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We take a look at the cost of living crisis in South Africa, mostly brought about by the war in Ukraine and the continued load shedding problems at Eskom.
Its going to get a lot worse before it gets better. |
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Our highlight over the last week
Global Factors
So while South Africans love to blame the South African government for all their problems, this time round its not all the government's fault. The invasion of Ukraine by Russia dealt world commodity markets a significant blow. Not only did oil and gas prices shoot up sharply following the invasion, agricultural crops such as wheat also felt the impact. Why is this? Well Ukraine is the 6th largest exporter of wheat in the world. With the war in Ukraine wheat productions and exports from Ukraine has dropped significantly. So there is a lower supply of agricultural products and with demand not changing the only route is for prices to go up, as demand remains the same and supply drops, economic theory states that prices will go up. And that is exactly what has happened.
So why has oil and gas prices gone up? Russia is a massive player in this market. And with loads of sanctions being levied against Russia for their invasion of Ukraine, buyers have to go buy these commodities elsewhere. So now the demand that used to be serviced by Russia has to be found somewhere else. So in this case due to sanctions available supply declines and demand remains the same, and with demand remaining the same and supply declining, prices go up.
So this is the global backdrop for the sharply rising prices across the world and in South Africa.
So lets look at some of the local factors adding to the cost of living crises.
Local Factors
While the global factors mentioned earlier is out of government's control, there are a few reasons for the cost of living crises we can lay at their door. The main one being Eskom. Without a stable power supply we will not see significant new investments into the South African economy, be it from foreign or local firms. Why would you build a plant or factory here when you cant be guaranteed a stable power supply? The latest load shedding problems at Eskom which saw Stage 6 make a return after almost 3 years has seen the Rand depreciate (weaken) against the US Dollar and other major global currencies. Load shedding has a significant impact on consumer and investor confidence, it affects economic growth and the investment returns on South African markets, so as load shedding continues and worsens the exchange will continue to weaken with it.
Since crude oil is paid for in US dollars a weaker exchange rate means we as South Africa pay more per barrel of oil. The higher this price the higher the fuel price. Then there is the fuel levy government adds to the fuel price (just another tax the inefficient South African government levies on consumers and businesses). We a South Africans already pay personal income tax and VAT.
We shouldn't be taxed on something like fuel, or the use of roads, or on our investment profits. South Africans are some of the most taxed individuals in the world. As government finds a way to tax everything, including sugar, plastic bags. roads. fuel etc. So why are we paying personal income tax? What are they doing with all the taxes? Ok rant over. Back to the topic.
Higher fuel prices in South Africa means transportation of all goods and services increases, which means most goods sold at retailers will increase, diesel for Eskom's back up power generation goes up, which means Eskom will ask for above inflation increases in their electricity prices. Fuel for tractors and other agricultural equipment goes up. So the cost of food goes up.
All of these price increases leads to a higher inflation rate, which is currently sitting at 6.5% for May 2022. This is above the South African Reserve Bank (SARB) inflation target of between 3% and 6%. In order to keep inflation in check, the South African Reserve Bank Monetary Policy Committee will raise interest rates. This leads to higher home loan repayments, vehicle repayments, credit card repayments and higher overall cost of loans.
All leading to less cash in consumers pockets., more money spent on fuel, more money spent on goods and services, higher interest rates and slow growth of salaries all seeing South African consumers being a lot worse off than they were a few months ago. And the problems are just getting worse.
Fuel goes up by over R2 a liter tomorrow, governor of the Reserve Bank mentioned already that there will in all likelihood be a 50 basis points increase in interest rates.
So tighten your belts even more my fellow South Africans. Things are going to get a lot worse before they get better.
So while South Africans love to blame the South African government for all their problems, this time round its not all the government's fault. The invasion of Ukraine by Russia dealt world commodity markets a significant blow. Not only did oil and gas prices shoot up sharply following the invasion, agricultural crops such as wheat also felt the impact. Why is this? Well Ukraine is the 6th largest exporter of wheat in the world. With the war in Ukraine wheat productions and exports from Ukraine has dropped significantly. So there is a lower supply of agricultural products and with demand not changing the only route is for prices to go up, as demand remains the same and supply drops, economic theory states that prices will go up. And that is exactly what has happened.
So why has oil and gas prices gone up? Russia is a massive player in this market. And with loads of sanctions being levied against Russia for their invasion of Ukraine, buyers have to go buy these commodities elsewhere. So now the demand that used to be serviced by Russia has to be found somewhere else. So in this case due to sanctions available supply declines and demand remains the same, and with demand remaining the same and supply declining, prices go up.
So this is the global backdrop for the sharply rising prices across the world and in South Africa.
So lets look at some of the local factors adding to the cost of living crises.
Local Factors
While the global factors mentioned earlier is out of government's control, there are a few reasons for the cost of living crises we can lay at their door. The main one being Eskom. Without a stable power supply we will not see significant new investments into the South African economy, be it from foreign or local firms. Why would you build a plant or factory here when you cant be guaranteed a stable power supply? The latest load shedding problems at Eskom which saw Stage 6 make a return after almost 3 years has seen the Rand depreciate (weaken) against the US Dollar and other major global currencies. Load shedding has a significant impact on consumer and investor confidence, it affects economic growth and the investment returns on South African markets, so as load shedding continues and worsens the exchange will continue to weaken with it.
Since crude oil is paid for in US dollars a weaker exchange rate means we as South Africa pay more per barrel of oil. The higher this price the higher the fuel price. Then there is the fuel levy government adds to the fuel price (just another tax the inefficient South African government levies on consumers and businesses). We a South Africans already pay personal income tax and VAT.
We shouldn't be taxed on something like fuel, or the use of roads, or on our investment profits. South Africans are some of the most taxed individuals in the world. As government finds a way to tax everything, including sugar, plastic bags. roads. fuel etc. So why are we paying personal income tax? What are they doing with all the taxes? Ok rant over. Back to the topic.
Higher fuel prices in South Africa means transportation of all goods and services increases, which means most goods sold at retailers will increase, diesel for Eskom's back up power generation goes up, which means Eskom will ask for above inflation increases in their electricity prices. Fuel for tractors and other agricultural equipment goes up. So the cost of food goes up.
All of these price increases leads to a higher inflation rate, which is currently sitting at 6.5% for May 2022. This is above the South African Reserve Bank (SARB) inflation target of between 3% and 6%. In order to keep inflation in check, the South African Reserve Bank Monetary Policy Committee will raise interest rates. This leads to higher home loan repayments, vehicle repayments, credit card repayments and higher overall cost of loans.
All leading to less cash in consumers pockets., more money spent on fuel, more money spent on goods and services, higher interest rates and slow growth of salaries all seeing South African consumers being a lot worse off than they were a few months ago. And the problems are just getting worse.
Fuel goes up by over R2 a liter tomorrow, governor of the Reserve Bank mentioned already that there will in all likelihood be a 50 basis points increase in interest rates.
So tighten your belts even more my fellow South Africans. Things are going to get a lot worse before they get better.