BAD TIMES AHEAD FOR JUST ABOUT EV­ERY­ONE

Financial Mail - Investors Monthly - - Opening Bell -

A’s econ­omy is ex­pected to grow by less than 1% this year — an in­di­ca­tion that ur­gent and ex­tra­or­di­nary ac­tion is needed.

In­com­ing eco­nomic data, such as min­ing and man­u­fac­tur­ing, is sup­port­ing the view that there will be a fur­ther slow­down this year. Growth mod­er­ated to 1.3% last year from 1.5% in 2014 and 2.2% in 2013.

Busi­ness con­fi­dence also re­mains very low. It is a proxy for pri­vate-sec­tor in­vest­ment spend­ing and if it is low, so will be in­vest­ments and job cre­ation.

The con­trac­tion in SA’s min­ing pro­duc­tion deep­ened to 4.5% in Jan­uary com­pared with a year ago from 1.2% year on year in De­cem­ber, Sta­tis­tics SA data shows. Man­u­fac­tur­ing pro­duc­tion de­clined by 2.5% year on year in Jan­uary af­ter a 0.5% year on year in­crease in De­cem­ber.

The two sec­tors, which to­gether ac­count for 20% of gross do­mes­tic prod­uct, are tak­ing strain from lower com­mod­ity prices and slug­gish global de­mand, par­tic­u­larly the slow­down in Chi­nese de­mand. China is one of the main ex­port mar­kets for lo­cal min­ing com­modi­ties.

These chal­lenges are made worse by ris­ing in­put costs for pro­duc­ers and have re­sulted in a re­duc­tion of op­er­a­tions as well as re­trench­ments. All this puts pres­sure on eco­nomic growth be­cause the fewer the work­ing peo­ple, the smaller the pool of peo­ple who are spend­ing and driv­ing eco­nomic ac­tiv­ity.

Mone­tary and fis­cal poli­cies are tight­en­ing and can no longer sup­port eco­nomic growth.

Gov­ern­ment will re­duce its spend­ing ceil­ing over the next three years, raise taxes this year, and shed jobs. It hopes that its con­tin­ued spend­ing of over R800bn on in­fra­struc­ture devel­op­ment will still drive job cre­ation and sup­port growth.

Mone­tary pol­icy is also un­der pres­sure. In­ter­est rates are go­ing up, which will neg­a­tively af­fect eco­nomic growth. But the Re­serve Bank is more con­cerned about ris­ing in­fla­tion and the weak rand.

The Bank’s mone­tary pol­icy com­mit­tee started rais­ing rates in Jan­uary 2014. The cu­mu­la­tive rate hikes since then amount to 200 ba­sis points and more rate hikes are in store this year.

The Bank raised the repo rate by 25 ba­sis points to 7% in March, cit­ing con­cerns over ris­ing food prices and con­tin­ued weak­ness in the rand.

As if these were not enough prob­lems for Africa’s sec­ond big­gest econ­omy, SA is on the brink of a rat­ings down­grade by Moody’s. The bit of good news is that mar­kets seem to have al­ready priced it in, so there may be lim­ited mar­ket re­ac­tion by the time a down­grade hap­pens.

Mar­kets are pre­pared for the down­grade be­cause Moody’s has al­ready is­sued a state­ment in March plac­ing SA’s rat­ing on re­view for a down­grade.

The big ques­tion is: did lo­cal au­thor­i­ties con­vince the agency be­yond doubt dur­ing its visit to SA ear­lier this month that they have con­crete plans in place and are im­ple­ment­ing them to grow the econ­omy faster and stick to fis­cal con­sol­i­da­tion? If so, then an af­fir­ma­tion rather than a down­grade will oc­cur.

Though a one-notch down­grade by Moody’s will raise the cost of bor­row­ing, it will not be too dis­as­trous as it will only bring the agency’s rat­ing in line with those of Fitch and Stan­dard & Poor’s (S&P).

The rat­ing agency to worry about most is S&P. Not only does it rate SA just one level above spec­u­la­tive grade (or junk), it also has a neg­a­tive outlook on the rat­ing. Fitch also rates SA one

Finance min­is­ter Pravin Gord­han has al­ready gone on a UK and US road show to talk to in­vestors about the bud­get

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