Business confidence plummets to a three year low

The latest Business Confidence Index (BCI) confirms a trend of sliding confidence among South Africa’s business leaders. The South African Chamber of Commerce and Industry (SACCI) backed survey states that “The BCI, after bouncing back to 98.7 in September 2007, dropped to 96.9 in October 2007 which is the lowest level for the BCI since June 2004 and a new low for 2007.”

Does this survey make sense? We thought the domestic economy was poised for great things in the next five to 10 years. It seems almost ironic that lower business confidence coexists with the longest equity market run South African investors have ever seen. The problem is that uncertainty in international markets, concern over local policy shifts, slowing GDP growth, and the impact of a rising interest rate cycle have all taken their toll.

Another cog in the global market machine

“Didn’t we dodge the sub-prime bullet?” we hear you ask. This topic has been discussed at many of the economic presentations we have attended since the emergence of the crisis in the US. Most speakers focus on South Africa’s limited exposure to low grade debt, stressing that none of our big four banks have participated in similar questionable lending practices. Even Investec (which has a more international profile) has managed to dodge the missile.

But these speakers miss the point. The real threat to the domestic economy is not that posed by one or two of our banks posting massive losses; but rather the impact on the domestic economy of slower economic growth in the US and UK. In these developed economies the impact of sub-prime goes beyond a few ailing banks too. Companies in these economies now have to conduct business under tighter credit controls and increasing liquidity concerns. “The sub-prime problems in the US have not only affected the financial markets, but have also led to growth prospects declining,” said SACCI economist, Richard Downing.

In support of this we quote a recent report in the Financial Times which shows that upward of USD 200 billion in US private equity deals have been scrapped. Reasons given include a tighter lending environment and an inability to renegotiate pre sub-prime financing structures.

Consumers suffer under the interest rate whip

Locally consumers have a number of other concerns. Top of this list is Reserve Bank governor, Tito Mboweni’s continued assault on their disposable incomes. A series of interest rate hikes has sent the prime lending rate 350 basis points higher in just over a year. And consumers are starting to feel the effects of this stranglehold. New passenger vehicle sales are already in decline – and house prices are not nearly as resilient as real estate commentators would have you believe. With the average middle-of-the-range house going for close to a million rand, the impact of each 50 basis point interest rate hike is telling.

The National Credit Act is also taking its toll. Although motor retailers claim the Act has not significantly impacted their businesses there is little doubt that obtaining finance for big ticket items is more difficult than before. Nowhere is this pressure more evident than at the furniture retailers. Locally listed Steinhoff, JD Group and Ellerine Holdings have all upped provisions for bad debt while struggling to maintain the turnover growth of the last couple of years. And banks have been upping their bad debt provisions too.

We are probably heading for a mini consumption expenditure recession. Fortunately this loss of consumption spend is offset by investment expenditure on infrastructure and other related social projects. But this will not be enough to push local GDP growth to government’s 6% target. Instead, finance minister Trevor Manuel had to slightly moderate GDP growth forecasts in his Mini Budget presentation.

Stronger rand spoils the party

Another concern mentioned in the BCI survey was South Africa’s growing current account deficit. It is difficult to feel pride in a stronger rand when the result is pressure on exports and increased import volumes. At R6.50 to the dollar we are likely to see the current account deficit grow even further.

As we’ve mentioned before this is not too much of a problem when a country is performing well; but dangerous should the economy turn. Fortunately most of the concerns outlined in the business survey are short term. We still believe the outlook for South Africa to 2010 and beyond is extremely positive.

Editor’s thoughts:
There has been so much positive spin around government infrastructure spend and the upcoming 2010 Soccer World Cup that you could be excused for believing business confidence is off the charts. In reality, corporate SA is more worried with consumer strength and trade statistics right now. Do you think South African business is correct in projecting a negative outlook? Send your comments to gareth@fanews.co.za

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