2010 is just the beginning
Many years ago, earth's inhabitants believed they lived on a flat disc. They feared that they would fall off the edge if they travelled too far in a given direction. Today it often seems that South African economic commentators hold a similar view on the
This is definitely not the case says Investment Solutions' Chris Hart, presenting to a packed auditorium at the Absa Consultants and Actuaries Annual Client Conference on the Future of Retirement Funds in Midrand recently. He believes that "infrastructure is going to be playing catch up for 10 to 15 years after the Soccer World Cup!" And this infrastructure element will underpin the economy through that period.
Shift to investment expenditure
Domestic expenditure has been on the rise for some time now, prompting a number of interest rate hikes from the Reserve Bank. Hart believes the latest rate hike confirms the Reserve Bank is being allowed to manage the economy free of populist political interference. While increasing money supply is not always a good thing, a great deal of recent data supports a shift from pure consumption expenditure to investment expenditure.
Hart believes we are definitely at the top of the interest rate cycle and that most consumption measures have been trending lower for some time now. Demand for credit and new passenger vehicles are already in decline. And residential property is showing signs of strain too.
Improving in leaps and bounds
What have the last ten years meant for South Africa and the region? Hart produced an interesting graph comparing the growth and inflation situations in a number of countries around the world. The situation in 1997 showed the Southern African Development Community (SADEC) way out on the right of the graph, with high inflation and low growth across the board. Zimbabwe was excluded for the purpose of this comparison.
Today the picture is remarkably different with the region closing in on the traditionally favoured developed world investment options like UK and the US. The only thing that remains the same is China is still the top choice with low inflation and GDP growth nearing 10% per annum. "Remember if growth is on the rise and inflation is in check a country is managing its economy well," said Hart.
Another major African success story is the commodity market bull run. Many analysts have been asking if commodity prices can really rise further. Hart says the answer is probably yes because world economic growth is averaging 5% per annum. At the same time, "The demand is there and supply is strained." This situation is unlikely to reverse overnight and will lure more investment capital to South Africa in coming months.
Stages of foreign investment
South Africa has been attracting foreign inflows since the dawn of democracy. But the nature of these flows has changed significantly. We can identify three distinct periods. In the run up to 1998 the majority of cash entering South Africa was yield seeking. International investors were pouring funds into money market type investments knowing they could pull the plug in a matter of seconds in the event of any political shock.
Toward the end of 1998 South Africa experienced a currency crisis. The rand devalued significantly against the currencies of its major trading partners. This induced a shift from yield seeking to risk seeking investments. Investors brave enough to face the currency risk snapped up equities and property. Again, these were paper investments with no direct impact on the physical economic environment.
We are now finally entering the Foreign Direct Investment stage. "The next wave of investment that comes to South Africa is going to be foreign direct investment," says Hart. South Africa has worked hard to put an economic platform in place that warrants the kind of investment grade that gives foreigners the confidence to invest directly in projects in Africa over and above equity and private equity deals.
The outlook for the domestic economy is good and the pension fund administrators and fund managers who attended the event will be able to leverage the strong economic foundation and consistent long-term equity market returns to underpin members' portfolios going forward.
Editor's thoughts:
With all the negative talk out there it was refreshing to attend a presentation that put such a positive spin on prospects for the domestic economy. Do you share Chriss positive view for the future of South Africa? Send your comments to
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