CAPITAL EXPENDITURE: Business’s actions speak louder than words about Government
Private sector capex is necessary to maintain and enhance the economy’s productive
BUSINESS IS OFTEN criticised for not being vocal enough about controversy about policies affecting South Africa. But actions speak louder than words and you could argue the private sector’s lack of confidence in Government’s policies is evident from its paltry capital expenditure. According to the latest Reserve Bank Quarterly Bulletin, real capex by the private sector moderated from a rate of increase of 2% in third quarter 2010 to 1,6% over the fourth quarter. (All figures are quarter-on-quarter, seasonally adjusted and annualised, unless otherwise stated.) That sluggishness brought the year-on-year drop in private sector capex to 4,4%. During the boom, private sector capex rose by double digits.
Business and Government have agreed to set up a group to start resolving their differences. Hopefully, a resolution can be found such that private sector capex starts picking up. Capex is spending on productive assets such as plant, machinery, factories and commercial vehicles. That spending is necessary to maintain and enhance the economy’s productive capacity. It creates jobs and is an investment in SA’s future. Consumer spending can’t just continue to boom indefinitely without capex catching up, because that’s unsustainable and ultimately inflationary.
As a sign of a how weak SA’s capex is, the Quarterly Bulletin reports that part of the small increase is attributable to strong growth in the commercial vehicle market. That, the Bulletin says, could partly be attributed to the replacement cycle that comes into play after three to four years of weak vehicle sales. So that isn’t really investment in new capacity but simply the replacement of obsolete capacity.
Reasons why capex has remained sluggish despite robust consumer demand include talk of nationalisation, weak logistical infrastructure – such as rail freight and ports – fears of electricity supply problems and concerns about new taxes, such as the planned carbon emissions tax. Now there’s been talk of a new windfall tax on mining companies and a new levy to fund the R27bn backlog in electricity distribution infrastructure. Business is also unhappy with aspects of the New Growth Path – which puts Government, and not business, in the driver’s seat of the economy.
Without a pick-up in private sector capex growth any recovery is doomed to be pathetic. But there’s reason to believe – despite being aggravated by Government’s actions – business is gearing up for bigger spending.
The Rand Merchant Bank/Bureau for Economic Research business confidence index (BCI) jumped from 44 points in fourth quarter 2010 to 55 in first quarter 2011. This index is based on a survey of business people. Interestingly, instead of being a leading indicator of economic growth, it now appears to be tracking gross domestic product growth. In other words, business waits for the economy to improve before becoming optimistic, instead of becoming optimistic before conditions improve.
With the BCI above the neutral level of 50 it means more companies are now optimistic than pessimistic about prevailing business conditions. The last time that was the case was three years ago. Business confidence increased in three of the five sectors making up the BCI: vehicle trade, wholesale trade and manufacturing. Confidence declined in the retail and building sectors.
Elna Moolman, economist at Renaissance BJM, says while the current BCI level is high enough to signal firms are confident enough to again start investing in long-term capital, it would need to rise further for a robust and sustained expansion in capex. “We don’t expect business confidence to reach the heights of the previous cycle again and, likewise, don’t anticipate a repeat of the multi-year double-digit growth GFCF (gross fixed capital formation) recorded in that cycle.”
Another factor inhibiting private sector capex is the fact that Government capex is so weak, which suggests delivery problems leading to social instability.