More money in pocket as cost of living falls

ANALYSIS

South African economists were correct in predicting that the latest consumer price index (CPI) figures – the measure of inflation – released today would be revised downwards by Statistics South Africa (Stats SA), leaving consumers with more disposable income.

Stats SA announced that annual CPI inflation dropped to 5.3% in December 2014 from 5.8% in November 2014, mainly because petrol and food prices clocked up lower annual inflation rates. But economists warn that falling inflation as a result of lower oil prices does not necessarily mean interest rates will be reduced or that South Africa’s growth prospects will increase.

In an interview with the Mail & Guardian prior to Wednesday’s Stats SA announcement, Investec group economist Annabel Bishop said lower petrol prices have caused downward revisions in CPI inflation. 

Bishop explained that the petrol price fell by R1.10/litre in 2014, and then again by R1.23/litre in January 2015. She added that another R1.04/litre cut is scheduled for February.

“The substantial cuts in the petrol price have caused downward revisions in CPI inflation, with our CPI outlook for 2015 lower now at 4.6%, from 5.1% previously.” She correctly predicted that CPI inflation would come in at 5.3% for December 2014.

Nedbank had also revised its CPI inflation expectations to 5.5% prior to the announcement. Nedbank economist Busisiwe Radebe said that lower petrol prices would play a big role in the general trajectory of “disinflation” or falling inflation. But she warned that lower inflation would not necessarily result in lower interest rates or higher growth prospects.

“You see, what is going to happen to the rand is that it is going to weaken – especially as interest rates in the United States increase. We will see an uptick of capital outflows as investors take their money from emerging markets and into the US,” said Radebe.

Shift in investor preferences
According to the International Monetary Fund (IMF) world economic outlook update report for 2015, growth in the US rebounded ahead of expectations and unemployment declined, whereas inflation pressure remained muted.

The stronger economy and the projected gradual rise in interest rates have caused a shift in investor preferences, with many opting to invest in the US rather than in emerging markets. This is reflected in the appreciation of the US dollar and the weakening of emerging market currencies.

Radebe said that capital outflows from South Africa would cause the already volatile rand to weaken. “We [Nedbank] used to think that they [the Reserve Bank’s monetary policy committee] will increase interest rates, but if inflation is stable for the next 18 months the [committee] might keep [interest] rates stable,” Radebe said.

On the other hand Investec believes the Reserve Bank will increase interest rates. Bishop said Investec revised its repo rate hike expectations from 75 basis points (0.75%) to 25 basis points (0.25%) for the current year.

“But this will change if commodity prices rise meaningfully, and in particular if South Africa experiences substantial petrol price increases,” she said.

Even though lower oil prices could lead to demand-side growth as consumers increase their spending, the IMF has stated that this growth will be offset by negative factors such as investment weaknesses, constraints on electricity supply, labour productivity and falling commodity prices.

Growth forecast
On Tuesday, the IMF revised its growth forecast for sub-Saharan Africa down to 4.9% from 5.8% in 2015 (and to 5.2% from 6% in 2016), citing lower oil and commodity prices as the reason.

South Africa’s growth forecast has been reduced to 2.1% in 2015 from 2.3%, and from 2.8% to 2.5% in 2016. Radebe said that growth projections were even lower because of labour strikes.

“Strikes are stoppages of work, which means less production takes place. When there’s no production, there is no output and no growth,” she said.

“Also, the falling of commodity prices means negative growth. Lower commodity prices negatively impact on export earnings and contribute to the trade deficit.”

Eskom hands over the reins of solar power geyser initiative

It is Eskom’s job to produce energy, not to save it. But as its power station maintenance comes into focus the utility says breathing room of about 5 000MW is needed to avoid load-shedding and, to achieve this, energy saving is imperative.

The government’s ambitious solar water heating rebate programme could have gone a long way in helping reach this level of energy saving. But the project, entrusted to the power utility, has fallen dismally short of its target.

Now the project will, by January 31, move to the department of energy where it could potentially be bolstered. But the department’s silence has detractors worried that the industry, and the jobs it has created, could be at risk.

When the solar water heating rebate programme was launched in 2008 – when rolling blackouts first took hold of South Africa – it was hoped that a rebate would encourage consumers to heat water, one of the most intensive household activities, with solar power and result in “maximum power savings”.

The government aims for 10 000GWh to be replaced by power from renewable sources, and the department of energy believes 23% of this target can be achieved by solar water heating.

According to Eskom’s website, an electrical element geyser is responsible for 40% of the average household’s energy cost. A high-pressure solar water heating system can reduce a household’s electricity bill by up to 24% while a heat pump is three times more energy efficient than an electrical element geyser.

New hands at the wheel
The programme aimed to have installed a million solar geysers in homes across South Africa by 2013. Only 400 000 systems have been installed, according to Eskom.

Eskom does not see the 400 000 as a failure and in response to questions said: “We have enjoyed mixed success.”

The introduction of minimum specifications on local content has had the unfortunate consequence of stalling the programme because of the low number of qualifying manufacturers, according to the utility. “In the long run the standards will be beneficial, but in the short term the industry is taking pain.”

Yet the installation of 400?000 systems makes this one of the biggest solar water heating programmes in the world.

Eskom said the programme had also led to new and improved quality standards. “This has been good for service delivery, job creation, electricity savings and environmental management,” it said.

But the Democratic Alliance said the manner in which the handover was being done could put thousands of jobs at risk.

Potential for disaster
The DA’s spokesperson for energy, Lance Greyling, said Eskom risked creating a major disruption in the solar water heater industry because of inadequate notice of withdrawing from the programme.

According to Greyling, rebates range from around R5?000 and R12?000, depending on the size of the geyser, and have achieved energy savings of up to 50% to households.

But, “if a new rebate programme does not start running immediately after Eskom withdraws, there will be a complete stop in installation and many companies and thousands of employees will be out of business and work”, Greyling said. “The industry is also facing a precarious financial state due to the uncertainty given to the market by government’s constantly changing policies.

“The government’s revised policy also repeats the mistakes of its past programme in that priority is given to the installation of low pressure units whereas it is only the high pressure units that actually achieve the goal of demand reduction.

“This latest move by Eskom is indicative of an entity in complete disarray, looking for any and all ways to remove themselves from delivering on their mandate,” said Greyling. “This state of affairs must not be allowed to negatively affect an entire industry, risk jobs and threaten the livelihoods of those most in need of support. We need a proper government plan for solar water heaters that can urgently reduce demand to the grid and provide certainty to the industry so that it can flourish and provide much needed jobs.”

Close deadline
Asked about the reasons for the handover, Eskom said it would be focusing on its core business of supplying electricity in future.

Despite Eskom’s inability to meet the target, in November the department of energy said it was committed to ensure that a million solar water heaters were installed in households and commercial buildings by the 2014-2015 financial year, leaving it with little more than three months to go.

The department has been vague on the particulars but last week told the Cape Times it would, towards the end of the month, release details once these had been finalised.


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