News in South Africa 24th January:
1. SARB decision tomorrow:
The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) is set to meet again this Thursday, 25 January, and most experts believe this meeting will be uneventful as the committee will keep the repo rate unchanged.
Since the current interest rate hiking cycle started in November 2021, the MPC has hiked the repo rate ten times by a cumulative 475 basis points.
This has brought the repo rate to a decade-high of 8.25% as the SARB has attempted to bring South Africa’s high, sticky inflation down and within its target band of 3% to 6%.
Their efforts seem to have borne fruit, as inflation has moderated to within this band and is now close to the mid-point of the target (4.5%), as July’s inflation print showed CPI standing at 4.7%.
However, after slowing slightly in the following months, inflation began to climb again in October, reaching 5.9%.
Inflation fell again slightly in November, but SARB Governor Kganyago has warned that one reading does not provide sufficient reason for the MPC to cut interest rates.
Kganaygo has repeatedly said the MPC would remain data-dependent in all future decisions.
As the next MPC meeting looms, Daily Investor asked several experts for their interest rate predictions, and there was an overwhelming consensus that the SARB will again keep the repo rate unchanged at 8.25%.
See the experts opinions on DailyInvestor.
2. Massive debt problem:
South Africa’s debt servicing costs are growing astronomically, with the country not being able to show much for the increases.
In the Medium-Term Budget Speech in November last year, Finance Minister Enoch Godongwansa said that the nation’s gross debt is set to increase from R4.8 trillion in 2023/24 to R5.2 trillion in 2024/25.
The minister added that the debt service costs will increase from 20.7% of revenue in 2023/24 to 22.1% in 2026/27.
He said that over the next year alone, the cost/interest on this debt will amount to roughly R385.9 billion.
This means that South Africa will spend roughly R1.06 billion a day on servicing its debt.
Over the Medium Term Expenditure Framework, which runs to 2026/27, these interest costs are expected to reach R1.3 trillion.
Although South Africa’s high debt-to-GDP – expected to stabilise at 77% of GDP in 2025/26 – is not uncommon for emerging markets, there is usually something to show for it.
Stanlib Chief Economist Kevin Lings said that the government’s R1 billion per day interest bill is coming at the cost of other services, including education, health and infrastructure.
“If we walk around the country a bit, we’ve taken up debt enormously, but what do we have to show for it, other than stadiums? You’re going to struggle to find something to demonstrate (value for money),” Lings said.
“If you look at China, go back to the same time period, government debt was 28% of GDP (in 2009), and now it’s at 80% – slightly higher (than South Africa).
“But if you walk around China, you can see what they spent the money on. The development over that time period is just phenomenal. They put themselves in a position to sustain decent growth for many years – those assets are going to last for decades. They will reap the reward for undertaking the investment.
3. Transmission IPP office:
Minister of Electricity Kgosientsho Ramokgopa on Tuesday indicated that government will create a dedicated office for the procurement of private sector participation in expanding Eskom’s transmission network.
The anticipated model for such participation is a build-operate-transfer (BOT) contract, which will see private sector companies build new transmission lines and operate them for a specified period, after which the asset is transferred to the relevant organ of state.
It is a model used to finance large projects, typically infrastructure projects developed through public-private partnerships.
The Gautrain is one example of such a contract; it was awarded to the Bombela consortium and comes to an end in 2026 when the train system will revert to government.
Funding
He says there is “insatiable” appetite among investors to participate in the transmission IPP programme. This was confirmed at the World Economic Forum in Davos, where one global bank declared its willingness to underwrite the investments. He did not name the bank.
He indicated that either the Industrial Development Corporation (IDC) or the Development Bank of Southern Africa (DBSA) will be central to the financing of the programme.
He submitted his plan for the funding of the transmission expansion to cabinet late last year, but it was remitted for some adjustment. He indicated on Tuesday that issues around “the legal configuration” of the procurement still have to be finalised, including the funding of the envisaged transmission IPP office.
It must be noted that Ramokgopa’s own portfolio is situated in the presidency and no provision has been made in the country’s budget for his position, which was created by President Cyril Ramaphosa in March last year. His office has so far been funded by the private sector.
At his first briefing for the year about two weeks ago, he said to journalists he may announce the plan “within the next week or two”.
In the meantime, the long-awaited appointment of the board of the NTCSA has been finalised and Ramokgopa indicated that he must engage with the board first to ensure their plans are aligned. It is not clear how long this will take.
4. Ramaphosa loses authority:
The government yielded to public pressure and revised the National State Enterprises Bill.
The initial version granted the president the sole authority to appoint board members of struggling state entities.
However, the revised version now establishes an independent panel to determine the suitable candidates for the board positions.
5. Inflation cools:
South Africa’s annual consumer price inflation (CPI) continued its downward trend by cooling slightly in December.
StatsSA announced today that annual CPI was 5.1% in December 2023, down from the 5.5% recorded in November 2023.
In June, the inflation rate fell within the South African Reserve Bank’s (SARB) target range of 3% to 6% for the first time since April 2022.
July’s rate (4.7%) was also within the SARB’s target range of 3% to 6% and far closer to its target midpoint of 4.5%.
However, inflation started trending upward again in August and reached a peak of 5.9% in October before falling again slightly in November.
According to Stats SA, the consumer price index was unchanged in December 2023.
The main contributors to the 5.1% annual inflation rate were:
- Food and non-alcoholic beverages increased by 8.5% and contributed 1.5 percentage points;
- Housing and utilities increased by 5.7% and contributed 1.3 percentage points;
- Miscellaneous goods and services increased by 5.1% and contributed 0.7 of a percentage point.
- Transport increased by 2.6% and contributed 0.4 of a percentage point.
In December, the annual inflation rate of goods was 6.4%, down from 7.1% in November. It was 3.8% for services, unchanged from November.
This data will inform the Monetary Policy Committee’s (MPC) interest rate decision at its meeting tomorrow.
All information sourced from articles posted by: DailyInvestor, BusinessTech, Moneyweb, and City Press.
