You can also listen to this podcast on iono.fm here.
SIMON BROWN: I’m chatting now with Dr Roelof Botha. He’s the author/reporter of the Altron FinTech Household Resilience Index. Roelof, I appreciate the early morning. You and I have chatted in the past around the interest rates and the real rate, and how it has squeezed consumers.
In this release you make the point that if debt-serving costs had remained at the 6.7% households would have had an extra one point – sorry, R172 billion – more disposable income. Treasury would have got an extra R42 [billion] and change of taxable income. Households have been, I was going to say, squeezed. This is way more than squeezed. This has been absolutely had the lifeblood sucked out of them.
ROELOF BOTHA: Yes. It’s frightening, Simon. if you look at the average salary, the formal sector salary in South Africa since the second quarter of 2019, so well before Covid hit us, it’s still lower. It’s 2% lower than it was in the second quarter of 2019. What obviously happened during Covid, immediately after Covid, is that a lot of South Africans with jobs retained their jobs but, because of the detrimental effect on turnover and profits of the companies that they were working for they were prepared to take salary cuts. It’s very obvious.
And just as things started recovering nicely the Monetary Policy Committee decided to take the prime overdraft rate, via the repo obviously, the 350 basis points difference, to 11.75%.
It was 10% before Covid, and it was too high. I keep on saying this, but I have to say it. The inconsistency of monetary policy to me personally and to I believe millions of indebted South Africans is a huge problem because, when Gill Marcus was governing the Reserve Bank, over that five-year period of her tenure the average real prime rate, prime minus CPI was 3.1%, and the economy grew at almost 3% per annum for five years.
Then three horrible things happened to the economy. She retired. That was very bad news. A new Monetary Policy Committee was appointed by Mr Jacob Zuma – by the way, just incidentally. And then state capture really started kicking in.
I’ve just had a quick look. The investment in construction works in real terms by public corporations since 2015 has declined by 60%, six zero. It’s no wonder that outside of the Western Cape our roads and our harbours and our railway lines are in this condition. Yes, we’re fixing them.
I’m a positive economist. I’m known as a Sunshine Economist. But the Monetary Policy Committee’s monetary policy right now is standing right in the middle of economic growth in South Africa.
SIMON BROWN: If we run the numbers and use that 3.1% from the days of Gill Marcus and take an inflation rate currently, let’s say, 4.4%, that would imply a primary, what, 7.5%?
ROELOF BOTHA: You know, I get so mad [chuckling]. I tell people I can wipe my nose with a puff adder because what happened is that virtually simultaneously with the measly, stingy 25 bps that we got last month there was a decline in the CPI of 20 basis points. So the real prime rate stayed at exactly 7.1%. In real terms there was absolutely no – zero – relief for indebted South Africans. I just don’t understand this because there has not been any sign of demand inflation in this economy over the last five years. Nothing.
SIMON BROWN: The flip argument is that if our rates are too low, money flows out of the country. Our rand weakens. And certainly that is sort of the defence that is offered to the MPC and the governor. You don’t seem to be concerned about that, or perhaps you just don’t think that that would be the outcome, because we would be getting GDP growth and that would benefit the rand and that would bring in money flowing in.
ROELOF BOTHA: Exactly. Anybody who thinks that our short-term interest rates are going to entice people to invest in fixed deposits in our banking system must be out of their mind. That is not how money comes into this country. It comes into this country because of bonds and because of direct foreign investment. So it’s a fallacious argument. There are just so many flaws in monetary policy. But the most important one is that your long-term interest rate – which is the benchmark, the 10-year bond yield – has declined in the last six months, less than six months, by 200 basis points.
So what that essentially means is that the prime rate shouldn’t be 11.5% today, It should be 9.5%. There is a positive relationship between the long-term and the short-term interest rate. They are manipulating the short-term lending rates and the cost of credit. Consumers are now paying 9.1% of their disposable incomes on servicing debt. It was just about 6% a couple of years ago.
SIMON BROWN: We talked before and my previous guest made that exact point, where he said money has just been sucked out of the average household. You’ve made the point that [it’s] probably around R50 000 a year to the average household just on the higher rates. That is not just squeezing the household immensely, it is squeezing the economy because that’s R50 000 that people would have gone out and spent.
ROELOF BOTHA: Yes. If you look at a variety of indicators, for instance the Altron FinTech Index of Household Financial Resilience, it is way below where it was before Covid. It is also way below where it was after the nice recovery following Covid. And indicators like the Afrimat Construction Index are still below those before Covid. The Drive.co.za Motor Sector Index consists of 12 different indicators, and that has also taken one helluva knock.
As a direct result of that, more and more people are buying cheap Chinese cars that have been imported. Many of them are probably being subsidised by that communist regime to the detriment of South Africa’s domestic motor-manufacturing sector. This is a huge concern for me, because we earn a hell of a lot of money by exporting cars all over the world, especially to the United States, Belgium, Netherlands and the UK. Because of the loss of economies of scale everything is related to excessively high interest rates which were never necessary.
SIMON BROWN: I’m looking at the Altron FinTech Household Resilience Index. It was moving nicely. In Q1 2020 it collapsed of course [with the] pandemic, but the post-pandemic recovery actually took it to new highs. And, well, we are well below those levels still.
We’ll leave it there. Dr Roelof Botha, I appreciate the early morning time.
Listen to the full MoneywebNOW podcast every weekday morning here.
