CAPE TOWN: The price of staple food may increase by close to 50% as a result of the ongoing drought, Capricorn Asset Management (CAM) says. CAM investment strategist Suta Kavari warned that the rate hike in South Africa could spill over into Namibia with dire consequences for consumers.
This follows the South African Reserve Bank’s announcement on Thursday of a 50 basis-points increase in the repo rate to 6,75%. The repo rate is the rate at which the central bank of a country lends short-term money to commercial banks against securities.
“The rate hike is a hard knock to consumers in South Africa, which could spill into Namibia. Coupled with the latest rate hike, consumers will be bogged down “by proposed increases in electricity tariffs, and the likelihood that staple food may increase by close to 50% as a result of the ongoing drought. The near-term outlook is pretty dismal,” he said in the daily Economic Headlines issued by the company on Friday.
The ongoing El Niño has resulted in a severe drought across southern Africa. Rains, which typically begin in October/November, have been from 10 to more than 50 days late and significantly below average.
This poor rainfall, in combination with above-average temperatures, has limited crop development, pasture regrowth and water availability. If rainfall remains below average, as forecasts suggest, the current growing season is likely to be one of the driest on record, according to the Famine Early Warning Systems Network (Fewsnet) last week.
Kavari emphasised that the effects of the rand’s recent and considerable depreciation and the worsening drought conditions have significantly contributed to the deterioration in the inflation outlook. A worrisome picture is that the expected peak in food price inflation in South Africa is estimated at 11% over the next 18 months.
It is thus expected that the Bank of Namibia will raise interest rates by 50 basis points at their next policy meeting this month. The South African and Namibian prime rates are now on par, while South Africa’s repo rate is 25 basis points above that of Namibia.
“We, however, do not expect any immediate capital flows out of Namibia into South Africa, as we believe that local banks will readjust to maintain their margin over South African deposit rates.
“This will result in a margin squeeze for local banks and the BoN will have to raise rates in order to ensure a healthy banking system,” according to Kavari. Meanwhile, local miller Namib Mills announced price increases in all its product categories, effective 25 January 2016.
Maize meal products increased by 10%, wheat flour by 6%, mahangu meal by 20% and sugar products by 15%. Rice products also increased by between 15% and 23%.
The company said one of the reasons for the price increases was that pressure of the drought in southern Africa had increased maize prices dramatically, as supply declined under the dry conditions. It was mainly due to the persistent drought and the weakening Namibia dollar, said the company’s chief executive officer, Ian Collard, when he announced the price increases in a media statement last month.
Collard added that the drought in Namibia had resulted in a very small mahangu harvest, which necessitated imports, adding that there is also a certain scarcity of the product, as the only country producing excess mahangu is India. CAM is a subsidiary of Bank Windhoek Holdings.
