Consumers warned to tighten their belts

Weak rand, drought, high food and elecricity costs make for difficult year

A BLEAK year lies ahead for con­sumers with the weak rand, a possible rate increase this month, a drought and soaring food and electricity costs.

Clif Johnston, the vice-chairman of the South African National Consumer Union, said consumers were anticipating a difficult year. “The drought will cause us to import much of our staple food, especially maize, and the weak rand means this will come at a much higher cost to consumers.”

Johnston said the weak rand would largely negate the benefits South Africa would otherwise have received from the low international oil price and cheap chick­en imports from the US. Almost everything else imported would cost a lot more.

“It is most important for consumers not to be enticed into debt at this time because that only exacerbates the problem. The golden rule is never to borrow money to pay for routine living costs, it always ends up costing more. Rather go without, or with less, until the next pay cheque arrives.”

FNB economist Alex Smith said: “We are expecting 2016 to be the most difficult year of the current expansion (since 2009). GDP growth is forecast to average only 0.5 per­cent this year as a combination of low com­modity prices, a severe drought, weak business and consumer confidence and ris­ing interest rates weigh on the economy.”

Smith said household spending growth was also forecast at 0.5 percent this year, while rising inflation and an expected 100 basis points of interest rate hikes during the year would constrain household finances.

“Meanwhile, weak demand from house­holds is likely to see business profitability come under pressure and may force compa­nies to absorb rising costs rather than
passing them fully onto consumers.”

David Crosoer, head of research and investments at PPS Investments, said the market was expecting the Monetary Policy Committee (MPC) to respond to the dete­riorating inflation outlook with a 0.5 percent rate hike at its meeting this month and a fur­ther 1 percent over the rest of the year.

“Consumers will find it very difficult to absorb an aggressive tightening cycle and this could put further downward pressure on the economic growth.”

Crosoer said this year could be very chal­lenging because inflation could get close to double-digit levels and further rate increas­es from the MPC could push the economy into recession.

Wendy Monkley, marketing head at DebtBusters, said the firm’s latest third quarter Debtometer Report reflected the economic difficulty, which showed clients required 102 percent of their net income to service their debt before paying for any liv­ing expenses.

“The recent weakening of the rand, tighter monetary and fiscal policy and infla­tionary pressure has us headed towards a hike in the repo rate on the 28th of this month. A repo rate hike after a pay day that already doesn’t fully cover debt repayments and living expenses will be the tipping point for many families.”

Monkley said added to this, food prices were expected to sky-rocket as a result of the worst drought South Africa has experi­enced in 111 years. Eskom was calling for a 16 percent electricity tariff increase and penalties were being levied on overconsumption of water.

Neil Roets, chief executive of Debt Rescue, said the continuous drought, the likelihood of an electricity price increase and the probability of a tax increase would squeeze consumers to the maximum.

He said the depreciation of the rand would increase the woes of severely strained consumers in the early part of this year, when the impact on imported goods would be seen.

Roets said it was imperative for con­sumers to draft a budget and stick to it.

Mpho Ramapala, education and commu­nication manager at the National Credit Regulator, advised consumers to borrow wisely and avoid over-indebtedness.

She said to borrow only from registered credit providers, borrow only when neces­sary, plan in advance how to repay the loans and determine whether you can afford the repayments.

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