‘Our real interest rate is 8.3% – the highest in the world’

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SIMON BROWN: I’m chatting now with Dr Roelof Botha around the Altron FinTech Household Resilience Index. This is Q3 for 2024. Roelof, I appreciate the early morning time. Let’s start on a positive note, and that is that private-sector employment has increased and is actually finally at higher levels than before Covid. We’ve got the Covid jobs back, I suppose we can say. And while we still have chronic unemployment in South Africa, that is a good sign from the index, even if it’s a small green shoot.

ROELOF BOTHA: Yes, absolutely. I was thrilled when we finally managed to beef up employment creation in the third quarter of last year, because leading up to the third quarter it was quite pathetic. One of the main reasons for that, of course, is the restrictive monetary policy. We have the highest interest rates in the world, and it doesn’t make any sense to me.

SIMON BROWN: Absolutely. I want to come to that in a bit, because of course we’ve got the MPC [Monetary Policy Committee] later. Has remuneration followed? If we’re seeing employment pick up, are we seeing more money being paid in remuneration as we see more people entering the workforce?

ROELOF BOTHA: Yes, it has picked up – not quarter on quarter, but certainly year on year there has been a marginal increase. Just on the side it’s also interesting to note that if you look at the average salaries that are earned by people who apply for mortgages, for home loans, that started a nice upward trend a couple of quarters ago, and especially in the fourth quarter as well.

SIMON BROWN: The household debt costs, however – that is a percentage of income. That still remains very elevated. South Africans are indebted. To your point earlier, that debt is costing a lot of money.

ROELOF BOTHA: Yes. When Covid hit us obviously the central bank, as most central banks – I suppose all of them that are functional in the world – started lowering interest rates. And at one stage, folks were sacrificing 6.7% of their disposable income to pay for debt costs, which is a fair amount. That was until the first quarter of 2022.

But then the central banks all over the world were severely criticised by several leading economists, including Joseph Stiglitz, the Nobel Economics prize winner. I’ve been singing exactly the same story. He asked why they are trying to fight an inflation problem which was caused more exclusively by a 700% – I’m going to repeat that – a 700% increase in freight shipping charges.

Just for the listeners, I want to inform them that 80%, eight zero percent, of all tradable goods gets sent by ocean, not by air. That caused havoc with inflation all over. It’s interesting that South Africa’s inflation rate, CPI, peaked at just above 7%, whereas it peaked at between 10% and 15% in most of our key trading partners. And one of the key reasons for that is that food is by far the largest single consumption expenditure item for people all over the globe. South Africa is a huge net exporter of food. We should build a monument for our farmers, quite frankly.

But that 6.7%, Simon, went up to 9.1%. I did a quick calculation. Since the first quarter of 2022, when this started increasing, if it had stayed at 6.7% – and it could have stayed there if the rates hadn’t gone sky high – consumers would’ve had R200 billion more to spend over this period. That’s the reason why the economy is not growing. It’s not very complicated.

SIMON BROWN: That number fits. We were chatting with Lonwabo [Maqubela] a moment ago, and he’s talking around R50 billion from the two-pot, and here we are talking around a number that is 4X that size.

We also see that another massive squeeze is of course capacity utilisation in the manufacturing sector. That is not yet back at pre-Covid levels and that really does just tell a story. Again, this is an economy that used to be a manufacturing hub around the mining industries.

ROELOF BOTHA: Yes, Simon. I think you know this, but I just want to tell the listeners that I don’t think they can fully understand my frustration with the Monetary Policy Committee, because what has happened since they started raising rates is that your level of unutilised capacity in manufacturing, which is a huge sector, has just increased.

What happens here is that you are now spreading your fixed overhead costs over fewer units of production. What this means is that it restricts aggravating supply-side inflation, cost push inflation. My first-year students understand this, but apparently the MPC doesn’t understand it. They are anti-growth. I don’t understand this. It’s frustrating.

SIMON BROWN: We’ve had some green shoots over the course of the last year from consumers. But at the end of the day the South African consumer, for a myriad of reasons, some of them being massively high rates, remains severely under pressure. We have seen trading updates from a number of the local retailers. They are positive, yes, but they are single-digit positive pretty much across the board.

ROELOF BOTHA: Yes, it was very encouraging to see the November total retail trades data from Stats SA. So for the three months, September, October, November in 2024, year on year, in real terms the retail spending at general dealers was up by 9.4%. And general dealers are 44% of the weighting.

The data is slightly misleading from the perspective of the different types of retailers – pharmaceuticals, textiles, furniture, hardware, etc – because you can buy hardware and paint at general dealers as well. And you can buy textiles and clothing and footwear there as well. But that was very encouraging. And furniture and appliances – which section is relatively small, 4.4% of the total but, as I said, some of it also finds its way at general dealers – was up 12%, double-digit in real terms year on year.

So there is definitely life in the economy.

I like to believe that a lot of people have postponed [retirement], especially because of the two-pot system, and decided, okay, I’m going to dip into this because I do need a new car or a better second-hand car in my case. I’m going to have to work a little bit longer, which is good for the economy, quite frankly.

But the interest rate thing – if they can just lower rates a little bit quicker and not by this 25 [basis points] Mickey Mouse stuff, the economy is asking for that. We need to unleash demand. It’s there, it’s latent. But we need to unleash that. I don’t know how we’re going to get sense into those five members of the Monetary Policy Committee. I really don’t know. In Afrikaans: ‘Ek wens ek kon ’n paar klappe gee’. Sorry for sounding aggressive.

SIMON BROWN: We hold thumbs for the three o’clock meeting.

A last question. We had the Fed pause [rates] last night. Does that make sense to you? They did some aggressive cuts. Their rate is obviously much lower, and their inflation has been edging higher away from their 2% target. The pause last night – does that sort of fit fair enough?

ROELOF BOTHA: Yes. I believe one needs to look at the real interest rate, and that’s the US real interest rate. Their benchmark commercial lending rate, minus their CPI, is acceptable. In South Africa’s case, it’s more than double that.

If you take our real interest rate, it is currently as we speak, Simon, 8.3%. This is frightening. When Gill Marcus, who became a colleague of mine at Gibs, when she was the governor of the Reserve Bank, during her five-year term of office the average real prime rate – prime minus CPI – was 3.1%. And the economy, the South African economy, grew at 2.6% on average during those five years.

Now our real interest rate is 8.3% – the highest in the world. And the economy is not growing, hardly growing. What more does one have to do to convince these people that we need a real prime rate, max, of about 5% in this country? They are way behind. And if you look at the benchmark long-term interest rate in this country, the 10-year government bond yield, that has declined by 220 basis points. They’ve given us a measly 50[bps]. These guys are behind, and it’s as if they are blind to this reality.

SIMON BROWN: Yes. And for the third-quarter GDP, even if we remove the agriculture – which was a shocker number – our growth was what, 0.4%, which is pretty much close to zero.

We’ll leave it there. Dr Roelof Botha, I always appreciate the early morning time.

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