Is it the economy, stupid?

You would have to have been locked in a sensory deprivation chamber for decades not to have heard the electioneering catchphrase that reads: it’s the economy, stupid! The phrase, commonly used in United States’ electioneering, was first credited to the then US President George W. Bush, around 1992, though it reportedly first surfaced on a campaign placard rather than as a spoken quote. Who uttered the phrase is largely irrelevant: this writer likes it because it is punchy, to the point and, carries just the right level of arrogance.

From policy blunder to poor outcomes

The headline of today’s newsletter is purposefully altered from the original to read as a question rather than a statement. Is it the economy? Hell no! It is easy to blame everything that ails 21^st Century South Africa on the economy; but anyone reflecting on the country’s economic and social progress over the past three decades knows better. Our mantra or one-liner to explain our present malaise should read: It’s the politicians, stupid! And indeed, we can list countless policy blunders to explain poor outcomes in education, electricity provision, employment, healthcare, housing, security, transport … you name it. But we digress: ours is not to muse on the country’s myriad problems, but to report on the consequences.

Thus ends a rather lengthy introduction to the latest domestic economic research published by professional services network, PwC. PwC South Africa recently released its fifth South Africa Economic Outlook report for 2022 titled ‘Export prospects and import disruptions’. The report, as always, offers valuable insights into the macroeconomic environment that South African businesses and consumers navigate daily. We hope that the nuggets we carve out of this report will prove useful to our readers, who are mostly financial and risk advisers active in the insurance and investment fields. The economic indicators shared here will certainly add colour to the day-to-day experience of advising individual and commercial clients on their risk and investment needs. 

Growth as lacklustre as ever

First off, the report restated the lacklustre growth outlook for our domestic economy. “Local economic growth is [constrained by] a weaker global environment weighing on SA’s export potential; a tightening of domestic monetary policy; a further rise in electricity load-shedding; a series of big fuel price increases; and the adverse impact of local and foreign factors on business supply chains, amongst other factors,” noted PwC. That’s quite a mouthful, but it accurately describes why SA’s GDP is forecast to grow at less than 2% in 2022 and 2023. If one adds the real possibility of a repeat of the R50 billion rioting and looting economic shock experienced in July 2021, then one could be excused for closing up shop tomorrow. 

Further unsettling news came courtesy PwC’s forecast of real economic growth among our key trading partners, down from a January estimate of 4.7% to just 3.7%. “Our key trading partners comprise some of the world’s largest economies, including China and the Euro-area,” said Lullu Krugel, PwC South Africa Chief Economist. “These countries are currently facing a multitude of headwinds, including rising interest rates, supply chain disruption, resurging COVID-19 waves and producer and consumer inflation at the highest levels in decades”. Countries across Europe are also getting to grips with the domestic impact of far-reaching economic and financial sanctions introduced against Russia, following that country’s incursion into Ukraine more than 100 days ago. 

Supply chains in disarray

These are grim conditions for firms involved in import / export. Locally, supply chains have been disrupted by both manmade and natural catastrophes in KwaZulu-Natal, which have severely damaged infrastructure and hampered transport and logistics operators in and around the strategic port city of Durban. And Eskom’s bustling load-shedding roster is not helping matters. Internationally, our importers and exporters are at the mercy of the supply chain constraints already mentioned, coupled with massive inflationary pressure for air, marine and road transportation. Christie Viljoen, PwC South Africa Senior Economist, notes: “Supply chain pressures are now more intense than seen during the worst of the COVID-19 pandemic and the global financial crisis of 2008-2009; this requires companies to evaluate the resilience of their supply chains to continue providing goods and services”. 

There were some positives in the report, provided you do not go digging for reasons to dismiss them. For example, the National Association of Automobile Manufacturers in SA reported 119151 vehicles exported between January and April 2022, up 2.7% from the prior year; and mineral sales increased 6.6% year-on-year in March, to reach a record-high one-month value of R82.9 billion. Countrywide exports reached R170 billion in March, also a record. Another piece of good news came courtesy the out-of-favour fossil fuels sector. It seems that “coal exports to Europe jumped significantly during April 2022 … as European power utilities ramped up purchases as part of their efforts to wean economies off Russian supplies”. 

SA managed to move 560000 tonnes of coal through the Richard Bay Coal Terminal to European destinations in the first three weeks of April, compared to 60000 tonnes in the comparable month in 2021. It will be interesting to see how net-zero commitments shift in response to the Russia-Ukraine conflict, because if Europe cannot rely on existing Russian gas infrastructure, they may be forced to abandon some of their more noble climate-change-thwarting initiatives. 

Great for exports, not so for jobs

One of the issues flagged by PwC was that the major contributors to SA’s export windfall were not creating jobs. “An increase in exports with a high jobs impact can make an important contribution to help solve South Africa’s unemployment conundrum,” noted PwC. They suggested some quick fixes to boost agriculture exports by, for example, improving electricity supply reliability; increasing efficiencies in port operations; and offering more reliable rail transport, among other factors. 

The PwC report then quashed the country’s various export revenue celebrations by reporting on the triple-threat of currency, inflation and interest rates. The rand has set off on another of its frequent corrections, touching ZAR16.30/USD in May, the weakest level for the year so far. “Sentiment towards the rand was weakened by a myriad of factors, including weakening local economic growth prospects, escalating domestic inflation, fast rising interest rates in the US and a slowdown in China,” noted PwC. They expect an average ZAR15.38/USD for 2022 compared to ZAR14.78/USD in 2021. If you filled up with petrol recently then you will also be aware that an inflation shock is coming. According to PwC, headline inflation was measured at 5.9% year-on-year in March and April and was likely to touch 6% for 2022. Higher inflation equals interest rate hikes; and we have already seen three Repo rate hikes since November 2021, with a 50 basis point jump in May this year. 

Six tips for supply chain resilience

We end today’s newsletter with PwC’s six tips to improve supply chain resilience. These are relevant to firms that receive equipment, goods for resale or manufacturing inputs from abroad or supply commodities or goods globally; but could also offer new perspectives in the financial and risk advice context: certainly, they could prove useful to commercial risk clients. PwC suggested bolstering supply chain resilience during times of disruption by: 

• Identifying and prioritising your critical products, services and suppliers.
• Identifying alternative supply chain scenarios.
• Reviewing your demand planning for increased volumes.
• Monitoring costs of impacted products closely, and developing pricing strategies.
• Maintaining contact through continuous supplier management.
• Localising supply chain components by increasing domestic sourcing. 

Writer’s thoughts:
Financial and risk advisers could be excused for glossing over lengthy reports about the state of the South African economy; but the reality is that all business and individual consumers are affected by macroeconomic developments. Inflation and rising interest rates have an obvious impact on your clients; supply disruptions less so. Have you or any of your clients been affected by global supply chain disruptions? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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