THE CEN­TRE CAN­NOT HOLD

Finweek English Edition - - INSIDE - BY TINA WEAVIND

Cover story: Tina Weavind Cover lay­out: Zan­dri van Zyl Cover story lay­out: Tshe­betso Ditabo

With un­em­ploy­ment at its high­est level since 2003, eco­nomic growth at a ble a k 1.9 % , man­u­fac­tur­ing out­put now 10% be­low 2008 lev­els, a credit rat­ing just a notch above junk sta­tus and reg­u­lar load­shed­ding ex­pected to f ur­ther hurt ac­tiv­ity, there is lit­tle to cheer about in the South African econ­omy.

And no­body be­lieves it can get any­thing but worse: Two things that are set to af­fect South Africans on a daily ba­sis are food price in­creases af­ter the re­cent drought shrank agri­cul­tural out­put and soar­ing fuel prices on the back of ris­ing oil prices. In Gaut­eng, e-tolls can be added to the mix.

South Africans should also brace them­selves for fur­ther in­ter­est rate hikes, with Re­serve Bank Gover­nor Le­setja Kganyago warn­ing that rates would be in­creased for the f irst time since July 2014, al­beit mod­er­ately “with­out un­duly sac­ri­fic­ing” eco­nomic growth. Growth has been slow­ing: it mea­sured 1.9% in the first quar­ter of the year, com­pared with 4.1% in the fi­nal quar­ter of 2014.

The mon­e­tary pol­icy com­mit­tee’s (MPC) de­ci­sion not to hike rates at its 21 May meet­ing was not unan­i­mous. The eco­nomic out­look was rocky enough to war­rant two of the six mem­bers of the com­mit­tee vot­ing for a 25 ba­sis­point rate hike at the body’s bi­monthly meet­ing. In­fla­tion ac­cel­er­ated to 4.5% in April and is ex­pected to peak at 6.8% in the first quar­ter of 2016, above the tar­get band of 3% to 6%.

A ‘SLOW PUNC­TURE’

With growth col­laps­ing and inf la­tion soar­ing, un­em­ploy­ment f ig­ures are pre­dictably de­press­ing. Head­line un­em­ploy­ment − peo­ple who don’t have a job but are look­ing for work − rose to 26.4% from 24.3%, the high­est level since 2003. And ac­cord­ing to anal­y­sis by Ja­panese in­vest­ment bank No­mura, the per­cent­age of those no longer ac­tively look­ing for work had also ticked up from to 34.9% to 36%.

Eskom is a glar­ing red light both to growth and t he i nf l ation rate. Wayne McCur­rie, port­fo­lio man­ager at Mo­men­tum Wealth, said in the light of how long it is tak­ing to get the f irst unit go­ing at Medupi, “Eskom will be trou­ble for the next 10 years”.

The rosy glow that has shone on growth f ig­ures since the f ive-month long min­ing strike last year has also faded. Growth ap­peared to be soar­ing i mme­di­ately a f ter min­ing out­put re­sumed, but it was com­ing off a low base. Ac­cord­ing to Peter At­tard Mon­talto, emerg­ing mar­kets economist at No­mura, growth is now ref lect­ing the “fad­ing im­pact of the post-min­ing strike re­cov­ery”.

But de­spite the gloom, McCur­rie wa s pr a g mat i c . He sa i d that, com­par­a­tively speak­ing, “eco­nomic grow th i s not a n u n mit ig a t e d dis­as­ter. It’s not good, but we aren’t in a re­ces­sion. We aren’t Brazil, or Zim­babwe or Rus­sia,” he said.

How­ever, McCur­rie de­scribed the econ­omy as hav­ing a “slow punc­ture. The wheels are turn­ing, but we can’t go above 80.” Reg­u­la­tory un­cer­tainty in is s ues s uc h a s em­pow­er­ment l eg­is­la­tion i n min­ing, aff i r ma­tive ac­tion, visa reg­u­la­tions, land re­form a nd st r i kes was go­ing t o st y mie growth be­cause “no one knows what’s com­ing next”.

THE POWER DILEMMA

Kganyago sa i d t he c om­mit­tee’s head­line inf la­tion forecast of 4.9% in 2015 as­sumes the elec­tric­ity tar­iffs will

see only 12.69% in­creases in July this year and next year as was stip­u­lated by the mul­ti­year price de­ter­mi­na­tion process drawn up by the Na­tional Energy Reg­u­la­tor (Nersa).

