Most savvy consumers and those fixed on rising food costs and inflation will be paying close attention to the Medium-Term Budget Policy Statement (MTBPS) today.
South Africans could also be facing another interest rate hike when the National Treasury announces its decision on November 23.
Given the current state of the economy and the minister’s speech, IOL News spoke to Sonja Steyn, Head of Wealth Management Strategy at Consult by Momentum, on the current state of affairs.
When asked on the impact of another interest rate hike on consumers, Steyn said that “while interest rate hikes hit consumers where it hurts the most — their wallets —they are specifically enacted to stabilise and thus protect the economy.”
“By increasing the 'cost' of credit, consumers are deterred from borrowing to fund their expenditure, thus driving down goods demand and subsequently inflation.”
Steyn adds that unfortunately, consumers with existing debt, in the form of home loans, car repayments, and clothing accounts, are now paying a lot more for what they purchased.
WHEN WILL THERE BE HOPE?
She says that given global macro-economic factors such as the Russia-Ukraine conflict (and now in Gaza), South African consumers have seen a series of rate hikes over the past few months that are unfortunately unlikely to be over.
She notes that consumers are likely to only see some respite in the second quarter of 2024.
“The cost of oil and the recent outbreak of bird flu (which has affected access to, and the cost of poultry and eggs) are also driving up food and petrol costs, so the bad news is that consumers will remain under pressure for some time longer”.
South Africans will therefore be forced to fund rising costs from other sources like investments and savings, which will have further financial repercussions down the line, according to Steyn.
There have been a number of comments this week from financial analysts that note that SA will fail to bring in enough tax revenue.
Steyn has consulted a number of economists who have noted the following:
Gross tax revenues are running behind schedule based on collections between April and August 2023. This is largely owing to an under-performance in corporate income tax (CIT) collections.
The South African Revenue Service (Sars) Tax Statistics report for 2022 showed that the mining sector acted as a large contributor to CIT previously. However, a slump in SA’s key exported commodity prices has likely driven this contribution lower.
Personal income taxes (PIT) have outperformed due to a rise in nominal wages, in the public sector in particular, and modest employment gains across the economy.
Domestic value-added taxes (VAT) have increased by 6.5% year-on-year (y/y) in the fiscal year to date (FYTD). This is only marginally lower than government’s February 2023 national budget full-year assumption of 6.7%. This highlights resilience in household spending, despite elevated cost-of-living pressures facing consumers.
Sars’ strategic intent to encourage voluntary compliance is also gaining momentum, with taxpayer behaviour improving and trust in Sars climbing further.
According to Steyn, this is a mixed bag.
“On one hand, individual compliance seems to be improving, but on the other hand, corporate tax is under-performing, in part thanks to companies' increasing cost bases," she notes.
“The shortfall remains yet to be fully understood, and government is largely dependent on tax revenue, and if collection is insufficient, it will need to cut spending, increase borrowing, and/or increase taxes to make up the shortfall.”
WHAT CAN YOU DO?
When asked what consumers can do to troubleshoot the rising costs of food and energy, Steyn said: “Every South African knows how to make a plan because we've always had to.
“We're under severe pressure as a population, but we are also one of the most resilient nations in the world, thanks to the issues we grapple with and have learned, somehow, to outmanoeuvre every day to survive, such as load shedding.”
She notes that with food and energy costs rising, she expects that consumers will continue to show tenacity and creativity in how they manage their finances.
“Many are moving to alternate energy sources — an initial expense, but one that is saving them in the long run. The silver lining of load shedding is that SA may have inadvertently leapfrogged ahead in its renewable energy transition, borne out of necessity!”
She advised that people looking to save on food costs should look at clever budgeting ideas, stokvels, bulk buying, and shopping around for the best deals.
In terms of investing solutions Steyn said that SA has a mature investment market with deep domestic capital markets, but with many foreign investors taking funds out of their South African bond investments, as well as local investors immigrating. She notes that it is not clear how much the market will be able to absorb as a result of these actions.
“Dipping into gold and foreign exchange reserves would not be wise, as it would impact the economy. Investment in the private sector is needed to grow the economy. This could be in the form of policies and a more favourable environment for doing business.”
THE BUDGET DEFICIT AND ITS IMPACT ON CONSUMERS
Steyn also looked at the impact on consumers if the budget deficit widens to 5.5% of GDP in 2023/24 as predicted by Nedbank last week.
Steyn notes that South Africans are in for a difficult time and that if this prediction is accurate, the cost of living will increase for a country of consumers, with many already in debt.
“Everyone will be impacted. This will probably be even more so for people with the lowest of incomes.”