Economic prospects

Luke Doig, Credit Guarantee Insurance Corporation.

Is there any viable catalyst that can lift the immediate and medium-term growth prospects out of the moribund 2% that appears to be in the offing? Indeed one may well ask whether even this mediocre target is in fact attainable in the current environment. Similarly, hopefully this year will not be referred to as ‘2013’ or R20/£ and R13/$, because this may invoke sharply higher interest rates.

The RMB/BER Business Confidence Indicator has averaged just 45 since the beginning of 2010, reflecting the myriad of challenges facing South African business. Confidence both among consumers and businesses alike is unlikely to see a strong and sustained move above 50 until the second half of 2016. This implies that growth may remain anaemic until electricity shortages become more manageable (the four units from the Ingula pumped water storage scheme are scheduled to add 1,333MW to the grid by this time next year although recent reports cast doubt on this, while the next Medupi unit and the first Kusile units are only coming on stream in the second half of 2017).

While retail sales have risen 2.8% in real terms in the first five months of this year compared with the 2.5% growth seen in the same period last year, the benefits from the fuel dividend have been rapidly eroded. Thankfully, the recent renewed weakness in Brent crude oil prices has seen large over-recoveries emerge for both diesel and petrol; August should see fuel price cuts of around 50 cents per litre for petrol and almost 75 cents per litre for diesel). This will help alleviate the pressure on load-shed manufacturers as well as on overall transport costs.

Credit extension to households grew 4.3% in 2014 and this has slowed to 3.4% in the first half of 2015. High debt and debt servicing levels imply further pressure on personal income statements. Since early 2014, credit extension to corporates was growing at year-on-year rates of close to 15% but this slowed considerably in June 2015. With interest rates having been hiked 1% since the beginning of 2014 (including the recent 25 basis points hike) and further possible rate hikes of at least another 1%, retail sales are going to face headwinds. Although it is expected that durable and semi-durable goods will be most at risk, spend on food and services will not escape the pressure. The 1% hike in the personal income tax rate and highly indebted lower and middle income consumers indicate that a sober outlook needs to be applied to expected household consumption growth.

Debt judgments against businesses were 22.4% lower in value terms in the first five months of the year, although May did see a 32.9% month-on-month spike. Credit Guarantee’s leading indicator for payment defaults has risen almost 30% in value in the three months to July from the previous quarter, although it is 15.1% lower in the first seven months of 2015 compared to the same strike-afflicted period last year.

The risk of rising inflation amidst currency weakness (a spike to R13.50/$ cannot be ruled out) could well see the South African Reserve Bank raising rates by a further 1%. While this presents opportunities to exporters, global demand remains weak. South African exports have grown by just 3% in the first five months of the year, despite May’s impressive 13.6% year-on-year performance; and the impact of lower revenues for oil exporting African countries is reflected in the mediocre growth in exports to the region of just 1.1% year-to-date May 2015. Can exporters rise to the challenge and erase the year to date trade deficit of R29.9 billion, thereby reducing the current account deficit further?

While strike action has been muted to date, rumbling across several sectors is growing. Against this backdrop, we would argue that payment default risks will require careful monitoring. In the absence of further shocks to global demand or domestic supply issues, we may be able to eke out growth of 2%. But risks are skewed to the downside and as Philander Chase Johnson said in 1920, “Cheer up, the worst is yet to come”.