2011 has so far painted a bleak picture for the future of the South African consumer with the price of fuel, electricity and food all expected to increase substantially in the months ahead.
According to Alon Perlov, Managing Director of Genesis Capital’s financial planning subsidiary – Genesis Advisory Services – the series of price increases will have a serious impact on people’s finances. “Consumers are already struggling with high levels of debt so the fact that daily costs are expected to increase significantly over the next year is only going to put more strain on their already overburdened pockets.”
“As a result, it is essential for South Africans to adequately prepare themselves now to ensure that their finances are on track so that any price shocks don’t force them to deviate from their financial goals.”
Recent reports have suggested that food inflation in South Africa could be heading towards 15% over the next year, with the World Bank reporting that global food inflation was at 36% year-on-year in March. This is on top of the 26% increase in electricity planned for July and petrol just shy of R10 a litre, up 16% on a year ago.”
Perlov says these price increases are likely to result in many South Africans being forced to change their spending habits. “The average consumer will have less money to spend on food, education and healthcare services and eventually we are likely to see people dipping into their retirement savings just to make ends meet.” This is especially worrying as statistics indicate that only 6% of South Africans will have enough money to retire comfortably as it is.
He says the fact that inflation is also rising faster than expected – up 4.1% in March compared with a year earlier – not only means that people may struggle to sustain their daily living expenses but also indicates that interest rates may have to increase to slow down the pace of inflation.
“If this happens and interest rates are increased then the average person will find that they are spending even more money just to service their basic debt such as car finance, credit cards and home loans.”
Perlov says it is important for consumers to ensure that they will be able to maintain debt payments even in the event of rising interest rates. “While the National Credit Act has helped to limit the amount of debt consumers can take on, it is still essential that consumers do not overstretch themselves when they first take on debt. They should also make adequate provisions so that if there is an interest rate increase they would easily be able to adjust to the higher repayment amounts.”
He says consumers concerned about how they will manage in the face of rising costs should speak to a financial adviser, who will be able to educate them on the impact of increasing inflation and interest rates. “An adviser should be able to take these factors into account when analysing a client’s financial situation and put together a comprehensive solution to meet the client’s needs and requirements.”
“While consumers can’t prevent costs such as fuel, electricity and food from increasing there are certain steps one can take to mitigate the impact that this will have on one’s finances and it is vital that people don’t wait until they are under severe financial strain until they act.”