 13 years from 1994 to 2006.

With interest rates still low by historical standards, overindebted consumers still have some room to breathe. But interest rates will not remain unchanged for forever. There are already expectations that rates could be raised by November, given the rise in inflation which already began accelerating from 3,9% year-on-year in February to 4% in March and to 4,5% in April. The rise last month was driven mainly by a R1,62/ increase in the petrol price, which took into account a significant fuel levy increase.

Inflation also rose on higher alcohol prices announced in the February budget. Inflation is going to accelerate further in coming months amid higher electricity tariffs and oil/petrol prices.

What will offer some relief for now is food prices, where increases are likely to be modest in coming months. Food inflation has been decelerating since late last year, offering consumer incomes some relief. Food inflation was recorded at 8,7% year-on-year in September 2014 and at 5% year-on-year in April. The Food & Agriculture Organisation’s food price index in April fell 2,1 points to a five-year low of 171 points — indicating no upward pressure on food prices. The only thing that will stop SA from fully benefiting from lower global food prices is a weak rand, which makes imported commodities more expensive. SA has to import around 753 000 t of yellow maize, according to Grain SA’s current estimates, after a drought in various parts of the country caused shortages. The estimates are subject to revision once more data on the maize harvest emerges.

Next month is also extremely important because Fitch and Standard & Poor’s (S&P) will review their sovereign credit ratings for SA. The likelihood of a downgrade is low, especially now that a strike has been avoided in the public sector.

For now, agencies are more likely to affirm their ratings. S&P has a BBB- rating, which is one notch above speculative grade or junk status, with a stable outlook, while Fitch has a BBB rating with a negative outlook. This suggests that Fitch is the more likely of the two agencies to downgrade. Though continued downward revisions to economic growth support the case for a downgrade, a lower-than-expected budget deficit in the 2014-15 year and government’s commitment to fiscal consolidation count in SA’s favour.

Moody’s does not have a set period for releasing its review, but the agency is downbeat about SA’s economic growth and rising debt levels. The agency cut SA’s economic growth forecast for 2015 to 2% from 2,2% previously because of the effect of severe power outages on economic growth. The agency was, however, pleased about the reduction in the budget deficit to 3,5% in the 2014-15 year from government’s earlier projection of 3,9%. Moody’s forecasts the budget deficit to narrow further to below 3% in the coming year.

A narrowing budget deficit and government’s ability to stick to fiscal consolidation will be positive for ratings.

Many households are already making the transition to other energy sources like gas and solar