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Jan 12 2012 07:33 Mzwandile Jacks

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SOUTH Africans should avoid long-term debt at all costs this year as the local economy will be under pressure from continuing volatility driven by the eurozone debt crisis, economists have warned.

Tony Twine, a senior economist at Econometrix, told Fin24 that consumers should avoid getting into debt that would take more than a year to repay.

"If they do take on debt, they should make sure that they will be able to repay their debt when the interest rates rise," Twine said.

He also urged South Africans to avoid overspending, shop carefully and always consider "buying down".

"By this I mean they should not buy the nicest things in the range, but should be practical and buy things at lower prices," Twine said, urging those who can save money to make it a priority.

Twine made these comments at a time when many observers believe the global economic slowdown holds the key to the local economic outlook this year.

This will also arguably be the key driver of the rand's trajectory, which is a critical determinant of the interest rate and inflation trajectories.

Tendani Mantshimuli, a consumer economist at SA's fourth-biggest life insurer Liberty, said the strength of the rand would be a further factor consumers should watch out for in 2012.

A significant deterioration in the rand will have a negative influence on inflation developments, he said.

"International food prices and higher petrol prices are partly behind inflation being over the upper target band," Mantshimuli said.

"While oil prices are high they haven't been increasing steeply, so most of the increases we've seen in petrol prices were related to the weak rand. The weakness of the rand recently has been related to risk aversion and investors selling off emerging market assets as a result of eurozone problems, not a result of SA economic fundamentals."

Mantshimuli said "administered" prices would still continue to pose an upward risk to inflation.

He added that Eskom this year would be adding another tranche of the higher tariffs it requested from the energy regulator to finance power stations.

These are mainly cost-push pressures, in other words they were created by the supplier rather than consumer demand.

Twine said the state of the economy in the first half is going to be almost a repeat of what happened last year. "It will be characterised by high volatility," Twine said, warning that this year's economic growth would be slower than that of 2011.

"We think South Africa will only experience 2.7% growth this year due to volatility caused by the lack of confidence in capital markets around the world."

Merina Willemse, an economist at the Pretoria-based Efficient Group, warned consumers to avoid debt even though interest rates remain low.

"As the high interest rate cycle is approaching, they should pay off debt taken before this," Willemse said."Though higher spending drives our economy, I would urge South Africans to spend within capacity."

 - Fin24

 
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