ECON­OMY WATCH

Financial Mail - Investors Monthly - - Contents - with Nt­sak­isi Maswan­ganyi

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

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