News in South Africa 6th September:

1. Households at breaking point:

Households in South Africa have been hit by a “tsunami” of cost pressures, with the two biggest sources of energy now threatening to push many over the edge.

Households at breaking point
Photo by Karolina Grabowska

The cost of petrol and diesel have shot up dramatically from today (Wednesday, 6 September), increasing between R1.71 and R2.84 per litre, respectively.

This will add even more pressure onto households’ transport cost, but also to the operational costs of businesses and entire industries across the country that currently rely on diesel generators to mitigate the impact of load shedding.

With load shedding back at stage 6 – and not going anywhere – these energy costs are mounting. Groups like Shoprite have had to cough up over R1.3 billion in the past year to pay for the diesel to keep lights on.

Even when electricity is available, an almost 19% tariff hike from Eskom in April, and the 15%+ municipal tariff hike in July have escalated household power costs significantly, putting consumers under severe pressure.

According to Debt Rescue chief executive Neil Roets, households have reached their limit and are a breaking point.

“There absolutely has to be some respite for consumers soon, and this needs to come in the form of financial relief from Eskom and the Department of Mineral Resources and Energy. The financial tsunami emanating from these quarters is wreaking havoc on the lives of people across all income brackets, who are paying the price for maladministration, bad management and corruption,” he said.

The Automobile Association (AA) warned that the fuel price increases will have negative consequences for all consumers, not just motorists, as the higher transportation costs will inevitably filter their way through to general inflation.

“Motorists will certainly feel the pinch in terms of higher prices at the pumps but consumers across the board can expect higher prices to all goods and services because of these hikes,” it said.

Hugo Pienaar, chief economist at the Bureau for Economic Research (BER) said that the outsized fuel price increases will affect inflation.

“With outsized South African fuel price hikes in September, headline and core CPI are set to diverge again in coming months,” he said.

Roets said the country is locked into a vicious cycle that can only spell financial disaster for the average South African.

“We are seeing more people across the income spectrum relying on credit to get them through the month. There is also an increase in people defaulting on their debt,” he noted.

This is broadly reflected in the latest data from Eighty20’s Q2 Credit Stress Report, which showed that South Africa’s middle class increasingly cannot afford secured loans – or are defaulting on loans they have – as the ongoing challenging economic environment continues to add strain to monthly budgets.

2. Eskom ignores power offer:

Mozambican energy minister Carlos Zacarias has expressed his frustration and wants to know why Eskom did not finalise the acquisition of the 100MW of electricity his country committed to South Africa.

A well-placed source at the Mozambican national utility company, Electricidade de Moçambique (EDM), said South Africa’s agreement with Mozambique would have immediately lifted one load shedding stage.

However, Eskom seems uninterested in engaging with EDM even though South Africa is currently in the throes of stage 6 load shedding.

3. Second-quarter GDP growth beats forecasts:

South Africa’s economy grew faster than expected as agriculture and manufacturing industries helped lift activity.

Gross domestic product expanded 0.6% in the three months through June compared with growth of 0.4% in the prior quarter, Statistics South Africa said in a report released in the capital, Pretoria, on Tuesday. That’s more than the central bank’s forecast of 0.4% growth and the 0.3% median estimate of 15 economists in a Bloomberg survey. Economic output increased 1.6% from a year earlier.

Still, without the frequent power outages caused by Eskom’s inability to meet demand from its old and poorly maintained plants, and logistic constraints at state-owned port and rail operator Transnet, the economy would be growing at a faster pace.

The Reserve Bank predicts electricity rationing will shave 2 percentage points off economic growth this year and a study by consultancy GAIN Group forecasts inefficiencies at Transnet will cost the economy R353 billion ($18.4 billion), equivalent to 4.9% of GDP.

That means that economic growth for 2023 could have been much higher, the consultancy said in the report. The central bank expects the economy to expand 0.4% this year and the International Monetary Fund 0.3%.

“The nearly 5% GDP loss is catastrophic and could have been even worse at higher commodity prices,” GAIN Group said.

The scaled-back growth is affecting National Treasury’s revenue projections and budget deficit forecasts.

Fixed-investment spending rose 3.9% from the previous quarter.

Household spending, which comprises about two-thirds of GDP, declined 0.3% in the second quarter. It’s likely to face further pressure because or rising gasoline prices and high interest rates that are at a level last seen 14 years ago during the global financial crisis.

