Inflation to ratchet up
BAD NEWS: PEOPLE ALREADY FALLING BEHIND ON PAYING OFF DEBT
The rand is expected to remain on the back foot, says economist.
The inflation rate is expected to increase again while the rand falls and this does not bode well for interest rates, which are also expected to remain elevated in a tough financial environment for consumers.
This bad news comes on the back of another big increase in the fuel price and data from the National Credit Regulator shows people are increasingly falling behind on paying off debt while payday loans continue to increase.
Recent signs of rising price pressures based on volatile international oil prices is again raising the spectre of increasing inflation, says Jee-A van der Linde, senior economist at research group Oxford Economics Africa.
“A burgeoning US dollar has been a key factor behind the rand’s softness but concerns about the country’s deteriorating fiscal position also weigh on the local currency.
“Diminishing revenue performance amid power supply and logistical constraints, with a moderation in key export prices, has rekindled concerns about South Africa’s fiscal position.”
Van der Linde says greenback strength has kept the South African rand on the back foot.
“Serious concerns about South Africa’s fiscal position are among the primary idiosyncratic factors weighing on the rand.
“The rand should remain firmly on the back foot from now until the medium-term budget policy statement (MTBPS) on 1 November, with exchange rate volatility set to continue in the build-up to next year’s general elections.”
Oxford Economics Africa’s revised forecast for the rand is it will average about R19 to the dollar level over the coming quarters.
The problem with a weak rand is that it poses a risk for the domestic inflation outlook.
“The South African Reserve Bank (Sarb) governor (Lesetja Kganyago) has said defending the exchange rate is a futile exercise and we agree, considering South Africa’s weak macroeconomic fundamentals and the rand’s high daily trading volumes, which amplifies the currency’s risk-sensitivity to global factors.”
Nevertheless, the Sarb’s data-dependent stance means further interest rate increases cannot be ruled out for the monetary policy committee (MPC) meetings, Van der Linde says. The next MPC meeting is in November.
“Although further rate increases do not feature in our base case, we believe policy easing is still some way off and we have pushed out the first repo rate cut to the fourth quarter of 2024.”
He warns that supportive disinflation effects have mostly run their course and Oxford Economics Africa expects inflation to ratchet up over the coming months. Producer inflation has already begun to accelerate again.
“A series of sizeable domestic fuel price increases imply that fuel inflation will accelerate over the coming quarters. Our revised forecast sees inflation averaging 5.9% in 2023 and 5.5% in 2024.”
The higher-for-longer narrative has also firmly taken hold, with emerging market currencies like the rand feeling the brunt of this outlook, Van der Linde says.
“In addition, market jitters about South Africa’s fiscal position have intensified, with the country no longer expected to realise a primary budget surplus this year which is a requisite to stabilise government debt.”
The group forecasts South Africa will record a primary budget shortfall equal to 0.3% of gross domestic product for the 2023-24 financial period, with government debt as a proportion of GDP expected to breach the 80% echelon in the coming years.