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Send  Share  RSS  Twitter  29 Sep 2014

ECONOMY: Reserve Bank Needs a Miracle

 





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Government finances are stretched as it battles to concoct a rescue package for Eskom. After growing five times the pace of average consumer inflation from 2008 to date, businesses and consumers can look forward to Eskom’s tariffs rising at close to 12% for the next two years. The fall off in fixed investment and household consumption spending has not resulted in a narrowing in the current account deficit; in fact it stood at a record amount of R222 billion in the second quarter of 2014. This has since fed through into a weaker exchange rate of above R11 to the dollar and R14.25 to the Euro (from levels below R10 to the dollar and around R13.30 to the Euro a year ago). This has all but erased the gains in the over-recovery on petrol prices on the back of crude oil’s sustained fall to below $98 per barrel.

Rate hikes are inevitable and, in our opinion, the Reserve Bank is trying to buy some time. The entire constellation of stars will have to line up to enable us to escape more rapid punishment. Can Minister Nene find funds for Eskom and placate the rating agencies? We similarly see inflation trending lower in the first quarter of 2015 but remain concerned by recent exchange rate movements. Certainly the European Central Bank’s recently launched Targeted Long-Term Refinancing Operation will negate some of the curtailment in global liquidity as the Fed tapers but the window for our adjustment process is narrow. We have been maintaining for quite some time that growth this year will not exceed 1.5% and have to ask where the impetus for growth of 2.8% next year will come from? Export growth of 7.4% in the first seven months of the year – compared to import growth of 9.4% over the same period – is woefully inadequate to compress the current account deficit. Weaker commodity prices are not helping our cause.

While we broadly concur with the South African Reserve Bank’s assessment of local operating conditions as feeble at best, we remain concerned that they are hoping for a miracle, says Luke Doig, Senior Economist, Credit Guarantee Insurance Corporation


 
 
 
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