A smidgen of good news in a bleak economic picture

Despite a bleak economic
outlook for South Africa,
it’s not all bad news,
according to Stanlib
emerging markets
economist Kganya Kgare.
Speaking at a client
function jointly hosted
by CFR Freight and
Envestpro Corporate
Solutions in Johannesburg
last week, Kgare said
“the agricultural sector is
looking at a record high
in terms of harvest this
year, and we’re exporting
more than we’re importing
which means we’re running
a consistent trade surplus
– and that’s helping to
support the currency which
is forecast at R13.80 to
the dollar by the end of
the year and
R14.50 for
next year.”
But, while
global growth
is projected
to reach 3.6%
this year, the
IMF revised
South Africa’s
growth down
from 1% to
0.7% early in
October.
“South
Africa has
traditionally
grown in
tandem with
the world,
but in the
past four to five years
we have decoupled – and
that low growth has been
self-inf licted,” said Kgare,
who painted a picture of a
f lourishing world economy.
“If you look at developed
markets the US is growing
at 2 to 2.5%, the EU at
2% – and that includes
the likes of Greece and
Spain. From an emerging
market perspective, China is
growing at 6.5-7% and India
at 7% so clearly the world is
in a growth phase.
“Emerging markets
(EMs) are achieving average
growth of 4.7%, set to rise
to 5.2% next year, while
developed markets are
averaging 2% growth.”
The reason, he said, lay in
the vibrant manufacturing
base on which emerging
markets relied.
“Developed markets
depend on their services –
and while services grow at
2% manufacturing grows
at 6% plus – and that’s how
EMs have been able to grow
at this rate.”
South Africa, said
Kgare, had the profile of a
developed market – “and
that’s one
reason why
we are not
growing as
fast as our
peers because
services is the
biggest part of
our economy.”
In a global
environment
searching
for yield
foreigners
have been
investing in
EMs, and
the only
attraction
South Africa
has been
able to offer is high yields,
which is why there’s been
reluctance to cut interest
rates.
“Our Central Bank had
the opportunity to cut rates
– inflation is under control
at 5.4% and forecast to move
down to 4.7% – but they are
still focused on the search
for yield.”
Kgare explained: “In the
US historically they have
had three periods that
have resulted in job losses.
Every time they managed
to stimulate the economy
and create jobs. They lost
seven million jobs in the
financial crisis – after
which they made up that
seven million and added
another 10 million.
“They are able to do
this by cutting interest
rates to stimulate the
economy.
“In South Africa so far
rates have been hiked four
times, and we’re expecting
another rates hike in
December and two more in
2018.
“Our peer group on the
other hand – the likes of
Brazil, China, Russia and
Indonesia – are cutting
interest rates and focusing
more on growth in order to
stimulate their economies,
and we should be doing the
same.”
Confidence levels
also play a major role.
Confidence in Germany
was at an all-time high,
said Kgare. In Europe it’s at
multi decade highs, and the
same applies in the US and
China. “If you look at the
Ipsos confidence indicators,
South Africa
is right at the
bottom.
“Investment
by the private
sector is in
a recession.
Companies are
making money,
but they’re not
investing – and the
main reason is the
confidence level that’s
not there.”
And government can’t
bail us out.
“We will undershoot the
target of revenue collection
by approximately R40bn
this year, which means
government will have
to borrow more money
to fund the shortfall.
Borrowing more money
means we are under threat
of a downgrade."
It’s not a pretty picture
and there are several
concerns on the horizon
– the mid-term budget
statement, the credit
rating agencies, the
December conference
and the budget
speech in February.
“We are on junk
status with Standard
and Poor’s and Fitch,
but Moody’s still has
us on investment
grade.
“They’re
waiting for
the budget
speech in February to
see the response to the
low growth environment
and the under-collections
before they make a
decision.”
It’s a question of ‘wait
and see’ for everyone.
INSERT & CAPTION
In a global
environment
searching for yield
foreigners have been
investing in EMs, and
the only attraction
South Africa has been
able to offer is high
yields.
– Kganya Kgare