This week’s interest rate hike comes as no surprise.
This statement, not in the sense that I think we should have it, but simply that the matter is so “on the fence” that the decision could go either way in any of the MPC meetings. The SARB is faced with horrible decisions because GDP growth is pathetic and nothing exists on the horizon to change the situation. You get the feeling that the world economy is moribund as the USA growth story is so fragile and based on the billions of printed Dollars, whilst the China story has been coming for some time and now that it has hit, seems obvious and irreversible in the medium-term [make that 3-5 years]. The impact of both on South Africa is direct and inescapable – the USA is needed for global growth particularly amongst our leading trade partners and we critically need China to buy our primary commodities [frankly, so do Australia and many other so-called development economies, in Africa, Asia and South America]. The Rand is weak and we sit with the Rating agencies’ threat of junk bond status hovering like Damocles’ sword over our national head.
Talking about our “sword of Damocles”, according to Wikipedia:
“Damocles (literally: “fame of the people”) is a figure featured in a single moral anecdote commonly referred to as “the Sword of Damocles”, an allusion to the imminent and ever-present peril faced by those in positions of power. The Damocles of the anecdote was an obsequious courtier in the court of Dionysius II of Syracuse, a 4th-century BC tyrant of Syracuse, Sicily. According to the story, Damocles was pandering to Dionysus, his king, and exclaimed to him that he was truly fortunate as a great man of power and authority, surrounded by magnificence. Dionysius then offered to switch places with Damocles so that Damocles could taste that very fortune first-hand. Damocles quickly and eagerly accepted the king’s proposal. Damocles sat down in the king’s throne surrounded by every luxury, but Dionysius arranged that a huge sword should hang above the throne, held at the pommel only by a single hair of a horse’s tail. Damocles finally begged the king that he be allowed to depart because he no longer wanted to be so fortunate, realizing that with great fortune and power comes also great responsibility (and danger). “
The decision to raise the Repo rate is as tense. We are told that the USA has to raise rates at some stage so as to protect inflation in that country from raising its head as growth rates rise. In addition, there is justifiable concern that not signalling a rise of interest rates will over-stimulate the propensity of the American public to spend on credit. Many consider that the rise of the rate will occur later this month partly to curtail overspending for Christmas. For SA Inc, this means that money will be invested in the Dollar and our currency will weaken further. Roll on R15 to the US$ which will have its own impact on our inflation and require rate rises to temper it. Not pretty by any means. But remember to see the interest rate rise in relative and not absolute terms. When it started, our Repo rate was 5% and the 0.25% absolute increase was a 5% rise in interest cost. This rise, off a base of 6% was absolute 0.25% but only a 4.2% rise in interest cost. The Prime rate is still below 10%, psychologically in single digit territory. To put it in monetary terms with which we may better identify, a R1m bond just became R164 per month more expensive with a total of R807 per month in total since the upward rate cycle began, which is 2% and 9% relative increase in interest costs, respectively. Necessary? If the USA rate rises, yes; if not, then no, too much too soon in a struggling economy.
However, don’t lose heart. The increases are really well controlled and pre-emptive. In the figure below you will note how interest increases have been cone-shaped in the past – steep and effective but with the risk of collateral damage. In the recent rate increases, much circumspection has gone into grasping the nettle early but not squeezing the life out of the economy.
South African Repurchase Rate
With this background, I was struck by a Moneyweb article by Patrick Cairns on 20 November 2015, titled, South Africa needs a “Modi moment”.
We have a great country, tortured yet beautiful. We have people with a will to stay here and continue to make it greater. We need leadership in every sector but are blessed with good examples in the property industry. Our estate agencies, originators, developers and property funds are world-class in many respects. So we in property are truly blessed. Homeloan Junction is proud of its place in the tapestry of the industry, small but well deserved.
Yours in Property