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Comment                                                                                            25 May 2017

Mix of fortune holds us back     

by Cees Bruggemans                 words 480

We can't claim a lack of luck favouring us of late. A near doubling of the maize harvest as a more normal summer rain season favoured us. A stronger 1Q17 mining output has export prices favoured us. A major decline in CPI inflation to 5.3% in April, possibly reaching 5% by mid-year. Well supported Rand as global forces support emerging market currencies.

And yet this isn't the whole story. SARB reportedly remains cautious, and is not expected to lower interest rates soon, not even for the remainder of the year. And this with massive GDP underperformance, steadily falling inflation, retreating food inflation as agriculture performs strongly, and steady petrol and diesel prices as global oil prices remain similarly steady and the Rand firm.

The SARB caution appears focussed on on our domestic politics, our possible further downward credit rating deeper into junk, and the bomb this places under the foreign holdings of our domestic bonds. SA is part of foreign bond indices, and its investment rating has attracted large appetite for our bonds, especially in the present low global risk environment seeking returns where it can find it.

Further SA credit downgrading deeper into junk later this year, at a time when the favourable global conditions may change, may see many foreign asset managers sell our bonds, even as market conditions force our bond yields higher.

It is these unpredictable strains that could put renewed downward pressure on the Rand, and also our inflation, potentially destabilizing financial conditions. A time perhaps to stay cautious.

Despite the stronger cyclicals mentioned, such as farming & mining output, we face structurals of a much weaker kind. Our domestic politics has been acting as if its actions have no meaning for our economic performance. And yet the credit rating agencies have been badly put off by our policy behaviour, in changing ministers and in state owned government governance and the implied debt behaviour we might expect.

One would have expected a much more abrupt fall-off in confidence then actually suggested by market behaviour. Certainly the investment weakness has been there, as local companies have increasingly favoured regional diversification, keeping domestic investment low and growth strained.

But instead of this sinking us much more decisively, our institutional staying power has kept us adrift. Our institutional strength remains in evidence throughout the private sector, despite the undermining of non-supportive publicly policies.

And thus this strange appearance of recovering cyclicals in the presence of weak structurals, carried along if only weakly by remaining pockets of institutional strength.

It makes our GDP growth straddle the zero line, not allowing much of an escape into stronger growth, or confronting us with a growth collapse. We await a more fundamental shift in the mix of our growth supports to get going again. This may still take time.

 

Cees Bruggemans

Bruggemans & Associates, Consulting Economists

 

Website www.bruggemans.co.za

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