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South Africa Economic Overview (27 July 2015)

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MCP) meeting was held on 23 July 2015 and as it is was widely expected the repo rate increased by 25 basis points, from 5.75%- 6.0%. The interest barometer, as published by Nedbank Strategic Research, considers the factors influencing the decisions of the SARB’s MCP in the statement made relating to the previous decision (26/03/2015) as well as all developments since this meeting. These factors can be categorised in 3 areas with 12 sub categories:

  1. The Global economy – contributing 20%
  2. The Domestic Economy – contributing 40%
  3. Major inflation drivers –contributing 40%

Inflation – The Consumer Price Index was published by Statistics South Africa on 22 July 2015 and as expected the annual inflation rate has increased from 4.6% in April 2015 to 4.7% in May 2015. On average prices increased by 0.4% between May 2015 and June 2015. The main contributors to the increase in inflation were the increase in transport cost (increasing month on month by 1.4% mainly due to the increase in the petrol price of 47c/L ); the weaker Rand (confirmed Rand depreciation); drought induced increase in price of maize; Eskom tariff hikes and an increase in municipal rates and taxes. This clearly indicates that the inflation is not due to demand pull but rather primarily driven by the supply side pressures. The current inflation expectations set by the SARB are between 3 and 6%. However, the SARB expects this level to be breached temporarily in the Q1 of 2016, but market sentiment is that this will be breached in Q4 of 2016 and that it would be more persistent. As per the data released Gauteng is below the headline rate, however Western Cape and the Free State is above the headline rate with 5.1% and 4.9% respectively. Due to the fact that the inflation rate is currently driven from the supply side, the general consensus is that an interest rate hike will not influence the inflation rate in the near future.

Key Economic Indicators – Retail sales decreased from 3.4% year on year in April 2015 to 2.4% in May 2015. Month on Month basis the retail sales increased by 0.1% and on a 3 month basis by 0.8%, illustrating a declining trend in growth. Private sector credit extensions growth accelerated to 9.5% year on year with credit to companies remaining firm at 14.4% year on year, however, household debt remained weak at 3.2% year on year. Motor trade sales decreased by 0.8% year on year in May 2015. Seasonally adjusted motor trade sales increased by 0.8% in the 3 months ended May 2015 compared with the previous 3 months. Motor trade sales increased 1.3% in the 3 months ended May 2015 compared with the 3 months ended May 2014. The main contributors to the increase were: Sales of accessories and Used vehicle sales. In Manufacturing there was a 1.4% year on year decrease in the manufacturing production in May 2015, mainly due to the lower production in Iron ore and steel, non-ferrous metals products, metal products and machinery, Petroleum, chemical products, rubber and plastic products. Five of the ten manufacturing divisions reported negative growth rates in the 3 months ended May 2015 compared with the previous 3 months. In Mining production increased by 2.7% year on year. The highest growth rate was recorded by the Platinum Group Metals (PGMs) due to the low base in 2014 when the sector was adversely affected by industrial action. Mineral sales increased year on year by 4.5% in April 2015 with the highest contributions by: PGM’s Chromium Ore.

Statistics on civil judgments for debt indicate that the total numbers of civil summonses issued for debt decreased by 5.5% in the 3 months ended May 2015 compared to the 3 months ended May 2014. A year on year decrease of 11% was recorded between May 2014 and May 2015. The total number of civil judgments recorded for debt decreased by 7.2% between May 2014 and May 2015, however a 5.3% increase in the value of civil judgments issued was recorded for the same period.

South Africa has been classified among the threatened 3 emerging markets, together with Turkey and Brazil due to the weak currency fundamentals. The Rand has declined 9% versus the USD since the start of 2015. Two of the largest credit rating agencies – Fitch and Standard and Poor’s- adjusted their ratings on South Africa. Credit ratings are extremely important as they help to determine a country’s cost of borrowing and influence investor appetite for its debts and equities. This affects how much capital flows into the country and the value of the Rand. Fitch maintained the South African credit rating at BBB but with a negative watch. Standard and Poor downgraded South Africa to the lowest investment grade possible – BBB. Both rating agencies site lack of confidence in the government’s ability to address the country’s deeply rooted structural problems as main contributor for the adjustment.