THE CENTRE CANNOT HOLD
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.