Is the worst over or yet to come?
By Colleen May
A volatile mining sector, political uncertainty, rising costs and levels of debt have caused an economic storm. With the rand falling and the cost of living reaching unheard of highs, what caused the economic woes we now find ourselves in and how should we make sure we survive and thrive in the tough economic climate?
Mining strikes start the economic woes
Before you can look at how to react to the current economic reality of South Africa, you must understand how the country got to where it is today. One of the biggest factors that contributed to the current economic woes is the volatile mining sector. In order to grow the economy, you need to export more than you import. The mining sector in South Africa is one of the biggest contributors to export earning in South Africa. With unrest due to labour challenges, which are not yet over, wildcat strikes and a government that has not resolved this ongoing problem, the mining sector has been in serious trouble since last year. What this essentially does is wave a red flag to investors who invest money in South Africa and help create economic growth; and when investors start fleeing, the rand price drops and this slows economic growth and increases prices. In July, the finance minister, Pravin Gordhan, said that South Africa would cut the economic growth forecast for 2013 to as low as 2%, partially due to mining strikes.
Political uncertainty sends investors packing
But it’s not just the mining industry that has investors worried about putting their money into the South African economy; social unrest and the political climate have caused business confidence to fall sharply. The Bureau of Economic Research’s business confidence index fell by four points to 48 in the second quarter of 2013 (any figure below 50 indicates that most of the respondents are pessimistic). In the manufacturing sector, the percentage of people who rated the ‘political climate’ as a constraint to investment is the highest it’s been since 1993.
The government was unable to quell the mining problems and the unfortunate events of Marikana are seared into the nation’s subconscious. With elections coming up next year, the government is trying to use the National Development Plan to accelerate growth, but how exactly this will be implemented is very uncertain, especially as the labour market policy and macroeconomic policy in the National Development Plan will put the ANC at loggerheads with its alliance members, the Congress of South African Trade Unions and the South African Communist Party.
The political sentiment in South Africa has reached a tipping point right now with the arrival of the Economic Freedom Fund, spearheaded by Julius Malema, whose promises of land grabs without compensation paint a picture of civil war that will see investors flee faster than you can say “Zimbabwe”. But what is even more frightening than the effect one man can have on the economy is the thought that he will challenge the ANC in the next election and gather up all the angry, unemployed youth votes, of which there are many. Confidence in the ANC is lacklustre at best; one particular example that highlights this is when last year the headlines screamed ‘Jacob talks and the Rand drops’ – after Jacob Zuma commented on government involvement with the labour unrest in the mining industry, the rand experienced a sharp drop less than 24 hours later. Coincidence? I think not.
Foreign investors are looking for a country that will offer them the best return on their investment, and a country that is gripped with strikes, civil unrest and the possibility of civil war is hardly a country people want to put their money into. So now the investors are leaving, selling off their investments in South Africa and this makes the rand drop, devaluing our currency and causing a situation where you are paying more for the same goods as inflation starts to rise. The first thing to rise is the fuel price; because the rand is weaker than it was the month before, the same barrel of oil now costs more and that extra cost is passed on to you in the shape of you paying more for petrol. But it’s not just petrol that goes up; the petrol price has a domino like effect on the price of other goods, like food, which have to be transported. And with rising oil prices and a weaker rand, the pressure of inflation is felt quite sharply by you, every time you buy groceries or fill up your petrol tank.
Rising costs create more debt
One way to see that people are struggling to meet the rising costs of living on the back of weak economic growth is to look at the level of everyday debt in South Africa. “Consumers are highly indebted and funding everyday needs with debt.
Further to the costs pressures felt by consumers and the business community, the recent sharp increases in the valuation roll in major urban metropolitan areas are expected to increase rates and taxes of consumers who are already under pressure as a result of rising petrol price, high food costs and transport costs. Despite these cost pressures, inflation moderated in May 2013 to 5.6% from an average of 5.9% in Q1 2013, but even the Reserve Bank is not optimistic that price increases will be contained as it foresees this reduction as temporary and could peak to 6.3% later in 2013, surpassing the inflation target upper limit,” says Ndibu Motaung, head of research at Jones Lang LaSalle.
