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October/November 2016
W
ith slow growth econom-
ic anticipated for 2016,
Weimar says that many
firms are retrenching to reduce costs
and stay afloat. Fixed investment
activity has beennegative for the past
three quarters and this has contribut-
ed to broad-based restructuring and
472 000 job losses. Income growth
has stagnated and household debt
is currently 76%.
The economy has fared better in
the second quarter growing at 3,3%,
but only 0.6% over the year. Pro-
tracted pressure on companies have
hurt confidence and reduced the
appetite to expand capacity. Capital
expenditure by major role players in
the government, public and private
sector is also shrinking.
Nedbank’s straight-talking, feisty,
economist says that interest rates
increases of 2% in two years is mild
stuff. “The Reserve Bank is being
gentle. You don’t need big increases
to feel the impact and economic
strain,” says Weimar.
The mining sector is bleeding
losses as wage growth exceeds
productivity growth. Another factor
contributing to the country’s woes
is the giant Medupi power station.
Electricity costs have escalated over
300% since 2008. Medupi is fast be-
coming aworld record for the longest
construction time and it is still not
finished, eight years later.
“The lack of general economic
infrastructure is not enough to fuel
growth – the International Monetary
Fund shows that existing power is
the best growth for domestic and
global conditions of between 1,3% to
1,5% and unless we can finish power
stations quickly we can’t grow faster.
There is alsonot enough clarity on the
country’s economic policy going for-
ward. Investors raising capital need
to know that the policy landscape
will not change.”
With government deficits climbing
to 50% of Gross Domestic Product –
three major ratings agencies have
given us sovereign risk downgrades
with S&P and Fitch one notch above
junk status.
Pulling no punches, Weimar says,
“Government has to get its act togeth-
er – tax is not growing – government
needs to cut back on the size of the
civil services and hierarchies. Govern-
ment cannot stimulate the economy.
Wehaveno fiscal ammunition leftand
government has been a drain on the
economy.”
State paralysis, lack of leadership
and not speaking with one voice,
has seen Independent Chapter 9 in-
stitutions trying to keep politicians
accountable. “Labour remains a
contentious issue but the root of the
problem is the central bargaining sys-
tem,” says Weimar. Adding that there
is a perception the President is at the
heart of the problem. In government
there are two camps, all the Presi-
dent’s people who receive patronage
and use government resources to
benefit a few politically connected
people – and the opposite camp.
She questions why government
would want to fiddle with the highly
regulated banking sector, which
is on a par with international best
practices.
The Minister of Finance, Pravin
Gordhan, needs to show progress
and curtail government spending, as
well as to illustrate policy certainty
on a number of issues. This includes
negative land holdings, expropria-
tion, minerals and resources, the
private security bill, and the investor
rights bill that does the opposite. This
legislation is being relooked at and
Gordhan has to show that bankrupt
parastatals are making progress.
“The market will not accept interfer-
ence and the removal of Pravin – this
reduces the power of Treasury to
reduce government spending.”
The dominant factor driving the
price of the rand is based on how the
global market perceives risk in the
emerging market and how for-
eigners perceive risk and return
on investments. Nedbank’s
economic forecast anticipates
GDP growth of 0,2% in 2016, 1%
in 2017 and 1,5% in 2018.
A downgrade has serious
implications for the country
– should two ratings agencies
downgrade the country then
investments worth R600 bil-
lion will leave the country and
then the situation will become
volatile.
■
The cost of a ratings downgrade
Nedbank Corporate Investment Banking Senior Economist, Nicky
Weimar, sheds light on the South Africa economy and what to expect
if international rating agencies downgrade the country.
cto er/ ove er 2016
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