“Rulers have no authority from God to do mischief,” Jonathan Mayhew (1720 – 1766)
An energy parastatal in distress, parlous domestic and external demand, a plunging exchange rate, adversarial labour relations and rising consumer debt levels paint a poor outlook for economic prospects yet the government believes that it is “making progress in many other areas and aspects of the government programme of action”.
“This could not be further from the truth,” says Luke Doig, Senior Economist, Credit Guarantee. While the pass-through effects to inflation from the weaker rand have been muted to date, the weak state of the manufacturing, agriculture and construction sectors, together with headwinds for consumer and government spending, paint a bleak outlook. “Daily revisions are being made to the timelines for new electricity generating capacity to come on line, thereby placing at further risk the likelihood of growth materially exceeding 2014’s 1.5% for quite some time,” he says.
Sharply falling crude oil prices are providing some relief to fuel prices, so consumers and businesses alike can look forward to another cut next month so long as the rand holds its ground. Current over-recoveries amount to 60-67 cents per litre for petrol and 63-66 cents per litre for diesel depending on the grade, but would have been some 17-19 cents per litre higher were it not for the weaker exchange rate. “The twin devaluation to the Yuan is spooking the markets and adding to pressure on the rand, which will erode further expected gains from weaker Brent prices.”
Although gold and coal sector strikes have been averted for now, any such action will drastically affect downstream suppliers of food, housing services, mining equipment and drilling services, insurance and finance as well as utility and logistic providers. Not to say anything about the impact that lost wages will have on the lives of the affected families and in turn of retail and wholesale suppliers.
With a manufacturing sector already in recession, all efforts are required to avert the potentially debilitating effects on not just manufacturing, but the economy at large. “Interest rates may well rise at least another 50 basis points this year and payment default risks remain elevated in our view,” Doig notes.
Johann Els, Senior Economist for Old Mutual Investment Group, seems a little more positive: “South Africa may be suffering currently, but glimmers of hope are starting to emerge that undermine the more negative perceptions plaguing the SA economy.”
He explains that while local growth is struggling under the burden of electricity shortages, commodities under pressure and a weak rand, “positive signs, such as an improving trade deficit and inflation figures, could be slightly buoying the economic outlook.”
With consumers still absorbing the sting of the recent increase in the interest rates, the economy is looking shaky in a low growth bind and the rand at risk from US interest rate hikes, he acknowledges. “The indicators of real economic activity have remained soft, with credit demand, especially from households, very slow, car sales falling further and the Reserve Bank’s leading indicator index weakening. This all points to little chance of any acceleration in economic growth anytime soon and the Reserve Bank now forecasts 2.1% GDP for 2015, down from its forecast of 2.5% made in December 2014.”
However, he points out that it doesn’t all appear to be doom and gloom, with a second consecutive trade surplus recorded in June, thanks largely to recovering gold and platinum exports and falling oil imports. “The improvement over the past few months is indeed comforting,” says Els. “We estimate that this could mean a narrowing in the current account deficit to about 3.5% of GDP in the second quarter, down from 4.8% in the first quarter and 5.5% in 2014.”
In addition, a declining oil price, coming closer to previous lows, means that we are likely to see further petrol price cuts. He highlighted that, while consumer spending may not be at ideal levels, they are under less pressure than in previous cycles, with slightly increasing disposable income growth and inflation surprising on the downside in June. “If you look at inflation plus prime rate and the forecast, we are seeing a far flatter profile compared to the previous cycle where there was a significant spike in both inflation and interest rates,” says Els. “Therefore, this year might not be as dire as many assume, in fact it might even be better than last year.”
Looking further afield, he says that global market sentiment is being dominated by the imminent first hike in US interest rates since the financial crisis, as well as the economic slowdown in China. “The combination of these two forces is putting downward pressure on commodity prices and emerging market currencies, causing more difficult conditions for many developing countries,” he explains, and pointed out that global growth recovery was still slow and inflation remained low. “While US rate hikes are likely to start soon, it will be a slow, but measured, cycle. Still, as the Fed marches closer to the beginning of the hiking cycle, markets remain unnerved by the potential ramifications of rising US rates, especially given the vulnerabilities and weak growth elsewhere in the world.”
