Nene will focus on debt as inflation levels out

2015-10-20 17:16 - Matthew le Cordeur
A South African man holds a few hundred rand. Inflation is driving up prices of basics like bread and milk. (iStock)

Cape Town – South Africa’s inflation has been relatively stable in 2015, an expert said ahead of Wednesday’s Consumer Price Index (CPI) update by Stats SA.

The Inflation Factory’s Riyadh Bhyat estimated that September’s CPI levels increased by 0.1% to 4.7%; Stats SA will likely confirm this on Wednesday morning, just before Finance Minister Nhlanhla Nene’s mini budget speech in Parliament.

Bhyat said volatility in the change of CPI in 2015 had only been 0.7% per annum, varying from 3.9% to 5.9% during the year. Over the long term, the CPI had a stable volatility of 5% per annum and has varied between -2% and 20.9%, he explained.

With second quarter gross domestic product contracting (GDP) by 1.3%, the repo rate going up by 25 basis points in July and credit agencies tilting South Africa over the “junk status” cliff edge, every bit of data is becoming crucial to determine the economic stability of the country.

The rand hit its lowest point since 2011 in August, breaking the R14/$ mark, because of the plunge in commodity prices and China’s economic woes.

Growth forecasts will be lowered

Within this context, Nene will deliver his mid-term budget statement on Wednesday and he will be fully aware that debt levels are approaching 50% of SA’s GDP.

Treasury will likely lower its growth forecasts on the back of lower commodity prices, Kim Silberman, an economist at Standard Bank’s SBG Securities, told Fin24.

“The budget deficit could widen to 4.1% in 2015/16, instead of the 3.9% estimated in the February budget,” he said.

READ: Prepare for growth adjustments - economist

Eskom’s inability to supply reliable electricity for nearly a year has been identified as a major reason why South Africa’s growth had contracted.

Nomura analyst and emerging markets economist Peter Attard Montalto said SA was behaving economically "like it had lost a major industry" in August. "This is the impact of Eskom load shedding," he said.

Since then, Eskom has kept the lights on for 35 successive days even as it starts its intensive summer maintenance programme to sustain its ageing power fleet.

Warning from Moody's

Moody’s warned that there was a risk of a downgrade if the government's commitment to fiscal consolidation and stabilising debt faltered or the investment climate deteriorated further.

It cut the country's rating to Baa2 from Baa1 in November last year, citing poor prospects for medium-term growth and rising public debt, but changed its outlook to stable from negative, Reuters reported in September.

Moody's said Nene’s tough budget decisions to cut government spending will become clearer in the mini budget.