Simonis Storm Securities has said that it expects to see inflation consistently coming in higher than 5% in coming months and therefore maintain their forecast of 7.1% for 2022.
This is contrary to a forecast of 6% by both the Bank of Namibia and IMF.
“Globally, services inflation is on the rise as consumers switch to travel and tourism amongst other services as the world learns to live with the virus. However, locally, we expect goods inflation to be higher than services inflation as a result of expensive supply chains, elevated fuel prices and a weaker Rand exchange rate,” Economist with the firm, Theo Klein said.
Annual inflation was recorded at 5.4% y/y in May 2022, compared to 5.6% in the prior month. Goods inflation stood at 7.1% in May 2022 (compared to 7.4% in the prior month) and services inflation at 3.1% in May 2022 (same as the prior month). YTD, inflation averages 4.9% compared to 3.2% during the same period last year. The Transport (up 16.7% y/y), Hotels and restaurants (up 8.5% y/y) and Furnishings, household equipment and maintenance (up 7.5% y/y) categories recorded the largest annual increase in prices. Given the respective weights in the consumer price basket, the Transport, Food and Alcohol (up 6.6% y/y) and Alcoholic beverages and tobacco (up 4.7% y/y) categories contributed most to the annual change in inflation.
“Within the Hotels and restaurant category, prices in catering services increased by 3.6% y/y and accommodation services increased by 14.6% y/y in May 2022. This indicates that the hospitality establishments operated sub-optimally since the pandemic outbreak. Numerous specials offered to locals in the last two years would also have negatively impacted their profits. Prices are also likely to increase for locals as specials are removed, as the number of tourists is increasing. In light of improved bookings from Namibia’s popular partners and owing to rising input costs (e.g. electricity, wages, fuel, food, etc.), local hospitality establishments have increased their rates in recent months and are now starting to reflect in the inflation figures.
“Within the Furnishings, household equipment and maintenance category, prices of products and services used for general household maintenance have increased by 19.4% y/y, electric appliances (up 5.5% y/y), glassware and household utensils (up 4.1% y/y) and both gardening tools and household textiles (up 3.8% y/y) in May 2022. These price movements are indicative of elevated global commodity prices which rebounded after the war in Ukraine broke out. While higher commodity prices benefit our local mines and export earnings, imported merchandise goods (such as electronic household appliances) become more expensive and weighs on consumption spending,” Klein explained.
He further went to say that Brent crude prices have increased over 60% in the last 12-months, coupled with a weak Rand, and they expect fuel prices to remain on an upward trajectory in coming months.
“The current implied underrecovery in South Africa indicates a fuel price increase of R2.00/litre in July. Should the South African government not extend their levy reduction, fuel prices could increase up to R3.50/litre.
“Namibia can therefore also expect a fuel price increase of a similar magnitude and if the government does not extend the levy reduction, local fuel prices could increase by more than N$3.00/litre in July 2022. This will take local fuel prices closer to our initial forecasts ranging between N$23/litre to N$25/litre. A crucial risk to local fuel prices still remains the eventual removal of lockdown restrictions in China. This could potentially provide a second global oil price shock and filter through to higher fuel prices in Namibia as discussed in our report on the Chinese economic slowdown released in May 2022. The transport category has reached an all-time high of 18.9% in April 2022. Whenever transport inflation was above 10%, Namibia had headline inflation rates close to 6%. Therefore, we maintain our view that headline inflation will likely edge closer to 6% in coming months,” he said.
Furthermore, Klein went on to say food prices have been driven higher this year due to new sanctions on Russia, weaker Rand, lockdown restrictions in China, expensive supply chains and adverse weather conditions in certain regions. The UN’s Food and Agriculture Organisation reported that significant amounts of agricultural exports are stuck in Ukrainian warehouses, as exports are blocked by Russia’s naval blockade and destruction of infrastructure.
“In addition, protectionist measures in certain countries have banned the exports of certain food products which also adds upward pressure to global food prices. Examples include India which restricted wheat exports, limited sugar shipments and mentioned that they might target rice exports next and Malaysia which is banning chicken exports. Indonesia banned palm oil exports in April 2022, sending futures prices higher as the country supplies 60% of global demand. However, this ban was reversed by end of May 2022. Palm oil is a crucial element as it is used in the production of food products, shampoo and biodiesel amongst other.
“Russia’s attempt to release grain and fertiliser exports as global shortages mount in exchange for sanctions to be lifted was rejected by the US and enraged Europeans as Russia attempted to use food as a political weapon. Certain Northern African and Middle Eastern countries are already in a food crisis, and with rising food prices and no end in sight for the war in Ukraine, risks of mass migration and social unrest rises in these regions. Other factors negatively impacting global food production include a bird flu virus and avian influenza outbreak that has caused chicken and egg production in the US to plummet. According to Bloomberg, this is the worst bird flu outbreak experienced in the US, with egg production at its lowest since 2015. In addition, countries such as Brazil have shifted to chicken as a cheaper protein source given that beef and pork prices have increased significantly more than chicken in recent months. All these factors could lead to higher chicken prices locally in the near future,” extended Klein.