Registered users can save articles to their personal articles list. Login here or sign up here

SA should brace for more expensive credit

SA’s real interest rate – the difference between the repo rate and the CPI – is likely to widen in 2019.

Delivering the monetary policy committee speech last week, South African Reserve Bank (Sarb) governor Lesetja Kganyago announced that the Sarb would raise the repo rate by 25 basis points to 6.75%. The decision was informed by the fact that inflation has been edging towards the upper 6% level. The market saw the decision as hawkish, but with the consumer price index (CPI) for October registering at 5.1% year-on-year, the Sarb was bound to act at some point.

A more chilling prospect is presented by the widening differential between the CPI and the repo rate, which is bound to complicate Sarb’s policy actions if it persists. “The difference between the repo rate and the CPI is known as the real interest rate,” says Montfort Mlachila, the International Monetary Fund’s senior resident representative in South Africa. “If the real interest rate is rising, it will increase the funding cost for companies but it may also increase savings.”

This year, South Africa’s real interest rate eased from about 2.7% in Q1 to about 1.5% in Q3. But in the past two years, as the US Federal Reserve normalised, the Sarb embarked on a relatively accommodative stance. The two inverse monetary actions have seen the variance between Sarb and Fed interest rates exacerbate pressure on the rand. “The differential between US and SA interest rates fell from 6.7% to 4.3%, with the rand depreciating alongside,” says Annabel Bishop, Investec’s Group economist. ” SA has cut interest rates as the US has hiked, and the rand has weakened markedly.”

Dovish in the US

Fed chair Jerome Powell, addressing members of the Economic Club of New York this Wednesday, was more dovish. He confirmed that rates were currently “just below neutral” – this coming barely two months after he said interest rates were “a long way from neutral”. Powell’s tone sent the Dow Jones Industrial Average up more than 600 points as equity markets took the comment as the Fed being aware of the risks of tightening too soon.

From South Africa’s perspective, the dovish tone signals a much-welcome respite as the widening between the Fed’s interest rates and Sarb’s repo only adds pressure to the rand. Sadly, imminent US interest rate hikes in 2019 will play a prominent role in South Africa’s CPI inflation/repo rate differential – and not even President Donald Trump’s rants at Powell will avert the Fed’s planned actions.

However, Bishop cautions that: “SA is likely to see the difference between CPI inflation and its interest rates widen slightly next year, rising from 1.5% to 2%, which would typically herald some mild rand strength, if not stabilisation of the domestic currency, other factors unchanged.”

Private sector credit

One of the most palpable effects of a widening real interest rate is expensive credit. Growth in private sector credit extension is already feeling the pressure – dropping 5.8% year-on-year in October from 6.3% year-on-year in September 2017. With third-quarter unemployment edging up to 27.5% and National Credit Regulator data revealing that the rejection rate of new credit applications climbed 1.6 percentage points to 50.1% in the second quarter, South Africa’s private sector could do with some cheaper money.

Source: Iress, Investec

Sadly, forecasts paint a dismal picture as the interest rate and CPI inflation differential is only expected to widen more next year.

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.



To comment, you must be registered and logged in.


Don't have an account?
Sign up for FREE

The world should not have got drunk on ridiculously cheap credit for so long.

This is the flip side coming into effect.

Methinks the only drunk one here is you – as in always blaming others.

The ‘failed state walking’ that is post ’94 SA, has only one cause, namely: post ’94 SA.

The leading article is simply more incoherent babbling, by the intellectually blind being led by the economically blind, that is SA’s post ’94 bundu economics.

The final chapter in what was once the greatest- and most powerful economy that Africa had ever seen (and ever will), began the day post ’94 SA, lost control of its (currency) exchange rate.

The moment this happened, SA’s economy became a piece of driftwood, in an open ocean – at any given moment it has an equal chance of being smashed to pieces vs drifting aimlessly. Bottom line: SA has zero control over its own economy.

Anything over R6-00/US$ equates to an economy that is not sustainable – eventually everything will collapse and will never be rebuilt. Currently SA is seeing its ability to generate electricity collapse. By 2020 SA will be a full scale African economic basket case (unable to sustain even the most basic economic requirements – eg electricity).

Take Germany as an example – the greatest industrial economy on earth (eg multiples better than China). It deliberately kept its currency as strong and as stable as possible – thereby ensuring its workforce remained one of the most (if not the most) competitive on earth. Side note: fear not – that will NEVER happen in SA.

Something very dramatic will have to change in SA – else pack up and run; NOW!

…stopped reading as it says the rand weaken alongside…rand strength from R16 to R13.5…compare that to inflation in the same time?
Smoke and mirrors…other aspects in play

Load All 3 Comments
End of comments.


Insider GOLD
ONLY R63pm

Moneyweb's premium subscription is a membership service which will give you access to a number of tools to take charge of your investments.
Or choose a yearly subscription at R630pa - SAVE R126

Get instant access to all our tools and content. Monthly subscription can be suspended at any time.



Follow us:

Search Articles:Advanced Search
Click a Company: