SA business and consumer confidence to be driven by the commodities super cycle
By Ryk de Klerk
Despite recovering from the heavy lockdown due to the outbreak of Covid-19 last year, consumer and business confidence, the main pillars of economic prosperity, remain in the doldrums. Things are about to get better soon, though.
The next commodity super cycle is already solidly under way and is set to gain further impetus as major economies are about to throw off the shackles of the coronavirus. It must have a major positive impact on South Africa’s economy.
The current global economic upturn will not only be a return to normality, but instead of a boom/bust scenario, the duration of the upturn could exceed expectations.
The two super cycles in commodities since the turn of the century lasted about 17 quarters on average. The cycle in 2003 to 2007 lasted 16 quarters and the 2009 to 2012 cycle, 19 quarters. The new commodity super cycle’s positive impact on South Africa’s business and consumer confidence is likely to be repeated as it did in the previous two super cycles.
Over the past 20 years, consumer confidence closely tracked commodity price cycles; but while the trend continued since 2011, it is evident that consumer confidence weakened relative to commodity prices as measured by the Economist Metals Index. It can be attributed to South Africa’s abysmal economic performance compared to major economic zones.
South Africa’s consumer confidence index as measured by the FNB/BER CCI tends to follow the same trend as South Africa’s business confidence index as measured by the Sacci BCI. The only major exception was in the first two quarters of 2018, which saw consumer confidence spike after Cyril Ramaphosa was elected president of the ANC and the country.
The follow-through on business confidence was very limited, though. Ramaphosa’s land announcement followed by power utility’s Eskom’s woes brought back the miseries from before the president’s election and consumer confidence tanked to follow the down trend in business confidence.
Where Eskom accounted for a large percentage of fixed capital formation, the massive cost overruns at the utility and the severe technical problems due to the design of the new power stations left Eskom and the country stranded. A shortage of funds led to a lack of critical maintenance and replacement of plant and equipment at Eskom, and reverberated throughout the entire economy. Mismanagement in other state-owned enterprises left the state and the private sector in an increasingly precarious financial position as fixed investment in the economy effectively dried up since 2014.
Furthermore, the BER’s Employment PMI (purchasing managers’ index) for South Africa remained mostly below the 50 level since the start of 2011, meaning that employment in the private sector contracted nearly every quarter since then. Needless to say, it had a major impact on consumer and business confidence.
South Africa’s worsening business confidence had a direct impact on the rand compared to my equity market weighted emerging market currency index. The business confidence index fell by 25 percent from the first quarter of 2011 to February 2016, while the rand declined 43 percent over the same period. Ramaphosa’s election saw a brief lift in confidence in the first half of 2018 and lifted the rand, but since then the rand, compared to my equity market weighted emerging market currency index, tracked the Sacci Business Confidence Index.
The weakening economic circumstances as measured by the business confidence index also had a massive impact on the cost of borrowing of the South African government and private sector, as the countries’ sovereign credit rating fell to junk status from investment grade.
The down-rating of the country’s debt also saw global bond investors requiring a yield of about 3 percent higher than the average of South African’s BRICS partners compared to five years ago.
As things stand, as a result of the impact of the coronavirus, and especially the devastation of household savings, job losses and effectively a stalled economy, the consumer confidence index is likely to remain in negative territory in coming quarters.
Very few respondents are probably able to provide positive answers to the three questions posed by FNB/BER to adults in South Africa – “the expected performance of the economy, the expected financial position of households, and the rating of the appropriateness of the present time to buy durable goods”, which they combine to calculate the FNB/BER CCI (Consumer Confidence Index).
Although Ramaphosa’s infrastructure investment project pipeline will undoubtedly boost much-needed growth in fixed investment over the next few years, government’s legacy of failure to properly and speedily execute its plans could undermine business and consumer confidence. With about a third of the workforce unemployed, the threat of increased civil disobedience is real.
South Africa, and especially the government, cannot afford to squander the opportunities presented by the commodity super cycle. The differences between South Africa’s government and the private sector must be set aside to ensure that the country’s rich and abundant resources are optimised to create jobs and protect the livelihood of its citizens. Inward investing by international investors and the creation of policies to restore global investor confidence in the country is non-negotiable.
Ryk de Klerk is an analyst-at-large. Contact [email protected] Views expressed above are his own. You should consult your broker and/or investment adviser for advice. Past performance is no guarantee of future results.
*The views expressed here are not necessarily those of IOL or of title sites