Double blow expected to strain consumers' pockets
October 20, 2009
By Ethel Hazelhurst
For a graphic on South Africa's budget balance from 2002/03 to 2009/10 - click here
Markets, households and taxpayers are bracing for bad news this week and next.
The Reserve Bank's monetary policy committee (MPC) is unlikely to make a further cut in its 7 percent repo rate on Thursday, after a 5 percentage point reduction since December last year.
And, next week, Finance Minister Pravin Gordhan is expected to announce a much bigger budget deficit than the one projected by his predecessor Trevor Manuel at the time of the February budget.
Both events have implications for consumers' pockets.
Twenty-five of 30 economists surveyed by Reuters expect the repo rate to stay at 7 percent. And Kgotso Radira, an economist at Investec, said markets were "pricing in no change". He said the MPC's key assumptions - rand exchange rate, oil prices, and global growth - were "unlikely to have changed since the previous MPC meeting as most have remained unchanged".
Jean Francois Mercier, an economist at Citi, the research arm of Citigroup, said: "Real rates are probably low enough to allow a recovery." Real rates are nominal rates minus inflation. He forecast no change for the Thursday announcement.
Tendani Mantshimuli, a consumer economist at Liberty, said she expected the repo rate to "remain unchanged at 7 percent because retail sales and credit demand respond with a lag to interest rates". But she said last week's figures on retail sales could persuade the MPC to make one further cut.
Retail sales fell 7.1 percent year on year in August - a sign that consumers were still "in distress", Mantshimuli said.
Whether there is a cut this week or not, it is certain the rate cutting cycle is close to its end.
Some economies are facing rate hikes, after a year in which central banks slashed rates to record low levels. Mercier said: "Nuances increasingly appear in the stance of central banks around the world, as economies emerge with different speed from the downturn."
Sapa-AFP reported yesterday that the Australian central bank was expected to raise interest rates by at least 50 basis points by the end of the year, after it lifted its key lending rate to 3.25 percent last week. And South Korea and Norway are expected to follow suit.
However in South Africa rate hikes are some way off. Mercier said: "We expect that the Reserve Bank will be among the laggards when moving away from stimulus."
Incoming Reserve Bank governor Gill Marcus's first decision could be seen as a sign of her stance on monetary policy. But it will be impossible to make comparisons with the pattern set by her predecessor as each MPC meeting has to consider a fresh set of factors.
Gordhan will make his first medium-term budget policy statement next week and the figures are expected to be very different to those that appeared in the February budget.
Manuel forecast a deficit equal to 3.9 percent of gross domestic product (GDP). The deficit is the gap between revenue collection and government spending. However, shortfalls in revenue collection and demands on the government's purse have changed the outlook completely.
Ian Marsberg, a macro strategist at Absa Capital, repeated his earlier forecast that the revised deficit would equal 7.7 percent of GDP. He noted the figure depended not only revenue and expenditure but also on GDP.
At the time of the February budget former finance minister Trevor Manuel projected growth of 1.2 percent in 2009. However Marsberg said GDP was likely to have contracted by 2.1 percent this year.
After regular tax concessions in the budget, the large deficit makes further concessions unaffordable.
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