News in South Africa 6th February:
1. Consumer relief on the horizon:
Battered by low wage growth, high interest rates, and increasing debt levels, many South African consumers are in the worst financial shape they’ve been in for years, maybe even decades. The result is a persistently weak economy.
This faltering economy, driven mostly by a failing state, means salaries and wages failed to keep up with inflation in 2022 and 2023 – resulting in a decline in household buying power of about 5%.
The danger of plummeting salaries is, however, not just that households stop spending sufficiently to grow the economy, but that consumers will need to borrow money to make ends meet.
In these tough times, consumers often turn to unsecured loans, which are not backed by any assets, which means banks charge higher interest rates to offset the risk. This usually does not end well for the borrower.
The last time there was a boom in unsecured loans (between 2012 and 2014), many households ended up poorer than before because they could not keep up with the interest rates they were being charged.
In the end, lower incomes and higher interest payments – not least because of the unsustainably high interest rates the South African Reserve Bank has forced on us – have put South Africans in a very tight spot.
Consequently, households have been unable to purchase the goods and services they previously could afford, putting strain on various sectors of the economy.
In fact, we have not seen the services sector perform this poorly, so consistently, for a very long time.
The reason for this is that SA is a consumer-driven economy, with more than 60% of its gross domestic product (GDP) attributed to private final consumption. As such, when households are under pressure, economic growth is under pressure. And if economic growth is under pressure, households are under pressure, and so the vicious cycle continues.
Improving picture
Fortunately, despite the uncertainty of the upcoming elections and the reaction of capital markets, the outlook for 2024 is much different. Inflation has been easing, and even the outlook for food prices is positive. Interest rate cuts may only be a few months away and could be reduced by at least 1%. Even unemployment figures have improved, albeit only slightly.
Amid cooling prices and the resilient nature of recovering enterprises, we are even expecting higher income growth this year.
Overall, the purchasing power of households should improve, together with their standard of living, which declined during 2022 and 2023. That said, consumers will probably only really feel the difference in 2025.
Concerning the upcoming Budget Speech this month, a few things have caught our attention: President Cyril Ramaphosa is committed to extending a Covid-era monthly payment for low-income citizens until March 2025. These payments can eventually become the basic income grant he hinted at a month ago when he said there is a “strong case” for it despite the fiscal constraints.
And while a basic income grant will place strain on the fiscus, it might not be all bad news.
For one, it will reduce the gap between those who have (jobs) and those who do not, and thereby alleviate some of the socio-political tension in our economy. We expect the ruling party will use policies like these as an electioneering tool to win votes in the upcoming election.
Many also expect Ramaphosa to sign the National Health Insurance Bill into law. But even if he does, we believe it will be vehemently opposed in court and will not see the light of day for many more years to come (at least not in its current format).
Ramaphosa also intends to fully implement the previously announced pay increases for 1.3 million state employees.
Consequently, the consolidated budget deficit should widen to 4.8% of GDP this year and remain at 4.6% in 2025, a major overshoot of official estimates.
We doubt that the markets were expecting anything different and should, therefore, not react too negatively. But we would still advise our clients to brace for impact.
2. Extreme food price spikes:
The prices of several food items often found in shopping baskets across all income brackets have increased by over 60% in the last six years – with some even doubling inflation over the same period.
This is shown by The Outlier’s new tool, which is currently tracking the price of 11 items found in South Africa’s essential basket of food items using Stat SA’s data dating back to 2017.
According to the data, the price of six of the 11 food items increased well over 60% over the six-year period – almost doubling that of inflation over the same period.
According to inflation.eu – a worldwide inflation data platform – South Africa’s Consumer Price Inflation (CPI) has been around 34% since 2017.
This means the top three items – potatoes, eggs, and instant coffee – more than doubled inflation, while others like sugar, tomatoes, and rice where close to doing the same.
The 11 food items analysed are shown in the table below, including their prices in 2017 and 2023, as well as the percentage change in price over the period.
| Food item | 2017 price | 2023 price | % change |
|---|---|---|---|
| Potato (per kg) | R12.51 | R22.46 | +79.53% |
| Eggs (18-pack) | R37.17 | R68.49 | +79.43% |
| Instant coffee (250g) | R34.83 | R58.55 | +68.10% |
| White sugar (2.5kg) | R37.18 | R61.64 | +65.78% |
| Tomatoes (per kg) | R16.04 | R26.22 | +63.46% |
| Rice (1kg) | R18.65 | R30.07 | +61.23% |
| Spaghetti (500g) | R13.15 | R19.73 | +50.03% |
| Whole chicken (per kg) | R43.69 | R65.39 | +49.66% |
| Beef mince (per kg) | R71.34 | R104.37 | +46.30% |
| White bread (700g) | R13.41 | R18.50 | +38.63% |
| Full cream milk (2L) | R26.06 | R34.92 | +34.00% |
Notably, the food items that have seen the steepest increases since 2017 have also seen a double-digit increase compared to just one year ago.
