Economic Watch

It promises to be an economic rollercoaster year

Heinrich Kruger

The first week of 2016 ended on a relatively positive note on the economic front, but with storm clouds on the horizon setting the scene for a turbulent year ahead.

There are such legions of factors in play that can impact on the state of the South African economy, one way or another, that it is virtually impossible to make reliable predictions about whether we are exiting the storm that was the end of 2015, or on the verge of entering a really big storm.

For the average South African household, the biggest challenge now is to remain calm and keep a close eye on personal budgets. The biggest danger is to, in the face of confusing and conflicting signals, be lured into a fatalistic what-will-be-will-be attitude.

At the end of last week there were some rays of sunlight with the announcement, in the proverbial pumpkin time, of an agreement between South Africa and the USA to keep the country inside the framework of the US’ African Growth and Opportunity Act (Agoa).

And there was the drop in fuel prices, plus news that South Africa’s automotive export was up. Some commentators interpreted it as a positive that for the first time since 1956 (when figures were first recorded) the value of South Africa’s foreign assets outstripped its liabilities. We will return to this issue further on.

Flip side

The flip side of the coin is that the end of last week also brought certainty that the worst drought in about 30 years will result in serious shortages in the domestic supply of some basic food supplies. In fact, the importation of corn from Brazil has already started. The cost of the average family’s food basket is set to rocket and inflationary pressure to increase.

AgriSA has called for the drought to be declared a national disaster. Both commercial and emerging farmers are facing devastation, while some towns in the Free State province are already running out of drinking water.

In the wake of the unfolding crisis one cannot only expect pressure on transport, storage and other related infrastructure to increase, but there is also likely to be an uptick in social unrest. With an already fragile social stability situation there will be increased pressure on the national treasury to fund social relief programmes.

With lacklustre economic activities and the South African Chamber of Commerce and Industry’s Business Confidence Index (BCI) on 79.6 at its lowest level since 1993, a tough and challenging budget awaits Minister of Finance Pravin Gordhan next month. Most commentators expect increased and/or new taxes.

Confusing and unpredictable picture

One of the toughest challenges faced by businesses, households and investors is not to jump too quickly to too simplistic conclusions in what is an extremely complex global and domestic economic construct.

This was clearly illustrated by the divergent reactions of expert commentators last week to news about the balance between South Africa’s domestic and foreign held assets – that is if it was indeed assets referred to in the statistics release by the South African Reserve Bank. Some reports interpreted it as the difference between South African held assets and foreign capital flows into South Africa.

Just to make the picture more confusing, some reports referred to “state-held” assets, while others on the same subject suggested that privately held assets were included in the figure.

A report in Bloomberg, like some respected local commentators, interpreted the statistics as a sign of “capital flight” from the country due to domestic, mostly political, factors. Others interpreted it as chiefly both the negative and positive impacts of a weakening rand.

For an absolutely comprehensive view one probably has to factor in the impact of US interest rate changes, the uncertainties surrounding the Chinese economy, the impact of plunging commodity prices, the fluctuating global risk appetite, domestic political policies/developments and many more.

All of these factors also impact on the South African economy in general, with some also bringing opportunities – for instance the opportunities for import replacement that come with increased import costs.

Some factors can also change overnight. For one, geopolitical risks, particularly in the Middle East, could see the trend in lowering oil prices turn around.

Then, as illustrated by the round of musical chairs with the ministry of finance at the end of 2015, the South African economy is very sensitive to what happens on the political front. Plus, the country has already entered campaign season for the crucial municipal elections that are sure to bring more twists and turns, with a lot of uncertainties surrounding the position of President Jacob Zuma.

To this can be added that the fallout of the end-of-year turmoil surrounding the leadership at the treasury is not over yet. To start off with, there was the announcement last week that Minister Gordhan has instructed the SA Revenue Service to halt its extensive restructuring plans.

In conclusion

All these factors add up to many uncertainties for the South African economy during 2016. The best ordinary people can do under these circumstances is to keep tight control over their personal budgets in order to meet the challenge of probably steeply rising costs of living, to avoid non-essential spending and to look after their jobs to the best of their abilities.

                                                                                                                                                                                    by Heinrich Kruger

 (Heinrich Kruger is founder and Managing Director of Kruger International Asset & Wealth Management. He can be contacted at [email protected] )

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