Wealth Matters

SA’s economic future depends on much more than credit ratings

Heinrich Kruger
Hein.jpeg

Positive international credit ratings are important, but do not but food on South Africans’ plates. Economic reality is much more multifaceted.

Two international credit rating agencies only days apart confirming the country’s credit rating as positive – even if it’s just positive ­– was great news.,.

Finance Minister Pravin Gordhan got it spot-on in welcoming the decisions, but adding that the country needed to shift the focus from avoiding a downgrade to concentrating on what is required to grow the economy. It is time to knuckle down and put a “universal focus” on lifting economic growth.

He said this focus was needed, regardless of whether “we are about to be downgraded to junk or not.”

This point was well proven by Statistics South Africa’s (Stats SA) release, just before the second rating announcement, of disappointing 2016 first quarter gross domestic product (GDP) figures.

Following on a weak last quarter in 2015, it told the story of a country on the verge of a recession, irrespective of credit ratings pronouncements.

And on the same Wednesday the release of the latest South African Chamber of Commerce and Industry (SACCI) Business Confidence Index, found that business confidence fell to an almost 23-year low.   

Complicated situations and challenges

How complicated and confusing such situations of interlinked signals can become, was illustrated when, due to these seemingly conflicting signals, the rand went on a quick roller-coaster ride on that – figuratively speaking – misty Wednesday.

Initially up to R14.99 to the US dollar, it bounced back to R14,85 when the latest credit rating became known and closed the day stronger on R14,76.

It is, however, important to note that the exchange rate pattern with other major currencies, like the British pound, was different – mainly due to the influence of US domestic factors impacting on the dollar.

Further illustrating that a simplistic approach to judging SA’s economy will not do, a closer analysis of SA’s GDP figures reveals that, if the mining sector is excluded, the growth rate would have dropped by only 0,5% and not 1,2%.

Traditionally one the country’s biggest contributors to income, mining contracted by 18.1% due to a global slump in the resource markets.

Because of the drought the agriculture sector, also traditionally a big export contributor, has with forestry and fishing been in decline for five consecutive quarters.

In fact, the only relatively strong performer in its GDP contribution was the financial services and real estate sector.

 The story it tells

The takeaway from this is firstly that, because of the unlikely global upturn in demand for basic resource commodities in the foreseeable future, not all the factors impacting on the SA economy are under its own control.

Secondly, part of the work at hand Minister Gordhan referred to, is that more should be done to diversify the South African economy to make it more resilient and improve its flexibility – a basic principle that also holds true for the individual investor.

The work ahead includes improving the output by our educational system to deliver more labour market-ready candidates, regulatory reform and policy certainty.

To add to the present uncertainty, the news last week had it that the likelihood of Britain leaving the European Union – a so-called Brexit – is increasing. For South Africa it could imply a strong impact on its substantial trade relationships with both Britain and the EU.

Most importantly, especially for individual investors, is to avoid impulsive or panicky decisions based on simplistic signals in the daily news.

Furthermore, it is clear that there is broader economic restructuring taking place in the global economy to which the country and the individual investor should adapt.

Challenges of restructuring

Recent signs of economic restructuring on a global scale, which will also pose challenges on South Africa, are inescapable. The details, speed of and full scope of these process are, however, far from clear at this stage.

It would also be a mistake to place all responsibility and, when things go wrong, blame on government.

This reality was, also last week, illustrated by audit firm PricewaterhouseCoopers (PwC) reporting that the world’s 40 major mining houses squandered billions earned during the resources boom or super-cycle.

PwC’s Mine 2016 report found, on the back of $US53 billion of impairments in 2015, that the top 40 mining houses booked their first recorded collective net loss of $US27 billion.

Some analysts earlier warned about fruitless growth plans, arguing that mining companies needed to focus more on earnings rather than production growth. There was an ill-informed splurge on growth as they failed to read future supply and demand correctly.

All indications are that a return to strong broad-resource demand is not remotely in sight, among other things because of an information-technology driven so-called fourth industrial revolution (4RI), we reported on two weeks ago.

In a highly integrated global economy it is also important to take note of the signs of restructuring trends taking hold of big multi-national corporations in most sectors.  

In recent weeks it was, for example, reported that global banker HSBC is in the process of restructuring/rationalising its international investment banking arm to “save tens of millions”.

According to one report the corporation has already cut 1 000 jobs in the past year. It is aiming to reduce its overall global headcount by 50 000 (a fifth of its global workforce) by the end 2017.

At least part of this is trend is facilitated by the 4FI. The first 840 job cuts in the United Kingdom will be achieved by moving 840 IT roles to lower-cost markets such as China, India and Poland by March 2017,

For South Africa this particular trend poses the challenge firstly to decide how much of its infrastructure spend and effort should go the way of the IT sector and to ensure it has a properly trained labour force to compete successfully on the broader global service industry – the local call centre sector has already proved that it can be done.

The announcement that Royal Dutch Shell, which has operations in SA, is also part of the trend of multinational companies around the world trimming down operations and exiting various countries/regions to streamline operations and improve their balance sheets.

To this example can be added Barclays plc which started reducing its stake in its Johannesburg-based subsidiary, Barclays Africa, Anglo American plc, which announced plans to get rid of 60% of its assets and shed 85 000 jobs globally, and more.

Conclusion

Credit ratings are important, especially because they could cause a large outflow of capital due to restrictions on regulated institutional investors like pension funds. But, there is a much wider and complicated network of factors that will determine the future health of South Africa’s economy, and not all of them are political.

Most of all, it is a time for calm heads for both authorities and individual investors, and for well laid plans and policies focused on ensuring long term sustainable economic and value growth.

(Heinrich Kruger is the founder and CEO of Kruger International Asset Management. He writes this column in his private capacity.) [email protected]

by Heinrich Kruger

Follow us on Twitter | Like us on Facebook
M1
comments powered by Disqus

Subscribe to the newsletter



Final Word

Final Word

IntelligenceBul Final Word Confusing world of sluts, gays and lesbians https://t.co/qCz4oEd22o 0 years - reply - retweet - favorite

IntelligenceBul Let's Think Will Zuma admit that he is a “shady man”? https://t.co/sKBi6kL5lf 0 years - reply - retweet - favorite

IntelligenceBul Propery & Wealth Home-grown financial solution for a truly South African dilemma https://t.co/1XFQO45fNJ 0 years - reply - retweet - favorite

  • Chris C Viljoen
  • Edwin Mast-Ingle
  • Chwayita Mkabayi
  • Tracey Parry