According to the National Credit Regulator, 46,8% of a total of 19.97 million credit-active consumers had impaired credit records by the end of 2012. With the cost of living rising drastically, people are unable to meet their financial obligations. Even though the interest rate remained unchanged in July, people with large amounts of debt are unlikely to feel the effect of the lower interest rate and the best way to ensure you survive the current economic conditions is to pay off debt and address the state of your finances. Before you take on any more debt, you have to ask yourself if you really need the item in question. Right now is the time pay off debts and get your finances in good shape. If they already are, then start saving money. “Despite efforts by the authorities to boost spending through infrastructure investment, the remainder of 2013 is expected to yield a weaker outlook as a result of higher cost pressures and lacklustre global demand. This is being exacerbated by the continuing uncertainty in the mining sector, where unions are demanding unrealistic pay increases, resulting in declining foreign investor confidence. However, as the United States, European and Chinese economies start to improve, we are likely to see improved exports, which in turn should start improving the economic environment. The United Kingdom is not out of the woods yet, the United States data is beginning to improve and China recently downgraded its growth forecast, although still positive above 7%; this means some improvements are expected, but the remainder of this year remains a challenge,” says Motaung.
What about the property industry?
According to Jacques du Toit, a property analyst at ABSA: “Single digit nominal house price growth is forecast for 2013. This will be the result of recent developments regarding house price growth, as well as trends in and prospects for the economy, household finances and consumer confidence, which are expected to be reflected in the performance of the residential property market.”
Most of the top property agencies remain positive, like Pam Golding, whose CEO, Andrew Golding, had this to say: “While the trading conditions in the residential property market remain challenging, particularly for homeowners and aspirant home buyers who are faced with rising electricity, fuel and food costs as well as increased property rates and stringent bank lending criteria, the residential property market appears to have entered a new and more positive phase.” Seeff chairman, Samuel Seef, echoed this sentiment and added: “While the wider macroeconomic landscape is still not conducive to a real recovery, the market has settled into a new normal. Overall consumer indebtedness has reduced since 2007/8 and the banks are more willing to grant loans, although the high levels of consumer debt still constrains overall sales volumes. This notwithstanding, there is life in the market and well-priced properties are selling, with stock shortages becoming a reality in most of the major metropolitan areas.”
Despite the current woes, it’s not all doom and gloom; the property market looks set to keep up with the changes in the economy and will gradually improve as the economic situation improves in 2014.
So what should your business be doing right now to conquer economic woes?
Adrian Goslett , CEO of RE/MAX says:
· Focus on strengths and core business.
· Be flexible enough to be able to adapt to different situations, but not at the expense of the company’s values.
· Build relationships with existing and past clients and suppliers.
· Look to innovate, but ensure that before launching into something new, adequate research has been done to test the product/service.
· It’s important to know what is happening in the economy, but don’t focus on it. You have no control over it.
· They call it an economic cycle because that’s exactly what it is – a cycle. Some are longer than others.
· History shows that the companies that have succeeded in buoyant and challenging economic times are those that have developed a proven systematic approach to business – a formula of sorts that rarely changes.
· Jim Collins best describes this as the SMaC recipe. A simple, methodical and consistent approach to business that requires discipline, creativity, a mindset of “expecting the unexpected” and passion.
· This doesn’t mean doing what you always did. It means doing the right things right and doing more of them, while at the same time evaluating whether you are currently ‘doing the right things’.
While these are testing times and the last part of this year does not look set to be any better, the best way to survive in a tough economic climate is to understand the process and plan for it. If you can predict what the economy is going to throw at you, then you can ensure you weather any storm.