Rate hike will be devastating blow for consumers
A widely expected rate hike by the South African Reserve Bank (Sarb) on Thursday is going to have a devastating impact on consumers, Debt Rescue CEO Neil Roets told Fin24.
He said all indications are that Sarb will increase the repo rate by 0.5%. This comes on top of a proposed 8% hike in electricity rates.
Further repo rate increases will almost immediately translate into higher prices for all commodities including food, warned Roets. "The immediate future looks dismal for all consumers, but especially for consumers with heavy debt loads.
"There is also a strong likelihood that South Africa’s staple food – maize meal – may increase by as much as 50%. According to experts, this is going to mean that many South Africans are going to experience hunger," warned Roets.
"The depreciation of the rand, which hit all-time lows recently, is going to increase the price of all imported goods including the 5 million tonnes of maize, which would have to be imported and then distributed countrywide. Because of limited bulk rail capacity, some of this would probably have to be transported by road."
Rating agencies, including Fitch and Standard and Poor’s, have all warned that South Africa’s bonds could be reduced to junk status if the economy is not managed better.
"Should this happen, it would lead to an inevitable interest rate increase, which would have a severe impact on deeply indebted consumers," concluded Roets.
DebtBusters CEO Ian Wason expects Sarb's monetary policy committee (MPC) to increase the repo rate by between 25 and 50 basis points on Thursday.
In his view there is no doubt that SA’s poor economic growth, the commodity price slump and potential further US rate hikes will see the MPC raise the repo rate to compensate for the country’s economic downturn.
He pointed out that the expected interest rate hikes, coupled with electricity tariff increases, water restriction penalties and soaring food prices soaring as a result of the ongoing drought, are just some of the financial risks facing SA consumers.
"Consumers need to prepare themselves and find other means to pay their monthly expenses as opposed to taking out loans,” cautioned Wason.
DebtBusters' latest Debtometer Report shows that its clients require 102% of their net income to service their debt before paying for any living expenses.
“This is just the beginning of tougher financial times for consumers, with 2016 poised to be a strain for consumers, especially those living on the bread line,” said Wason.
In particular, he warned middle- and-upper income earners to watch out for higher living expenses and to factor these into their monthly household budgets.
“These consumers have houses, cars and ample monetary commitments, such as school fees and mobile contracts. An expected repo rate increase, coming on the back of the festive season spending spree and already maxed out credit facilities, could be the tipping point for many South Africans, where they will no longer be able to service their financial commitments,” he said.
He added that, according to the latest Consumer Bureau Monitor Report released by the National Credit Regulator, nearly 54% of South Africa’s credit active consumers are experiencing or have experienced financial problems with their accounts.
David Crosoer, head of research and investments at PPS Investments, said the market is expecting the MPC to respond to the deteriorating inflation outlook with a 0.5% rate hike in January, and a further 1% hike over the rest of 2016.
“The dramatic fall in the rand and drought-induced food and electricity-driven administrative price increases will put significant pressure on inflation and inflation expectations. Consumers will find it very difficult to absorb an aggressive tightening cycle, and this could put further downward pressure on the economic growth,” said Crosoer.
“While some of the deterioration in this outlook is already priced into South African government bonds and cyclical equities, it is clear that things could still get worse before they get better."