With a looming rate hike and a currency that is not showing any signs of strengthening any time soon, South Africans are in for a difficult time.
Speaking to CNBC Africa, Lesiba Mothata, chief economist at Investment Solutions said that the South African Reserve Bank (SARB) will likely hike rates by 50 basis points at the end of January, following a steep crash in the rand over the past week.
This will have a significant impact on South African consumers, particularly those with outstanding debt.
The hike in rates would primarily be to contain inflation, which has been uncomfortably close to the 6% barrier for the past quarter.
Mothata noted that for the first time since 1956, South Africa is seeing more money leaving the country than entering it.
“South Africans are taking money out of the country,” Mothata told CNBC Africa.
“That is ominous…when you look at countries that eventually had a current account crisis…these were similar outcomes.”
Ultimately, the current economic climate spells bad news for consumers. “You’re going to have to tighten your belts,” Mothata said.
With the rand tanking, and a hike rate looming, here’s how consumers, businesses and the entire country will be affected:
- A rate hike means the cost of borrowing will be higher;
- Subsequently, the number of over-indebted consumers is likely to rise;
- Taxes – at least in the top bracket – may be higher;
- Petrol prices are likely to climb;
- Any imported products – especially technology – will see much higher prices;
- Drought conditions are forcing South Africa to import basic resources – which just got far more costly; this, in turn, will lead to a significant increase in food prices in the country;
- These factors, coupled with slow growth and widening current account deficit, puts South Africa’s bonds at risk of being reduced to junk status by ratings agencies.
It’s not all bad news, however, as Mothata believes that the current global oil prices, which are pushing to dip below $30 a barrel, serve as somewhat of a silver lining, which will give the country a little bit of breathing room.
“It will help the inflation situation. We remain a miracle country…sometimes things just come and help us, and this is one,” he said.