NORESER­VA­TIONS

CAP­I­TAL EX­PEN­DI­TURE: Busi­ness’s ac­tions speak louder than words about Gov­ern­ment

Finweek English Edition - - COLUMN - GRETA STEYN

Pri­vate sec­tor capex is nec­es­sary to main­tain and en­hance the econ­omy’s pro­duc­tive

ca­pac­ity

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.

gre­tas@finweek.co.za

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