But when Nersa de­cided on this long-term se­ries of i ncreases its mem­bers had not been ap­prised of the ex­tent of the de­cay in the power grid. Eskom in March asked the South African Lo­cal Gov­ern­ment As­so­ci­a­tion (Salga) and Nersa to diver t f rom t he l ong- ter m plan and bump up power costs by an ad­di­tional 12.6% at the be­gin­ning of next month − mak­ing the to­tal in­crease 25.3%.

Kganyago sa i d t he pos­si­ble in­crease “poses a sig­nif­i­cant up­side risk [to i nf l ation]” and pre­dicted t hat i t c ou l d i nc re a s e av e r a ge inf la­tion “by around 0.5 per­cent­age points over a year”. Few an­a­lysts and econ­o­mists be­lieve the coun­try will es­cape a rate hike next month. The com­mit­tee ex­pected inf la­tion to move be­tween 6.8% and 6% next year.

But it is not just what is said at

the an­nounce­ments; it is how it is said and the rhetoric used that gives an­a­lysts an in­di­ca­tion of how the mem­bers re­ally feel about the state of the econ­omy.

Ge­orge Her­man, head of South African Port­fo­lios at Ci­tadel, said af­ter the an­nounce­ment that “the vigour of MPC state­ments be­comes stronger at ev­ery meet­ing and now borders on panic”. Ac­cord­ing to Her­man’s anal­y­sis of the rhetoric, it i s as i f t he MPC i s “plead­ing with gov­ern­ment and state-owned en­ter­prises to be sen­si­ble”.

Kganyago was also con­cerned about the ef­fect the ex­change rate and the loom­ing wage set­tle­ments would have on the inf la­tion rate. em­ploy­ees agreed on a three-year deal in which work­ers would get a 7% in­crease back­dated to April and then inf la­tion +1% for the next two years.

Mag­nus Heystek, di­rec­tor at Bren­thurst Wealth, put a dif­fer­ent spin on the public sec­tor agree­ment, say­ing it “will cost about R66bn per year”. South Africa’s en­tire tax base con­sists of around a pal­try 5m taxpayers, and it is they who will pay for this in­crease.

A two-year wage agree­ment in the gold sec­tor ex­pires this month and strike-prone unions are de­mand­ing i ncreases of bet ween 84% a nd 100%. This comes in the face of a plum­met­ing gold price − down 30% since 2011 to $1 204 − as well as low pro­duc­tiv­ity and in­creas­ing in­put costs such as power and fuel.

IN­CREASED PRES­SURE ON THE MID­DLE CLASS

The rand’s weak­ness against t he dol­lar is set to in­crease as the US Fed­eral Re­serve looks likely to hike in­ter­est rates in Septem­ber af­ter it nor­malises its mon­e­tary pol­icy. This will pull money out of emerg­ing mar­kets, in­clud­ing SA, and will hit for­eign in­vest­ment and eq­ui­ties.

Ac­cord­ing to Heystek, the net ef­fect of the per­ilous state of the econ­omy is an “im­mense crush[ing] of [the] mid­dle class”. He said this week car sales and sizes are shrink­ing as are home sales and sizes. While the tax base is around 5m peo­ple, around 10m peo­ple have an im­paired credit record. As credit is now harder to get, peo­ple are go­ing to “shadow lenders” or loan sharks. “The cen­tre can­not hold,” he said.

McCur­rie’s as­sess­ment of t he sit­u­a­tion was that “if you have a job, you will be okay”. How­ever, tax hikes are on the way and wage in­creases are al­most cer­tainly go­ing to be be­low inf la­tion. The econ­omy will stag­nate for at least three years.

“IT’S NOT GOOD, BUT WE AREN’T IN A RE­CES­SION. WE AREN’T BRAZIL, OR ZIM­BABWE OR RUS­SIA.” THE IM­PACT OF WAGE NE­GO­TI­A­TIONS While wage ne­go­ti­a­tions in the public sec­tor went rel­a­tively well ac­cord­ing to some an­a­lysts, a dif­fi­cult and pro­tracted se­ries of dis­cus­sions are im­mi­nent in the gold sec­tor. Last month, the state and its 1.3m

In­vestors fear more strikes in the min­ing sec­tor this year.

The in­crease in elec­tric­ity tar­iffs could push up in­fla­tion.

Le­setja Kganyago

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