27 July 2006
South Africans, caught up in a tendency to “borrow to spend”, have been warned to start saving and to prepare to pay more for interest on their debts as well as for general goods and services.
The warning comes from analysts after the latest consumer inflation figures were released on Wednesday – showing inflation up from 3.9% in May to 4.9% in June – and ahead of next week’s meeting of the Reserve Bank’s Monetary Policy Committee.
Adjusted fuel prices are also expected to be released on Friday, with a likely increase, prompted by higher international oil prices, set to add to the pressure on South African consumers.
Expect another rate hike
The Reserve Bank’s Monetary Policy Committee sets the repo rate – the rate at which the Bank lends money to the country’s commercial banks. When the MPC hiked the repo rate by 50 basis points to 7.5% in June, continued high consumer spending was one of the main reasons cited.
University of South Africa economist Philip Mohr told BuaNews that another interest rate hike was “highly likely”, but that people should not over-react to this.
“A few months ago analysts were saying there would be none this year, but now they are predicting hikes all the way following the pressures on emerging markets and the devaluing rand,” Mohr said.
“It is not inconceivable that the rand could in fact increase in value again this year.”
The Reserve Bank highlighted this pressure on emerging markets in its quarterly report in June, saying investors had lost some of their appetite for exposure to emerging markets in the second quarter, resulting in the depreciation of a number of emerging market currencies, including the rand.
‘Borrowing to spend’ the problem
Mohr also said it was not South Africans’ supposed lack of a savings culture, but their tendency to “borrow to spend”, that threatened the country’s economic growth rate.
“There is a misconception about the effect of savings on economic growth,” Mohr said. “Some of the world’s fastest growing economies have a huge current account deficit, such as the United States for example.”
The real problem, Mohr said, was that South Africans were “borrowing to spend”, which had a much more negative effect on economic growth than a straightforward failure to save.
“When people borrow to spend, it basically amounts to dis-saving. This increased spending exerts an upward pressure on prices and of course leads to people having to pay more for their goods.”
South Africans were in fact saving through a number of schemes, such as contractual savings in the form of pension funds, Mohr said. Many in this group, however, were also borrowing to save.
“This translates to a net position were they aren’t saving at all but in real terms the money is there, secured in the contractual savings.”