We need government policies that can help us dig ourselves out of our economic mess, writes Nicola Mawson.
So, Citigroup reckons the South African Reserve Bank will hike rates by a quarter of a percentage point next week, and again in September.
I’m hardly surprised; the push factors on inflation keep getting stronger. If it’s not municipalities hiking everything from water to refuse removal, it’s Eskom wanting more money so it can keep the lights on.
It looked like there would be good news earlier this week, when pundits suggested the petrol price would go down, but I don’t think we’ll see much relief over the longer-term. If anything, we’ll be lucky to have a month’s grace before it goes up again.
This is because oil prices are on the up, even though supply is increasing now that Iran is back in the fold and adding to supply. That pretty much messes with the whole supply-and-demand way of thinking because prices are being driven by speculating traders.
Let’s hope it’s short lived because the weak rand exacerbates the effect of even a small increase in the price of oil.
Frankly, those poor chaps at the Reserve Bank have quite a balancing act to do because they have to take all these factors into consideration, as well as consider the effects on the economy of a rate hike.
Generally, most experts in this field do not see rate hikes as a good thing, especially since the bulk of our spending is driven by consumption.
We all know what the effect of a 25-basis-point increase is on our back pockets, and just how much that trims our discretionary cash. When rates go up, we put off doing things like repainting the house, or trading in the car for a newer model.
And that hampers economic growth.
Economist and chief strategist at Investment Solutions, Chris Hart, believes a hike in interest rates is actually good for the economy. He argues this helps people who have savings earn more on their investments.
This, in turn, encourages more investment; creating a pool of savings that can be invested to grow businesses, leading to job creation and economic growth.
I agree with Hart that we need more business development locally, because bringing more and more people into the formal economy is vital.
Over indebted
I’m just not sure higher interest rates are the way to do this because I disagree with him about the pain being short-term.
The problem is, too many South Africans are carrying around too much debt.
According to the National Credit Regulator, South Africans owed a total of R1.671 trillion at the end of March, and there are 23.11 million credit-active consumers, of which 10.41 million have impaired credit records.
That’s frightening - there are only 20 million economically active South Africans, which means half the economically active population has some or other issue paying off creditors, and all of them are in debt.
As a result, even a small rate hike will hit the bulk of working or economically active South Africans hard and I fear we may see another round of repossessions because many South Africans are simply in over their heads.
We just cannot afford to fork out more each month, not when our pockets are being hit left, right and centre because of a variety of ever increasing costs.
Yet, Hart warns if we don’t get the economy right - trim debt, stop investing in foolish infrastructure projects and stop making counter-productive regulations, we are heading for a recession.
Not every analyst and economist agrees with that dire outlook, but all do concur that the economy is in a sorry state of affairs, and we are in for a long period of very low growth. I don’t see us hitting 2% this year and, frankly, we need to be hitting 5%+ to create the number of jobs we need to so the poor can have a lifeline.
What we need to do is stop spending beyond our means, tackle debt, and start saving. Then we can benefit from higher interest rates and start pumping the economy of what has the potential to be a really great country.
But we need the government’s buy-in, too. It needs to be an enabler, and not a destroyer, of opportunity.
* Nicola Mawson is the online editor of Business Report. Follow her on Twitter @NicolaMawson
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