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Interest rate cut likely postponed - economist

Cape Town - Despite the low oil price, the SA Reserve Bank (Sarb) will most likely not cut the interest rate on Thursday, but only postpone a hike, according to Nedbank economist Nicky Weimar.

She was a guest speaker at the annual Nedbank VinPro Information Day held at the Cape Town International Convention Centre (CTICC).

Due to the current low oil price, Sarb will most likely merely postpone an interest rate hike until November this year, in her view.

If the oil price continues to be low, however, Sarb might not increase the interest rate at all in 2015.

She pointed out that SA consumers are still sitting with very high debt levels and are vulnerable to interest rate increases.

"We think by June the oil price will start to normalise. SA's biggest concern for 2015 is, however, how Eskom is going to keep the lights on," said Weimar. "It is, therefore, very imporant to complete those new power stations. If power is mismanaged, it could be catastrophic."

Economic overview

In her overview of the SA economy Weimar said it is constantly losing momentum and 2014 was a particularly weak year.

"The SA economy has once again fallen short of expectations and growth has been slow and fading. Even against this backdrop 2014 was a weak year," she said.

"What went wrong for SA in 2014? It was a year of little shocks, lots of noise and low intensity chaos. These included strikes lasting for months on end."

SA is also living with limited, ageing infrastructure. This does not only include power constrictions, but also port infrastructure, for instance.

"The longer we take with upgrades and new build, the bigger the impact will be on the economy," warned Weimar.

She pointed out that the Eskom crisis has shaven off from SA's growth rate.

Another factor is that some of SA's key export markets for commodities have seen growth slowing down.

Apart from economic growth in the eurozone "slowing to about a a crawl", growth and the nature of the economy in China, another of SA's major trading partners, is changing. China wants to move to more of a services economy.

Mining and manufacturing was hurt the most in SA and on top of that the lack of power impacted these industries as well.

"As a nation SA is on a particularly unsustainable path as we consume more than we produce. That means we are not earning sufficient foreign currency to pay for our imports," said Weimar.

Business confidence

Because of the pressure due to strikes and the lack of capacity, especially due to power constrictions, business confidence is lower and businesses are not keen to undertake fixed capital investments or capital expenditure.

This in turn, impacts job creation as employment in the private sector is just about standing still.

"Foreign investors and financiers don't give money away as charity. They look at SA's risk rating and international ratings agencies are telling them the risk of SA investments are going up," said Weimar.

Government spending pitfall

The only way SA still managed to grow its economy was through government spending. This was mainly on employing more civil servants and at the same time paying those civil servants above average salaries.

"But if the private sector is shrinking, the tax base is shrinking and then the government cannot sustain the public sector spending. If you do not create more final tax payers, you run out of money, which has not happened to the government," said Weimar.

"The government is trying to keep the wheels of the bus turning, but finding it more and more difficult."

Outlook for 2015

Since June it has fallen about 60%. This will help SA's oil imports - which makes up 23% of SA's imports. It can have an impact on the diesel needed for Eskom's turbines and a positive impact on inflation and consumer goods.

"But if the rand weakens more, then the positive impact of the low oil price will be cancelled. SA must, therefore, try to attract more foreign capital," said Weimar.

"The moment the oil price increases again, it will impact on inflation."

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