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Johannesburg – South Africa’s solution for growth lies in boosting business confidence and encouraging the creation of small and medium size business.
This is according to Kevin Lings, chief economist at Stanlib, who was commenting on the latest business confidence index which stubbornly remains below healthy levels of 50 as the majority of business people are dissatisfied with conditions in the economy.
The Rand Merchant Bank (RMB) and Bureau for Economic Research (BER) business confidence index released on Wednesday show an uptick of 2 points to 40 for the first quarter of 2017, still way below the neutral mark of 50.
“It’s concerning that respondents continue to show little, if any increased willingness to ramp up fixed investment as well as headcount,” said Ettienne Le Roux, chief economist of RMB. “This is a bad omen for a country in desperate need of a growth kicker to so help safeguard its investment grade sovereign credit rating.”
The RMB/BER business confidence index is based on the results of a survey among 1 600 participants of all firm sizes across five sectors. Done between February 15 and March 7, it showed there are certain industries benefiting from the uptick in agriculture and mining and manufacturing exports. However, overall there is weak performance across remaining sectors.
Lings explained that fixed investment is a function of confidence. “Most private businesses are unlikely to expand or build new capacity, and therefore increase employment, unless they feel sufficiently confident about the future of their business.”
He added that raising business confidence was impacted by different factors such as political and social stability, adhering to law, policy certainty, ease of doing business and the international environment.
Since 2015 the RMB/BER business confidence index has remained almost entirely in negative terrain, except for the wholesale trade sector where sentiment is above 50.
In the retail trade sector, confidence in the first quarter increased 11 points to 45, countering the decline in the fourth quarter of 2016. “Growth in total retail sales volumes is showing few signs of life, and in some instances it’s even contracting, with the rate of increase in selling prices slowing quickly on a broad basis,” the report said.
Retailers of non-essentials, have also felt the impact of strained finances of consumers, the report explained.
“Confidence also crept higher in the wholesale and motor trade sectors, but declined in building and manufacturing,” said the report.
Despite a four point increase on the index, new vehicle dealer confidence remains low at 30.
Wholesale confidence also rose from 53 to 56, but this was negatively impacted by consumer goods which was restrained given tough economic times. Non-consumer goods, like machinery and chemicals and building materials helped boost the index level.
Further, export sales volumes continued to improve, but not enough to counter weak domestic demand. “It’s worrisome that since it last peaked at 51 in 2011, manufacturing confidence has been in a constant downward trend for six years,” said the report.
Confidence in the building sector declined six points to 42, mainly due to reduced residential activity in the second half of 2016 and non-residential activity contracted at a faster pace.
RMB/BER Business Confidence Index
Source: BER, SARB (Shaded areas represent economic downswings)
SA business confidence vs private sector investment
Source: Stanlib
Lings said in South Africa, private sector fixed investment is in “a deep recession” having declined in seven out of the last eight quarters. Business confidence has also slumped.
This presents an argument for increased government infrastructural activity to kick-start the economy. “Unfortunately, government’s balance sheet is now heavily constrained and many of the State Owned Enterprises (SOEs) are in a poor financial position, making a large-scale infrastructural development problematic.” He added there was a risk of underperformance in tax revenue collection this year.
“This is especially applicable since South Africa’s corporate sector balance sheet, on the whole, is still in relatively good shape and able to be leveraged under the right circumstances,” he said. Additionally the cost of capital is relatively low.
“Business confidence matters hugely to the growth and development of an economy, and South Africa’s business confidence has fallen well below its historical average,” said Lings.
READ: Radical transformation does not guarantee change – Mabuza
Previously Jabu Mabuza, business leader of the CEO Initiative, said that South Afria remans an attractive investment destination, despite the “political noise”. He said there is reason for business to feel “moderately” confident about the country’s economic prospects.
“I am acutely aware prospects of better growth remain highly dependent on implementation of critical structural reforms,” said Mabuza. These include reforms in SOEs, the energy sector and labour market.
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