SA business leaders gripped by pessimism

Cape Town 150225. Minister of Finance Nhlanhla Nene and Sars Commissioner Tom Moyane during the press briefing at Imbizo centre.Picture Cindy waxa.Reporter Argus

Cape Town 150225. Minister of Finance Nhlanhla Nene and Sars Commissioner Tom Moyane during the press briefing at Imbizo centre.Picture Cindy waxa.Reporter Argus

Published Aug 12, 2015

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A weak rand, inflation rising and the lights won’t stay on – It’s no surprise that South Africa’s business leaders are pessimistic.

It’s not much of a secret that the economy is suffering from a few issues at the moment. Be it the seemingly endless saga over the price of electricity – in particular, the less than ideal supply levels – or the rising inflation that recently forced the Reserve Bank to raise the cost of borrowing, Africa’s most developed economy hasn’t had a banner year.

Yet, perhaps surprisingly, business confidence was revealed to have ticked upwards this month. However, anyone taking the data as a sign that the economy is primed for a golden era should be wary. Confidence has gradually slumped from a high of 104 points in July 2011 to 87 today, and a quick look at recent economic data reveals why.

First, new vehicle sales have hovered around the 50 000 mark for years and show no real sign of taking off.

Second, May’s retail sales figures were down a full percentage point on April’s data and, of course, the third observation to make is that inflation has crept towards a dangerous 5 percent.

The Reserve Bank’s decision last month to raise interest rates to 6 percent was roundly welcomed both in South Africa and abroad, but it was telling that many spectators commented they wouldn’t touch the rand at even 7 or 8 percent.

Dark cloud

Accordingly, the rand has weakened badly, but a boost to exports was supposed to be the silver lining in what was becoming a rather dark cloud.

Which brings us to the unforeseen problem that will surely spell trouble for South Africans in many sectors – China.

It came as a surprise to nobody that the Chinese economy finally revealed itself to be the paper tiger that many had suspected. A massive stock market sell-off has wiped billions of yuan from the exchanges, forcing the government to attempt to implement rather draconian rules limiting the sales of shares.

Those extraordinary measures haven’t done much more than stem the tide, causing havoc for those with interests within China, and panic for those relying on Chinese purchasing power away from Beijing.

And therein lies the issue for the Reserve Bank and Finance Minister Nhlanhla Nene – South African goods may be cheaper now thanks to a weak rand, but who will buy them if China doesn’t?

What’s more, September will more than likely see the US Federal Reserve, chaired by Janet Yellen, raise its key interest rate for the first time since 2009. South Africa, and other emerging markets, have done very well out of both China and the US in the past few years, but there is a sense that the music has stopped, the lights have come on and the guy behind the bar is sending everyone home – the party is over.

Emerging economies must now show that they are not over reliant on investment from China in particular, and many observers feel that it could be painful going in the short and medium term.

The manufacturing sector will be watched very closely indeed over the next few months. Next week, the manufacturing output figures for June will be released and if they are still in negative territory – as they were in April and May – then expect the rand to be hit hard.

The underlying issues in China are only beginning to fully come to light and many are eyeing up a potential real estate bubble-burst with great trepidation. They are right to worry, as the real estate sector contributes 15 percent to Beijing’s gross domestic product.

With South African mining and manufacturing slumping even before China’s slowdown had time to truly be felt, it would be a brave person who would back the sectors to have a fantastic next six months.

The performance of the rand suggests that not many are. And the problems in the euro zone haven’t yet been fully solved, far from it. Greece’s stock market dropped by more than 20 percent when it reopened this week and they will soon need more loans to cover their astronomic debt.

Also, fresh off an election victory, the Conservative party in the UK must now offer the population an in/out vote on EU membership, which promises to be a bitter and divisive debate, causing much uncertainty across Europe.

Not confident

With all of that said, it will probably come as little surprise that South Africa’s business leaders are not the most confident bunch at the moment. It isn’t all doom and gloom, however. The Reserve Bank’s rate rise should eventually get a hold of inflation.

If the economy can navigate through the decidedly choppy seas ahead, and emerge relatively unscathed in six months’ time, it will be declared a masterstroke by Nene and Co – and rightfully so. Only then will we see business confidence levels start to climb in earnest, although getting back to the lofty heights of 121 in 2006 is surely a step too far.

* Dennis de Jong is the managing director at UFX.com, an online Forex broker specialising in trading commodities, currencies, stocks and indices.

** The views expressed here do not necessarily represent those of Independent Media.

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