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The rand, Trump, petrol, food prices and more in 2017

‘If the US is going to go for a couple of rate increases, then it simply makes sense for us to follow’ – Dawie Roodt – chief economist, Efficient Group.

SIKI MGABADELI: Let’s get a little bit more of a sense of what’s expected for this year. Last year was very, very volatile on many issues. We’ve talked a little about Brexit, we looked at US markets, the rate-hiking cycle that only really started to kick off again in December and which has implications for the currency itself, not just US developments and rate hikes but also domestic factors affecting the rand. Fuel prices – we’ve just recently had a petrol price increase, a rather hefty one. There is one also expected soon and of course there have been worries about food prices. But it looks like we may be over the worst of the drought. But what does all of that mean?

Let’s get a sense from Dawie Roodt, who is chief economist at the Efficient Group. Dawie, thanks so much for your time today, and happy 2017. Are you happy that 2016 is behind us economically speaking?

DAWIE ROODT: Absolutely, Siki. Good evening to you. Very nice speaking to you. I’m so happy 2016 is behind us because really that was a horrible year with the economy really performed absolutely dismally. We are waiting for the final numbers to come, but 2016 was pretty much a nightmare. I’m in the process of having a look at the numbers for 2017. We’ve got one or two numbers that we will start sending out soon and I’m much more optimistic for 2017.

SIKI MGABADELI: And why is that?

DAWIE ROODT: Well, a couple of reasons. Where can we start? Let’s start with economic growth. Let’s assume that nothing really happens, let’s assume we just kick the can down the road, let’s assume there is no major change in the Minister of Finance or something like that. Then economic growth should be round about 1% or so. But we’ve had very nice rain, and we’ve had an agricultural sector that has been in a very deep recession for – how many quarters now? – seven quarters or something. The base is so very, very low. And I know agriculture is time affected, but it’s such a volatile sector it is quite possible for agriculture to grow at a very strong rate – even as much as 15% or even more. That can quite easily add another 1% to economic growth. So I will not be surprised, assuming the rest of the economy is going to behave, if agriculture can add 1% to GDP and quite easily we could get to 2%.

I’ve been a negative economist in the market for the past two years, but this time round I’m fairly optimistic on economic growth. That 2% is not good enough…

SIKI MGABADELI: But at least it’s better than where we are.

DAWIE ROODT: It’s a nice try, but most economists are expecting it. But the IMF has still got us I think at 0.8%.

The other variable that is really important is the currency. Everybody seems to think that the currency will keep on taking a knock, and they quote all sorts of fundamental reasons and so on. But if you do the normal…calculation – and don’t tell anybody I’m actually doing this, but I do a slightly more sophisticated purchasing power parity calculation and, based on that, the currency should in fact be below R8 to the US dollar. In fact, closer to R7 to the US dollar. I’m not suggesting it’s going to go there, but I’m just saying that we are already paying a huge risk premium. And again, assuming nothing happens, one can expect the currency to remain round about here and actually appreciate a little bit. Again, I will not be surprised, bar some political development, to see something – R13 is not impossible by the end of this year. So that’s another possibility.

SIKI MGABADELI: Even with US rate hikes, do you think we might stay around here?

DAWIE ROODT: But we never [do]. You’ve just spoken about inflation in South Africa, so we have probably falling inflation while the US has got rising inflation. That’s a very important distinction between the two. So I think the US is probably going to go for 50 or 75 points in the short term , and we are probably going to go with, say, 25 or 50 basic points in the short term because of those two different inflation environments.

If we do go for a bit of a rate increase in South Africa, and the US also goes, then we can keep the relative interest-rate differential more or less the same and I think the currency is not going to be affected that much by that.

I think another story that is playing itself out – it will be interesting to see how the Trump administration is going to affect the economies and the financial markets. The world has been in something like a 30-year bull market on the bond market. We had interest rates last year below zero – I’m talking about the US – but in many places, in Europe particularly. Could this be the end of this huge bull market on bonds? Could we see from now on interest rates going up? I think that could be the case provided that the Trump administration is successful in getting inflation going in the United States. Then we may be in for the high jump in two, three years’ time with the very high debt levels, especially for government in Europe and all over the place. But in the short term it could actually be quite good.

SIKI MGABADELI: Let’s talk about local consumers, then, in 2017. I mentioned petrol and food prices. What do you think is going to happen?

DAWIE ROODT: Food prices are going to take a little while before the rains will really filter through to food prices, so in the second half we are going to see, maybe at the end of this year, really, an impact on food prices. It’s quite possible to go negative on food-price inflation – in other words, actual food prices falling. For the average consumer I’m afraid it’s not good news yet because we have population growth at 1.6% and some productivity growth at about 1% or so. So just to keep the average South African where they are, we’ll need economic growth about 2, 2.5% or so. So we will probably remain more or less [where we are] or we’ll gradually be slightly worse off than 2016.

And, on top of that, interest rates going up. The petrol price is going to go up in February, and we know the Minister of Finance is going to nail us with tax increases in February as well. So I’m afraid the average consumer out there is probably going to pull a little heavier load this year … but not as bad as the fall in 2016.

SIKI MGABADELI: Do you expect another rate hike?

DAWIE ROODT: From the South African Reserve Bank? Yes. There are two variables. Of course, inflation locally. But of course what happens is the interest rates growth there as well – and if the US is going to go for a couple of rate increases, then it simply makes sense for us to follow because, if we don’t, the rand will come under pressure and it’ll eventually lead to inflationary pressures as well. Yes, I really do hope that the Reserve Bank will go for at least a 25 basis points increase.

SIKI MGABADELI: Alright. And finally, your view on Brexit? We were just chatting about it with Anthea Gardner.

\DAWIE ROODT: I’ve got some major issues with Europe. There are serious political issues in Europe generally speaking, but I’m afraid I’m slightly on the bearish side as far as Brexit is concerned. I think it’s going to be fairly hard and I think the pound will remain under pressure, and I think it’s going to be quite negative for he British economy as well. There is one silver lining, and that is that the British economy and the US economy are pretty much in sync usually. So there may be some positive spill over from the US economy to keep the British economy from slowing down even further.

SIKI MGABADELI: Thanks, Dawie. Dawie Roodt is the chief economist at the Efficient Group.

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