The state of the economy

Private Property South Africa
Kerry Dimmer

A reality check from economists at four major banks on the state of South Africa's economy and what this means for homeowners.

Just how strong South Africa’s economy is to resist potential and existing forces that stagnant the development of the country was made crystal clear when the President announced in his first weekly newsletter to the nation three weeks ago, that the fiscal situation is very tight, and little funding is available to improve growth, despite interventions.

“Government finances are stretched about as far as they can go,” he said, leaving sceptics wondering how the forthcoming document to restructure the economy will even be possible to implement. It has been indicated that the strategy will include, among many others, a revitalisation of the industrial sector, the introduction of an infrastructure fund, broadband cost reductions, and of course a pathway for Eskom to stabilise and sustain.

Factoring in that the economy will record lower growth than was expected or needed, trying to convincing the populace, and for that matter overseas investors whose ownership of SA government debt fell to its lowest (37%) since early 2017, to remain confident is a tough ask. There is a general view that confidence can only be restored once there is concrete evidence that the reforms Ramaphosa wishes to introduce are implemented, rather than the constant refrain that South Africans have become used to, which is, in a nutshell, to ‘tighten your belts, reform is coming’.

It’s a message that has been delivered for years, and one that has been heeded as best possible but the reality, regardless of what the economy indicates, is that home-owners are challenged. The man-in-the-street is not necessarily guided by facts and figures; generally preferring to consult their peers, friends and family to tap into market sentiment. Those conversations all start with the same statement: ‘the economy is bad’.

But how bad is it really? Private Property asked economists from four major banks banks, to provide a reality check by answering four questions that speak to discussions around the braai, as we ponder the price of meat, the rugby results, and whether or not New Zealand and Australia is a better place to be.

Interviewed are: Peter Worthington, Absa Senior Economist John Loos, FNB Property Economist Isaac Matshego, Nedbank Economist Dr Elna Moolman, Standard Bank Economist.

Q: How bad is the economy really?

Worthington: If you look at business confidence across the board, we are experiencing the same lows as the 2008/9 global crisis. When business lacks confidence, it won’t invest and the economy doesn’t grow. As for consumers, confidence and other metrics suggest that they are constrained, but not yet in outright crisis. We see some increase in unsecured lending to consumers. But without faster structural reforms, many of which are politically challenging, the economy is likely to continue to stutter. Consumers are impacted by weak job creation and a slowing of wage gains with the last quarter showing growth of earnings around 5 percent. The slowing labour market with a risk of big layoffs and tax increases are important headwinds against consumers’ ability to drive growth through spending.

Loos: One could look at recent economic growth of not far from zero percent and say that at least it is a stable situation. However, when one considers the already very-high and rising unemployment rate of South Africa, the situation appears very bad. Not only is it desirable to reduce poverty levels, but if we don’t, the risk of resultant social tensions causing far greater political and economic instability than we currently experience is very real.

Matshego: Weak economic growth, which has been slower than the population growth rate for almost a decade, has resulted in low income growth and limited job availability. Actually, the economy has been losing jobs in recent years, and the unemployment rate has risen to close to 28% as a result.

Moolman: The economic activity data is generally not yet as bad as it was during the global financial crisis for example, and the economy generally continues to grow (bar the contraction in the first quarter of 2019, which was temporary). However, if economic growth only averages 0.5% in 2019 as we expect, it means that the fiscal and poverty pictures continue to worsen. If the economy doesn’t grow at least 2-2.5% per year without any intervention from government (such as savings), the government’s budget continues to deteriorate. This typically means that its debt continues to rise, which in turn increases its interest bill. Less funding is thus available for social and infrastructure spending and/or taxes have to be increased. At such low growth rates, there is usually no job creation, so unemployment and poverty continues to worsen.

Q: Fundamentally, what went wrong?

Worthington: Essentially a combination of corruption, poorly conceived policies and policies that were well-conceived but poorly executed, a less favourable global environment, as well as a whole lot of bad luck. State capture during the Zuma era had a variety of different negative consequences; money was siphoned away and people were appointed to positions of power to aid in this theft, rather than for their honesty and ability in governance. Economic policy suffered in particular, critical institutions of state, such as Eskom, were grossly mismanaged. All of these have contributed to a negative business sentiment

Loos: What went wrong is that certain key structural problems that have been around for many decades have not been fixed. Most notable in this regard is the education and skills development system. Unequal basic education in SA leaves a large portion of the population less and less employable in a constantly modernising skills-dependent economy. Such skills inequality is a key economic growth “drag”. The other key structural constraint lies in the approach to a lack of healthy and well-regulated competition in certain sectors. Key examples are the electricity sector where the largest power utility is state-protected. Similar situation in the railways sector. Where healthy well-regulated competition exists, such as in the financial sector or in retail, performance levels can be very good by global standards, so better economic performance can be achieved. But protected monopolies don’t always bring out the best in human performance.

