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Credit Guarantee
Thursday, May 30, 2013 - 08:44
Struggling to cope

As South Africa struggles to cope with a ballooning deficit on the current account (2012 = -6.3%/GDP from -3.4%/GDP in 2011) and a sticky unemployment level of around 25% (narrow definition) and concomitant labour unrest, the spectre of a continuation in our low-growth mode should raise serious concerns for taxpayers, consumers and business alike. This compares to the average of 3.2% for the two decades prior to the financial crisis.

The World Trade Organisation (WTO) estimates that global GDP growth at market exchange rates eased to 2.1% in 2012 from 2.4% the prior year. The volume of world merchandise trade grew at just 2% compared to 5.2% in 2011. This is markedly below the 20-year average for trade growth of 5.3% or the pre-crisis trend of 6% (1990-2008).
Notes Luke Doig, Senior Economist, Credit Guarantee Insurance Corporation, “Even more worrying perhaps is the fact that, on the back of projected global GDP growth of 2.1% and 2.7% in 2013 and 2014 respectively, world trade growth of 3.3% and 5% is expected. Despite the extreme uncertainty prevailing in regard to prospects on either side of the Atlantic, this may yet prove to be optimistic. When China’s fourth quarter 2012 GDP growth of 7.9% broke seven consecutive quarters of slowing, there was hope that the world’s second largest economy would drive a global recovery. However the first quarter of 2013’s figure of 7.7% growth reflects soft overseas demand.”
He notes that Eurostat reported that unemployment in the EU-27 was at 12% in February 2013, up from 10.9% a year earlier and the low of 6.7% recorded in the first quarter of 2008. In its recent macroeconomic imbalance review, the European Commission noted excessive macroeconomic imbalances in both Spain and Slovenia, including large domestic and external debt, high deficits and banking sector problems. The Organisation for Economic Co-operation and Development also warned that Slovenia may need significantly more than the estimated €1 billion in additional capital for ailing banks while latest estimates indicate that Cyprus needs €6 billion more than initially indicated to rescue its banking system. The initial agreement was to provide Cyprus with €7 billion with the EU-ECB-IMF contribution totalling €10 billion. Debt repayment extensions for Ireland and Portugal are also mooted. Indeed the banking crises afflicting the Eurozone may become more widespread and entrenched in the years ahead.
In the latter half of 2012, we were becoming increasingly concerned about the trend in global bankruptcies but thankfully our worst fears were not realised. However Euler Hermes Global Insolvency Index revealed a 1% rise in 2012 and they are now forecasting a further 4% rise for 2013. They also observed two trends:
• a 12% decline for the Americas in 2012 where the rise in Brazilian insolvencies was offset by decreases in the US and Canada, and a further 6% decline for 2013; and,
• a rise in European insolvencies, especially Mediterranean countries (+22% in 2012) with a further 19% rise forecast for 2013.

As the consumer boom took hold over 2004-2008, so imports soared and the current account swung into deficit. This demand was driven largely by strong growth in household disposable income (see Chart 1). Doig says the recession in 2009 saw a brief improvement in trade trends but 2012 saw the deficit on the current account double in rand terms to R197.5 billion on the back of a poor export performance and continuing high import levels. Although a weaker exchange rate may improve our terms of trade, export demand will be weak in 2013 and hence the current account deficit may not improve significantly. Further evidence of this is seen in exports in the first two months of 2013 growing just 6% while imports grew 12.8%, causing the trade balance to widen from R23.7 billion in the first two months last year to R34.1 billion so far in 2013.
CHART 1

