On risk, recession and insolvencies
A raft of economic data has been released in recent days. And each release seems to drive another nail into the coffin of South Africa Inc. Insolvencies for January 2009 were markedly higher, GDP growth data for the fourth quarter of 2008 confirms the cou
Government just doesn’t get it
He is hell bent on keeping his ‘recession denialist’ title intact. During the 12 February 2009 Budget Speech he said “We’re waiting for the fourth quarter numbers to come and then we have to see what the first quarter looks like, but on past performance we are not in recession.” And even after the Q4 2008 number was released he remained nonplussed. His answer to the “are we in recession?” question put to him during a recent SABC radio interview was a resolute: “No, we’re not!” Manuel dismissed economists’ suggestions that the third quarter GDP number would be restated down, adding “technically, we’re not in a recession.”
We’re not sure for how much longer Manuel can hold out. At some point he’ll have to take the blinkers off and look at the situation on the ground. Companies are shedding jobs at an unprecedented rate, export orders are drying up and the manufacturing and resources sectors are a total mess. For our part we’ll stick with corporate results to get a feel for the real economy.
Big companies are feeling the pinch
Analysts have already had a field day with Anglo American’s decision to ‘pass’ their final dividend. In doing so the company poured water on a 70-year tradition! What does this mean for the country? Anglo American is the “bell weather” for local resources companies and boasts one of the strongest balance sheets in the sector. If they decide that conditions are too tough to pay a dividend then the rest of the resources sector is sure to feel the pinch. The sector has fallen in line with commodity prices which (apart from gold) have halved since May 2008 highs.
Fortunately commodities don’t contribute as much to South Africa’s economy as in previous years. Those making an upbeat assessment of the domestic situation point to the construction sector. They believe government’s commitment to infrastructure projects will save the sector – and the country. Earlier this week Murray & Roberts issued interim results that seem to confirm their view. Profit surged; but management warned the feat would not be repeated. “These are challenging economic times and Murray & Roberts has prioritised the preservation of its capital and the selective procurement of new order book in the period ahead,” said chief executive Brian Bruce. Despite R60bn worth of projects on the company’s books Murray & Roberts couldn’t guarantee job security. They announced plans to shed 3 900 jobs as recessionary fears take hold. Are you as confused as we were by this apparent contradiction? We can only conclude the order book is not as ‘rock solid’ as management would have us believe.
With resources in the doldrums – and construction throwing out mixed signals – we’re left clutching for straws with a look at Imperial’s results. The company has significant exposure to the struggling motor industry through its motor vehicle retailing operations. Headline earnings per share were down 4% to R432c – a result artificially ‘sweetened’ by the R394m ‘profit’ earned on foreign exchange transactions as the company repatriated funds from Imperial Europe. At grassroots level the company had to close 24 of its car outlets and put 800 more South African workers in the unemployment line!
Media led rate cut frenzy
Economists responded to the GDP number by baying for an early meeting of the Monetary Policy Committee. They argued that the soft business conditions and the imminent technical recession required immediate special attention by way of a swift and severe interest rate reduction. But their cries for help were stifled by the January 2009 CPI number which came in above expectation at 8.1%. Market commentators expected inflation to fall sharply due to the new basket of goods used by Statistics SA to produce it.
But new basket or not, it seems inflation pressures remain. Food and non-alcoholic beverages showed year-on-year growth of 15.7%! Food price inflation made the headlines recently when Pick ‘n Pay chief executive Nick Badmington wrote an open letter to the company’s suppliers urging them to pass food price cuts through the supplier chain. Apparently his plea has fallen on deaf ears. And we can expect continued pressure as March and April fuel price hikes loom. Higher than expected inflation means Reserve Bank governor, Tito Mboweni, is unlikely to convene an early meeting of the MPC. Consumers will have to wait until the scheduled April meeting for further interest rate relief.
Editor’s thoughts:
Although Manuel is quick to argue the strengths of South Africa’s economy he should realise that opinion cannot alter fact. Growth is contracting – companies are shedding jobs – and corporate earnings are in steep decline. Why doesn’t Manuel just admit the country is in recession? Add your comments below, or send them to [email protected]
