Housing in Southern Africa October-November 2016

News Housing

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.

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. ■

October/November 2016 cto er/ ove er 2016