Budget for interest rate increases

[Dave A]

We may be in for a period of relatively low interest rates, but I suggest if you're taking on new commitments, make allowance for the fact that interest rates could well rise again in the not too distant future.

First of all we have the budget deficit. Pravin Gordhan has indicated that tax revenue is down significantly, but government will keep on spending.

Stanlib economist Kevin Lings said he expected the budget deficit to approach 7%.

"That's quite high in South Africa's history," said Lings. "But our level of debt is incredibly low by world standards, so we are able to absorb this.

"They could raise taxes, but that is not a likely option, seeing that the economy is this weak. It wouldn't be the right move." He said it was risky to forecast the revenue shortfall a few months into the tax cycle.

"However, government expenditure is well ahead of budget and it's hard to see that getting reined in," said Lings.

Schussler said that interest rates are likely to increase, meaning that rates in the immediate future would probably not fall by more than half a percentage point.

Lings said an argument could be made for further interest rate cuts to support the economy, but the Reserve Bank's stance indicated this was unlikely. "I don't think the Reserve Bank will look at it this way," said Lings. "They seem to be saying they have done enough, so it is likely that we are at the bottom of the interest rate cycle."

Lings predicted that bond yields would move higher, with the percentage increase depending on "just how bad the government's financial situation is".

"Long-term interest rates will probably rise, but they were already very low, so it's not the end of the world," Schussler said.
full story from M&G here

So no great disaster for now, but sooner or later you have to pay the piper.

Second, we need to look at what is likely to happen in the recovery. Keeping on top of inflation is going to be a real handful, and with capital markets seemingy severely damaged, I think it's going to take some pretty healthy returns for liquid finance to come out and play.

Ultimately I'm troubled that our balance of payments relied so heavily on capital inflows when times were good. Do we have the capacity to build a healthy economy without reliance on external capital props when the recovery comes this time round? If not, capital funding is going to be a precious, and possibly expensive resource.