4. IMF warns of debt spiral:

The International Monetary Fund’s (IMF) Gita Gopinath has warned that the interest owed on South Africa’s government debt could increase exponentially, placing the country in a debt spiral

Gopinath spoke at the South African Reserve Bank’s biennial conference last week. She was the IMF’s chief economist until 2022, after which she was appointed the fund’s second-in-command.

The IMF projects that the interest bill on the government’s debt could skyrocket to triple the size of its health budget within five years. 

This would result in interest payments on debt consuming 27% of the country’s entire budget, up from 19%. 

South Africa’s current debt-to-gross domestic product (GDP) ratio is 73%. In nominal terms, the country owes around R5 trillion.

The situation is set to become much worse as the country’s fiscal deficit this year will be around 6% of GDP.

Fiscal deficit is the term used to describe a shortfall in the government’s income compared to its spending.

In South Africa, the state is spending far more than it gets in, which means it has a growing fiscal deficit and needs to borrow money to make ends meet.

The National Treasury revealed that South Africa recorded its largest budget deficit since at least 2004, sending the rand crashing and lowering demand for government bonds.

Data released by the National Treasury on Wednesday showed that the budget moved to a deficit of R143.8 billion for July.

This is the largest deficit since 2004 and wider than the R115.5 billion forecast by economists. There was a surplus of R36.7 billion in June.

The IMF called on the government to do more to stabilise the country’s debt by cutting expenditures. However, this is politically unpalatable and unlikely to happen. 

5. Rand bleeds amid global growth concerns:

Jitters about global growth caused the dollar to rise on Tuesday, sending the euro to its lowest in nearly three months.

The rand hit R19.26/$ early on Tuesday, its weakest level in weeks. The currency has lost 4% of its value over the past month, and is down 11% from a year ago. It still has some way to go to breach its previous record low of R19.80, which was triggered by the fall-out of the Lady R diplomatic crisis. 

Normally, stronger-than-expected GDP growth would have bolstered the rand, says Casparus Treurnicht, portfolio manager at Gryphon Asset Management. This signals to the Reserve Bank that the damage of aggressive interest rate hikes may be less than feared, and could convince the monetary authority to keep rates higher for longer.

“But the dollar is bolstered by traders seeking a safe haven amid market concern about the impact of a deteriorating Chinese economy on world growth.”

South Africa, as a commodity exporter, would be hit particularly hard by a Chinese slowdown.

China’s Caixin services PMI was at levels last seen when swathes of the country were under lockdown, the latest in a series of weak data points from the world’s second largest economy, while data showed euro zone business activity decline faster than initially thought last month.

“The twin drivers of dollar strength of US higher yields and weaker growth conditions out of the US are still in fifth gear,” said Simon Harvey head of FX analysis at Monex Europe.

US treasuries fell on resuming trading after a holiday with the U.S. 10 year yield up 4.5 basis points at 4.2163%.

The China-exposed Australian dollar was the most affected, falling 1.46% to $0.6372 hurt too by the RBA’s latest policy update.

The central bank left its benchmark cash rate on hold at 4.1% for a third month in a row, and although it left the door open to future increases, markets are pricing only about a 30% chance that rates go higher from here.

“The RBA’s policy stance overall remains a weight on the Aussie, especially against the U.S. dollar, where the Fed funds rate seems highly likely to remain 125+ basis points above the RBA cash rate deep into 2024,” said Westpac analyst Sean Callow.

The dollar was strong across the board, climbing against China’s currency, and was last up 0.47% at 7.3096 against the yuan traded offshore and up nearly as much in onshore markets.

The greenback also rose 0.56% against the Canadian dollar to $1.3669, its highest since late March, and up 0.85% against the Swedish crown at 11.10, its highest since November 2022.

The yen was at around a one-week low and analysts see it grinding toward 150 per dollar unless there is a sharp change in the gap between Japanese yields, pegged near zero, and U.S. yields comfortably above 4%. A dollar last bought 146.95 yen.

A Japanese government bond auction on Tuesday was uneventful, leaving 10-year Japanese yields at 0.65%.

All information sourced from articles posted by: BusinessTech, News24, Moneyweb, DailyInvestor, and Fin24.

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