According to Stats SA’s latest data, potatoes increased by a whopping 51.9% as of December 2023 compared to 2022. This was followed by eggs (38%), sugar (24.6%), and rice (19.9%).
If you look at a more expensive comparison of food prices – such as the Pietermaritzburg Economic Justice and Dignity group (PMBEJD) data – you’ll find dozens of other items have seen a significant increase in price compared to CPI.
The PMBEJD’s basket comprises 44 food items that most households in South Africa would purchase in a typical month. While this reflects a lower-income basket, this is what the majority of households would look at.
Across the 44 food items tracked by the group, only four came down in price, year-on-year, with Onions (-27%) and Cooking oil (-15%) seeing the largest price drops. The balance (40 items) went up.
24 food items saw double-digit growth year-on-year, reflecting significant increases – and nine were over 20%.
In contrast, these increases are higher than the latest recorded CPI for food, which came in at 5.1% in December 2023 from 5.5% in November and 5.9% in October.
3. Tough year ahead:
Renowned economist Dawie Roodt shared his predictions about South Africa’s economy in 2024, and they are mostly bad news.
Speaking to Ontbytsake, Roodt said he did a few forecasts related to the country’s finances, which do not paint a pretty picture.
He shared four predictions for the year ahead:
- 2024 elections – It is an election year which creates uncertainty and volatility. The private sector does not like uncertainty, which will limit investments. It means that not much will happen until the elections are over and will have a drag on the rest of the year.
- Economic growth – Because of the lack of investment and increased uncertainty, economic growth is likely to be low. South Africa will be lucky to achieve 1% growth. On a per-capita basis, people will get poorer.
- State finances – South Africa’s fiscal accounts are in deep trouble – not only the national government but also municipalities and state-owned enterprises. People should expect bad news during the Finance Minister’s 2024 budget speech later this month.
- Inflation – The worst inflation in South Africa and internationally is behind us. We may see a further decline in inflation, which will result in interest rate cuts.
“2024 will be a very difficult year for the South African economy. However, lower interest rates are the silver lining to the dark cloud,” he said.
4. 20 year IPP plan approved:
The City of Johannesburg has approved a 20-year plan with independent power producers (IPPs) aimed at reducing the effects of load-shedding on its customers and businesses.
Johannesburg is the country’s largest metro and economic hub and contributes almost 20% to GDP. However, it is dogged by high unemployment, violent crime, crumbling infrastructure and the energy crisis, which has resulted in factories and small businesses closing shop and thus low revenue collection and economic growth.
A report tabled in council last week shows that City Power plans to cut the amount of energy it procures from Eskom by 5% in 2025
5. SA rated more corrupt than ever:
The Institute of Risk Management South Africa (IRMSA) says that South Africa hitting a record low on the latest Corruption Perception Index is just another sign that the country is stepping towards becoming a failed state.
Anti-corruption advocacy group Transparency International recently published its Corruption Perceptions Index for 2023, with South Africa receiving its worst score to date.
South Africa dropped to its lowest ranking since the index was created, with the country ranking 83rd in the overall list. In terms of scoring, the country dropped by two points from 2022, receiving 41/100 – below the global average.
This places the country in the “flawed democracy” grouping and adds another black mark to South Africa’s name in its global standing, next to the 2023 greylisting, which also dented its reputation.
According to IRMSA, corruption is a core issue underlying multiple risks in South Africa, including economic collapse, crumbling infrastructure and poor service delivery.
IRMSA Chief Risk Advisor Christopher Palm said that corruption appears frequently throughout the group’s annual Risk Report as an essential risk that needs to be repaired before South Africa can even hope to address its poly-crisis.
“Our CPI score is another warning sign that we’re edging closer to becoming a failed state,” he said. “It puts us in the global spotlight, further deterring foreign investment after our concerning greylisting by the Financial Action Task Force last year.”
While the report acknowledges that the government has attempted to put structures in place to address corruption, the simple fact of the matter is that implicated officials are not being held to account – despite the findings of the Zondo Commission and other investigations.
“It’s clear that we have not put the measures required to arrest our poly-crisis in place fast enough,” Palm said. “I have heard prominent Chief Risk Officers in the Public and Private sectors refer to a perma-crisis, meaning that the risk profile reported and currently materialising at pace may be here to stay.”
All information sourced from articles posted by: Moneyweb, BusinessTech, DailyInvestor, and BusinessDay.
