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Inflated hopes

Sep 27 2012 07:00 *Geoffrey Chapman

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SOUTH Africans love making things harder for themselves, or so it seems to me: if a school has no textbooks, we burn the school down and when inflation is low, we want a weaker rand and interest rate cuts.

So, the South African irony is that these actions are irreconcilable with their objectives.

This month saw inflation rise marginally to 5% (up from 4.9%) as well as no change in the interest rate – a good move, I feel, by the Reserve Bank.

However, I do not want to discuss the interest rate but rather the impact of the road freight sector strike on already high transport costs and the spillover of this into inflation and South African competitiveness in global markets.

Total logistics costs are, to a large extent, a factor of transport costs.

In South Africa, the latter constitutes 50% of the total (considerably higher than the world average of 39%).

The demanded 12% (7% above inflation) increase in wages for the road freight sector workers, therefore, feeds directly into total logistics costs.

Since all goods need to be transported from where they are produced to where they are consumed, the rise in total logistics costs ultimately means the consumer will have to pay more.

In other words, the road freight sector strike will contribute to rising inflation. Exacerbating this fact are the numerous phases of production goods go through before finally being consumed and at each phase, transportation comes into play.

Notwithstanding this strike, the mining sector strike and the likely cascade into other sectors, South Africa's leading indicator of business activity went up (albeit by only 0.6%) in July for the first time in five months, pointing to a scenario in which inflation will start to rise naturally.

Should this occur, the Reserve Bank will consider increasing interest rates – exactly what the majority of South Africans do not want.

Therefore, in order to stem the chances of an interest rate hike, the road freight unions should consider very carefully the magnitude of their demanded increase.

In addition, rising logistics costs negatively impact the competitiveness of South African goods in the global market through increasing the purchase price for the end consumer.

South African exports are already underperforming because of the global slowdown, evidenced by our second-quarter trade deficit of R75.5bn (2.4% of gross domestic product).

With this being the largest quarterly nominal trade deficit on record, we do not need to exacerbate the situation.

My previous columns have mentioned technical regulations and their importance but as each of our 13 agreements with European Union member states is cancelled as they come up for renewal, we need to refocus now more than ever if we are to improve the current trade deficit.

In the week of September 16-22, Brazil notified the World Trade Organisation (WTO) of six technical regulations, two of which related to fruit juices (orange and grape specifically).

As an export market that has grown by an annual average of 810% since 2003, South African exporters must be aware of Brazil's proposed regulations so that 1) exporters can comment and possibly prevent the regulations from inhibiting their exports and 2) exporters can align their exports to the new regulations, if need be.

The burning of bridges resolves nothing and oftentimes results in a worse situation.

That being said, as one door closes another opens but to enter the new door, exporters must know what is required of them in order to do so.

The WTO Technical Barriers to Trade Enquiry Point of the South African Bureau of Standards informs exporters of these requirements, and also informs of any changes to the requirements.

As such, the enquiry point is the key you need to open the door.

 - Fin24

* Geoffrey Chapman is a guest columnist and trade policy expert at the SABS.


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geoffrey chapman  |  inflation  |  strikes  |  wage demands
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