Confidence key

The FNB/BER Consumer Confidence Index declined from minus 3 index points in the fourth quarter of 2012 to a 9-year low of minus 7 index points in the first quarter of 2013, a level not even recorded during the global financial crisis. Consumers’ downbeat outlook on prospects for the national economy and their household finances, together with a slowdown in household income growth and credit extension, foreshadow subdued growth in household consumption expenditure during the first half of 2013 according to the report.
The RMB/BER Business Confidence Indicator showed a marginal improvement to 52 in the first quarter of 2013 from 46 the previous quarter, implying that 48% of those surveyed rated prevailing business conditions as unsatisfactory. Of the five sectors covered, only retail showed a decline. The close link between growth in household disposable income (H/H DI) and GDP growth is apparent from the second chart; the steady fall in the tempo of growth in H/H DI thus poses a threat to the growth outcome this year.
CHART 2

Monetary policy conundrum

“Consumer inflationary pressures are building, fuelled in part by a weaker exchange rate, inefficiencies in administered prices (8.9% year-on-year rise in February 2013 vs 5.9% for overall CPI) that may well cause a breach of the upper 6% target guideline in the short-term,” says Doig. Most of these are supply-side pressures and not demand-pull and hence many do not expect the SA Reserve Bank to hike rates in response. A further consideration will be the overall sluggishness in the economy and the likely muted impact this will have on employment levels. Although unemployment decreased slightly to 24.9% in the fourth quarter of 2012 from 25.5% a quarter earlier, it was a full 1% higher than twelve months earlier. Ever more pervasive and entrenched fractious labour relations also bedevil this outlook.

Credit demand by corporates waning

Corporate credit demand improved during the course of 2012, registering an annual increase of 9.1% compared to 4.7% the previous year while household credit demand growth was more muted at 7.1% from 6.3% in 2011. Household credit demand appears to have consolidated – unless distress borrowing comes to the fore; but that of corporates showed growth of only 7.2% and 5.7% year-on-year in January and February 2013 respectively. This is symptomatic of lethargic business activity.

Manufacturing stutters

Doig says the increase in the physical volume of manufacturing production was just 2.6% and 2% in 2011 and 2012 respectively following the robust 5% growth seen in 2010. Although January 2013 saw a 3.7% year-on-year improvement, February recorded a 2.9% decline. And despite the vocal calls for a weaker exchange rate as a salvation for the sector and the economy at large, meagre global demand saw flat export volume growth last year.
The broad basic iron and steel, non-ferrous metal products, metal products and machinery sector (22.9% weight in the manufacturing production index) experienced a flat production performance year-on-year in 2012 but plunged 8.2% year-on-year in February following the traditional slow ramp-up at the start of the year. Food and beverages (15.4% weight) experienced a 3.7% year-on-year fall in production in February; textiles, clothing, leather and footwear (4.9%) a 2.5% rise; while furniture experienced 7.2% lower production levels. The slack global demand outlook outlined above, together with local household expenditure growth of just 3.5% this year - the same as in 2012 – does not imply any sharp rebound in prospects for the broad manufacturing sector until 2014 at the earliest.

Debt indicators turning

“The variability in official liquidation statistics continues to hamper timely understanding, given the absence of a consolidated picture of formal closures and business rescue data,” says Doig. “Hence 2012 had an outcome of some 23.7% fewer liquidations than a year prior but there was a doubling in business rescue applications in the latter half of the year. Liquidations in the first two months of the year have now escalated 29% and Credit Guarantee has been involved in 44% more business rescue cases in the first quarter of 2013 than a year earlier.”
Credit Guarantee’s leading indicator for potential payment defaults has not risen dramatically over that recorded in the first quarter of 2012 although we would caution that this is off a high base. Credit Guarantee’s claims experience in the first quarter of 2013 reflects numbers and values up 8.9% and 11.9% respectively.
Inflation is likely to average close to 6% this year and any further weakness in the exchange rate will exacerbate this. The SARB may well have to consider raising rates in the latter part of the year if pass-through effects become entrenched, although the consensus view is for flat rates given the sombre outlook. Confidence remains fragile and will have to be managed lest more labour strife distresses more industries. With limp external demand and no likely source of a spark to ignite stronger domestic output, we do not see GDP performance outstripping the 2012 outcome of 2.5%

Copyright © Insurance Times and Investments® Vol:26.5 1st May, 2013
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