Moderate inflation growth expected as Rand strengthens

by Edgar Brandt

Moderate inflation growth expected as Rand strengthens

Windhoek

The recently implemented carbon emission tax and municipal tariffs are expected to place upward pressure on inflation but the inflationary growth rate should be at a slower pace, mainly on the back of moderating food inflation and the stronger Rand, at least over the short term.

For these reasons Simonis Storm Securities (SSS) has maintained their full-year forecast for the Namibia Consumer Price Index (NCPI) at 6.5 percent.



The latest inflation statistics, released on Monday by the Namibia Statistics Agency (NSA), indicate that annual inflation remained constant at 6.7 percent, compared to 6.7 percent recorded in May 2016, but came in higher than the three percent recorded in 2015.
According to the NSA, the NCPI grew by 0.4 index points month-on-month (m-o-m) in June 2016 compared to 0.6 index points recorded in May 2016. The moderate growth in overall inflation can be attributed to slow growth in food, beverages (alcoholic and non-alcoholic) and tobacco.

“We believe the pressure was offset by the stronger currency (USD-ZAR) and declining South African white maize prices,” reads the SSS inflation report, which was compiled by Purvance Heuer, director of research and securities and trainee economist, Indileni Nanghonga.

Overall inflation grew on a monthly basis at a slower pace dropping to 0.3 percent in June 2016 since the highest monthly growth rate of 2.4 percent was recorded in January 2016. SSS said this suggests a slowdown in the annual inflation growth rate going forward at a moderate pace.

Because Namibia imports between 50 and 60 percent of its goods and services from South Africa, SSS pointed out that the biggest risk towards increasing food prices remains the volatility of the Rand.

“Recently the Rand has strengthen against the US Dollar and we expect the risk of increasing food prices to ease over the short-term.
“There is a positive correlation between SA white maize prices and the Rand. SA white maize prices declined by 5.4 percent to R4 727 per 100 metric tonnes at the end of June 2016 compared to R4 997 per metric tonne recorded on the 1st of June 2016.

“Meanwhile the Rand strengthened by 5.6 percent to R14.7 against the USD at the end of June 2016 fromR15.7 as at 1 June 2016. Despite the drought situation, we are of the view that food inflation will be offset by the stronger Rand and the slowing SA maize prices (R4 545 per 100 metric tonnes as at 18 July 2016),” SSS explained.

The NSA noted that the highest weighted category in the inflationary basket (28.4 percent), namely housing, water, electricity, gas and other fuels, grew by 7.6 percent during June 2016, compared to 2.5 percent recorded in the prior year.

On a monthly basis, this category grew by 0.1 percent in June 2016 compared to a zero percent recorded in May 2016. The monthly growth can be attributed to a 1.5 percent m-o-m increase in regular maintenance and repair of dwellings sub-category, coupled with a 0.3 percent m-o-m growth in the electricity, gas and other fuels sub-category.

The City of Windhoek implemented municipal tariff increases in early July 2016, of which it proposed a 10 percent increase on the basic water and property tax tariff and an 18 percent increase on the sewerage tariff.

“These increases were on the back of the persistent water crisis in Windhoek. We are of the view that these tariffs will exert further inflationary pressure in this category,” stated SSS.

Meanwhile, inflation growth in the food and non-alcoholic beverages category remain significantly high in annual terms, growing by 11.3 percent compared to a 4.1 percent in the prior year.

Annual inflation in major food sub-categories moderated in June 2016. “Interestingly, monthly growth in the food and non-alcoholic beverages category contracted by -0.6 percent compared to 1.5 percent recorded in the prior month.

“Negative monthly growth has resulted from a monthly contraction in bread and cereals (from 2.6 percent to – 0.7 percent), vegetables (from 0.4 percent to -1.4 percent), fruits (from -3.0 percent to -5.8 percent), and oils and fats (from 4.8 percent to -0.3) sub-categories. We believe the stronger Rand over the month of June 2016 has partially contributed to the slow growth in food prices,” said SSS.

Annual inflation under the transport category grew by 3.0 percent year-on-year (y-o-y) compared to -3.0 percent registered in the prior year. On a monthly basis, transport inflation grew by 2.1 percent compared to 0.1 percent recorded in May 2016.

According to the NSA, this increase emanated from the operation of the personal transport equipment subcategory, which increased to 3.3 percent from – 0.2 percent in the previous month.

“The upward inflation trend in this category can also be attributed to an increase in fuel prices by the Ministry of Mines and Energy during June 2016. Furthermore, the proposed 30 cent and 50 cent increases in petrol and diesel, respectively during the month of July, coupled with the recently implemented carbon emission tax will push inflation higher in this category,” SSS noted.

Annual inflation under the alcoholic beverages and tobacco category grew at a slower pace of 7.1 percent during June 2016 compared with 7.2 percent in the prior year. On a monthly basis, inflation in this category continues to grow at a slower pace of 0.6 percent compared to 0.7 percent in May 2016.

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