By Neil Roets – CEO of Debt Rescue

The grim prospect of Stage 8 load shedding is looming large and the repercussions of this could well catapult the country into a sustained period of stagflation that could make the preceding economic rollercoaster seem like a walk in the park. 

Capital Economics warned in a commentary that the impending escalation of the blackouts threatened to engulf South Africa in a ‘period of stagflation’, but that a case could be made that South Africa is already caught in the trap of stagflation and that the looming surge in Eskom power cuts this winter will worsen matters. 

“We are looking at an economy in meltdown, and the repercussions for consumers do not even bear contemplating,” says CEO of Debt Rescue, Neil Roets. “Stagflation refers to a period of economic hardship characterized by stagnant economic growth, high unemployment, and rising prices (inflation) – all of which we have been witness to over the past few years. There is no question that the escalating energy crisis is at the root of South Africa’s economic downhill slide, and now it is set to plunge our country into darkness and inactivity for extended periods, with devastating consequences for both consumers and businesses. This can only lead to a further decline in living standards for us all and a decrease in investment in the country, which will further inhibit long-term economic growth. The weak rand – dollar exchange rate is also not helping matters,” he warns. “We desperately need a solution – and none is forthcoming thus far,” he adds. 

Earlier this year Financial services company BNP Paribas said that South Africa will likely see long-standing energy insecurity intensify – halting economic progress even more.  This ominous prediction was realized with Eskom’s warning to the nation last week to brace for the utility having to slash as much as 8,000 megawatts from the grid to prevent a complete blackout – fuelling the flames of inflation and dashing any hope of economic recovery. The resulting pressure this puts on The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) makes another steep repo rate hike in May even more likely, as SARB will now rally to bring inflation levels down. 

Consumer inflation has been above 6% since May 2022 and food inflation raced to a 14-year peak in March this year coming in at 14%, while the latest unemployment figures released by Statistics SA reveal that  the unemployment rate edged up to 32.9% in the first quarter of this year compared with 32.7% in the last quarter of 2022.  In the face of this, another steep repo rate hike will drive many more thousands of households in South Africa below the poverty line. 

Efficient Group chief economist, Dawie Roodt says, “Developments in the past couple of weeks, especially the last two weeks or so, resulted in significant volatility in the exchange rate of the currency as well as a much weaker capital market. The result of that is more inflation expectations and actually more inflation going forward and I am afraid the Reserve Bank is likely to increase interest rates again.” 

In order to curb inflation and especially inflation expectation, he expects the Reserve Bank to increase interest rates by another 50 basis points, bringing the repo rate to 8.5%. This would be the 10th consecutive increase since the start of 2022, with South Africans seeing the repo rate rise from 3.75% at the start of January 2022 to its current level of 7.75%. 

Roodt says that technically South Africa is in stagflation because our inflation rate is too high, while economic growth is basically zero. “If this goes on for a long period of time – maybe two or three years - that is what is required before we can really talk about a period of stagflation. I think weak economic growth will be the norm for a long period of time, though inflation is going to come down a little in the short term. In the medium to long term though, we are probably in what is called stagflation,” he explains.

Roets concurs saying: “While I understand that the MPC likely has no choice but to hike rates again to address inflation, the economic situation is simply not sustainable. Our country is looking at a humanitarian crisis of astronomic proportions. The pending rate hike will inevitably increase borrowing costs for consumers and reduce their disposable income even further, while pushing levels of debt even higher,” he explains. He points to the deepening financial crisis of the country’s middle class, that has resulted in 85,000 domestic workers losing their jobs at private households. 

His concern is the millions of people who are turning to credit to survive, in the face of insurmountable cost-of-living increases, and the toll this takes on their mental and physical wellbeing – not to mention their financial circumstances.    

“Consumers are deeply pressed. We are witnessing more and more South Africans falling into a bottomless black hole of debt they cannot easily climb out of. My advice to those who are in a debt trap is to remember that you are not alone. “Seek help from a registered debt counsellor who can assist you to manage your financial predicament,” he advises.