Our clients will recall recent changes in our portfolios, especially the FVV Conservative Model Portfolio, in order to construct a buffer zone to our view of further expected economic weakness.
In light of recent stock market strenght, we would like to share and excerpt from an article by Nazmeera Moola, Co-Head of SA & Africa Fixed Income, Investec Asset Management. It encapsulates our thought process and stance and give further reassurance to our clients of our commitment to safeguarding their capital.
After a shaky 2016, South Africa’s economy was set for a recovery in 2017. The first quarter was always going to be weak, but better commodity prices were supposed to boost investment through the year. Improved consumer confidence was going to support vehicle sales. In early March, I thought 2017 growth could get to 1.8%. What a difference four months make.
Four and a half months ago, President Jacob Zuma reshuffled his cabinet and destabilised the South African economy. While the reaction of the rand was far more muted than anyone had expected prior to his actions, the destruction wrought by his actions of March 30th are becoming increasingly visible.
Let us not be fooled by the temporary bounce in growth in the second quarter. The high frequency data suggests that after contracting by -0.7% between the last quarter of 2016 and the first quarter of this year, on September 5th Statistics SA is likely to report that the South African economy grew by around 1.5-2.0% in the second quarter. At first glance this suggests my diatribe against the cabinet reshuffle is unfounded. However, a closer look reveals that the bounce is likely to have been confined to a bumper agricultural harvest, continued mining volume expansion on the back of higher commodity prices and some rebound in manufacturing activity after a very weak first quarter.
Construction and retail activity remained weak. The latest unemployment data showed that 113 000 people lost their jobs in the second quarter.
Regulatory uncertainty has choked the mining sector this year. Despite the solid rise in commodity prices, Mining Minister Zwane’s approach to regulation has ensured that this sector will not be investing in 2017. Instead the sector is planning closures that put 20 000 jobs at risk. Platinum production volumes contracted by 13.7% from a year earlier in June.
Weak growth is feeding into lower revenue numbers. After being saved by a withholding tax windfall in March, Tom Moyane has had to concede that revenues are likely to disappoint in the current fiscal year. Revenues as collected by SARS are disappointing. Between April and June 2017, tax revenues grew by 7.2% – well down from the 10.6% growth rate projected in the February budget.
Not only are revenues disappointing, but South Africa’s interest expenditure is rising. The South African government will need to borrow a further R191bn this year. State-Owned companies plan to borrow R48bn, while the Land Bank and DBSA will borrow R18.4bn. All of this debt will cost 0.75% more in interest than if it were issued on 27th March 2017.
Therefore, the increase in interest charges on this new debt alone in the next twelve months amounts to R2.3bn. That is R2.3bn that could have been better deployed on infrastructure or education or housing. It is a wasted ZAR2.3bn. More scarily, over the 20 years of the life of the debt, it will cost South Africa an extra ZAR46bn in interest.
The underlying cause is a lack of confidence. While the ANC continues to focus on its internal political battle (seemingly to the death), there will be no restoration in confidence. Therefore these trends are likely to continue.
Without a dramatic change of direction by January 2018, further rating downgrades will follow. This will exacerbate the problems. However, they will not cause the problem. A credit rating is a scorecard, not a root cause. The root cause is the lousy policies and low confidence levels evident in South Africa at this point.