But you may ask why economic performance has weakened in recent times, while these structural changes have been around for decades?? The weakness of recent years is because of three easy stimulus “levers”, which could temporarily hide the structural problems by creating a period of relatively strong economic growth from the mid-1990s to about 2011, luring us into a false sense of how good things were.

  • Lever 1 was the end of economic boycotts and sanctions which allowed a normalisation of trade and business with the world. The benefits have long been felt and that economic lever can no longer be pulled.
  • Lever 2 was a massive reduction in interest rates from late-1998 onward as we moved to CPI inflation targeting and not longer needed high rates (prime rate touched 25.5% in mid-1998). This unleashed a massive credit-driven consumption and housing spend boom from households, who up to the 1990s had a far lower level of indebtedness than today. This helped economic growth to above 5% for a few years prior to 2008. But the household debt-to-disposable income ratio rose sharply, and remains far higher even today than in the 1990s, so interest rate cuts today have far less impact on consumer spend now due to higher indebtedness, and rates are already low in any case (leaving far less scope for rate cutting than in the late-1990s. But there was one more easy lever to pull …
  • Lever 3 – Fiscal stimulus from around 2008, with government running a far higher deficit, and it and its state-owned enterprises ratcheting up the debt levels. The scope for rising govt and parastatal debt is reaching the end of the road, however, as it become unsustainable and lifts the risk of default to a level where ratings agencies and debt investors are increasingly concerned.

So with the 3 easy stimulus levers pulled, and little scope left, structural constraints come back to haunt us as 1980s-looking economic stagnation returns.

Matshego: Mismanagement of key state-owned enterprises and worries about the generally poor state of governance during the “state capture years” hurt business confidence and constrained investment by the private sectors; a key component of economic growth. For instance, power shortages which are a consequence of Eskom’s bad operational and financial state, hindered investment in power-dependent sectors such as manufacturing and mining.

Moolman: The global economy is weaker than expected, which affects our exports (volumes and prices) negatively. But the expected improvement in domestic policy certainty and government policy interventions to make the SA economy more competitive have so far disappointed. Until we see more policy certainty and growth-supportive policy interventions, businesses are unlikely to expand employment and fixed investment, which curbs economic growth. The electricity load-shedding in the first quarter of 2019 severely restricted economic growth, but even now that there is no longer general load-shedding, there is renewed uncertainty about future electricity supply (possible future loadshedding), which adds to firms’ reluctance to expand.

Q: Are the heydays over or can home owners remain hopeful that economic recovery is possible?

Worthington: SA has work to do certainly, but hope is important. President Ramaphosa and his team of reformers have made great strides in rolling back state capture, but the economic issues will require painful compromises amongst different stakeholders. So the challenge is that everyone, including South African businesses, need to compromise in the hope of a win for country as a whole.

Loos: The heyday is never necessarily over. But the economic “super-cycle” is a long one and can last a few decades. The economic stagnation part of the last super-cycle lasted through the 1970s/80s all the way to the early-1990s and helped bring about a turbulent political change. This round of super-cycle stagnation could be every bit as long.

Matshego: Economies go through cycles and we are currently in a weak cycle. An upturn will return, but it remains unclear when that is likely to be. What is undoubted is that private sector fixed investment will have to rebound strongly and state spending needs to become more efficient for economic growth to reach levels necessary to halt the rise of the unemployment rate and boost consumer incomes.

Moolman: There seems to be renewed focus on growth-supportive policy interventions. It will likely take time to be implemented and there are several structural constraints, but we are pencilling in gradually improving economic growth, from around 0.5% in 2019 to around 1.3% in 2020 and 1.8% in 2021.

Q: What should struggling home owners with mortgages, do?

Worthington: Such a decision is particular to each home owner and their personal circumstances. The 25bp cut in the mortgage rate was not a huge help to consumer wallets; it really only equates to a total of some R3-billion, less than 0.1% of GDP. However selling a home asset should not be a last minute forced decision. I urge those considering this to calmly and realistically look at their finances. Try to make mortgage payments by economising on other expenditures so it is important to act early and be realistic. Homeowners can feel secure in their property rights.

Loos: There is little to do except tighten belts and live financially conservatively I think. And given that a house and a car are the two expenditure items that bring about huge recurring costs in terms of maintenance, insurance, energy use etc, keeping these two purchases conservative (cheaper and smaller in the case of both) can greatly contain one’s monthly living costs). Given that the myriad of economic structural constraints don’t appear to be going away any time soon, one should probably not assume significantly better economic growth any time soon.

Matshego: Consumers facing financial hardships should contact their creditors as soon as is necessary and not wait until it is too late. In the event that a debtor is unable to meet their debt repayment obligations it is advisable that they get in touch with the creditor in order to utilise the creditor’s assistance programmes. For instance, banks have arrangements that assist homeowners who cannot maintain bond repayments, either to restructure the debt or to put the property in the market while searching for a lower cost property.

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