However, Adam Habib, Vice-Chancellor University of Witwatersrand, is on Luke Doig’s side. Early August he comment that, “South Africa was headed for a major crisis because important plans for the country are beginning to unravel under poor leadership. He was speaking at the 28th annual Labour Law Conference in Sandton, Johannesburg on 5th August.
“The time for diplomatic conversations in our society is over. I am going to be fairly blunt and frank about what I think is the challenge of South Africa in 2015. I think we are in a moment of reckoning. I think that the great innovations of 1994, the political pact of 1994, is slowly beginning to unravel. I think the easy stuff – the low hanging fruit – has been plucked.
“We are in a moment where we need nuanced and mature strategic leadership, and frankly I don’t think we have it. We don’t have it in the state, the presidency, the corporate sector and the union movement. Unless we get that strategic leadership, we are headed for a national crisis of incredible proportions.”
He said some people believed that things would change in three or four years, when the leadership changed. “I don’t think we have three or four years. And the problem is, if the malaise continues, it roots itself and I don’t think a turnaround would be easily possible thereafter.”
He said that if he was a betting man, and someone asked him if the country would change, he would say no. “The CEOs moan and groan, but they don’t do anything. The unions are fighting about who takes the secretary general [position] of Cosatu and there is no movement. The president, no one knows what he is doing actually,” he said to laughter from delegates.
Habib looked at different aspects of the ‘game plan’ that were unravelling. The first was the National Development Plan, which he said was supposed to develop and address inequality.
“All of the measures that it puts into place… are important, but what those will do is get growth going at the base of society, and as growth happens at the base of society, we will have poverty alleviation, but we will not have a reduction in inequality,” he said. “As these guys at the bottom grow, as they do better, the guys at the top will grow faster. They [the people at the top] own assets, they own properties… so what you have is inequality growing as poverty alleviation happens.”
As a footnote here are some headlines from Sharenet, Monday 24th August 2015, in what can only be described as a ‘ Chinese contagion’:
• Chinese stock markets plunge more than 8% (biggest one-day fall the since start of the global financial crisis);
• Honk Kong stocks fall for 7th day, down more than 5%;
• Australia shares plunge to over two year lows following its biggest one day percentage drop in 6½ years;
• Nikkei tumbles to 6-month low; share average down 4.6% in one day; and,
• The JSE follows world markets lower, closing 2.85% down at 5pm.
Stocks post worst week in years on China fears, Sharenet adds: the biggest weekly drop in global markets since 2012; stocks on Wall Street and in Europe fell more than 3%; crude oil is on its longest weekly losing streak in 29 years (it even went briefly below $40/barrel); and, China factory activity at almost 6½ year low.
South Africa's central bank says it will now consider intervening in foreign exchange markets to ensure "orderly market conditions", after the rand slumped over 3% to an all-time low on concerns over China's economy.
There’s no question there are a range of global issues outside of South Africa’ hands, accounting for general economic woes. But local politics are obviously not helping. If ever there was a reason to use the phrase ‘shooting oneself in the foot’, now’s the time.
Says Sharenet, it’s hard to believe that in January 1981 R0.73 bought you US$1 and that in the subsequent 34 years the rand has depreciated to over R12.90 to the US Dollar! In market terminology, this translates to an exchange rate fall of 1,606% against the dollar (that’s 8.5% per annum compounded). Look a little closer and you’ll notice that since the start of 2015 the rand has depreciated approximately 12%... and a gut wrenching 22% over the last 12 months!
It’s interesting to note, however, that the trend of a depreciating rand has continued under the watch of every pre- and post-apartheid SA President since PW Botha. This is a long-term structural problem and one that is not going away any time soon. If anything, the problem is worsening and at an accelerated rate. In addition, it doesn’t affect just those doing business offshore, planning holidays or looking to emigrate. It’s much more serious than that. A large portion of SA’s inflation basket (fuel prices, vehicle purchases, electronic goods, clothing and other imports) will suffer on the back of the continued rand slump and that means a real, tangible, higher cost of living for all citizens. The depreciation of the average South African’s wealth in US$ terms is alarming and if left unattended could spell disaster for the personal wealth of millions of South Africans.