Unfortunately, the poor start to the year in South Africa has not really shown much sign of improvement. Labour relations continue to dominate the scene, dragging down growth and undermining confidence. Although the protracted strike on the country’s platinum mines (led by AMCU) eventually came to an end late in the second quarter, this was followed in short order by a NUMSA strike targeting the steel and engineering sectors. This strike is still in progress at the time of writing, but it is hoped it will be resolved relatively quickly. Growth has been significantly impacted by the strikes, which have principally affected mining production but also vehicle production and exports. Apart from the damage to production and exports, there has also been a negative effect on consumer confidence and spending as a result of lengthy periods without wages.
MAN-DAYS LOST TO STRIKES (FIVE-YEAR MOVING AVERAGE)
For the platinum strike alone, producers estimate they lost more than R24bn in revenue and that their workers gave up almost R11bn in wages over the course of the strike. The South African Reserve Bank (SARB) describes the platinum strike, which involved around 70 000 workers, as ‘one of the longest and most costly occurrences of industrial action in the history of South Africa’. The effect on exports has been palpable, despite producers making use of stockpiles to mitigate the impact: the value of March platinum exports was down by almost a third on the 2013 average, while the average physical production of platinum in the first quarter (Q1) was 22% lower than the 2013 average. In addition to the direct impact on mining production and employees, the SARB also notes the negative effects seen on suppliers and capital investment.
SA PLATINUM PRODUCTION (INDEX, SMOOTHED)
In no insignificant part due to the platinum strike (mining production fell almost 25% on a quarterly annualised basis in Q1), GDP growth slumped by -0.6% at a quarterly annualised rate in Q1, albeit still managing a positive but lacklustre year-on-year growth rate of 1.6%. The SARB has estimated the direct and indirect effects of the strike shaved 2.2% off the Q1 GDP growth rate. With the strike continuing well into Q2, another soft growth outcome for that quarter is likely.
With the weak growth backdrop, even though it was to a large extent strike-induced, the SARB kept rates flat for the remainder of the half-year (after having increased the repo rate by 50 basis points in January), even as inflation crept steadily higher and had easily breached the top of the 3% to 6% target range by May (at 6.6%). While a turnaround in food and petrol prices was to some extent responsible for the higher recorded inflation, increased rand pass-through has also become evident, and core inflation has crept steadily higher to around 5.5%. The SARB’s rhetoric has continued to emphasise the primacy of inflation as its target, as well as noting that monetary policy cannot solve structural growth issues in South Africa. Over recent months, it also indicated that it may switch to 25-basis-point moves. Consequently, the rate hike of that magnitude, announced in July, was not a surprise. We do, however, believe the effect of moving to smaller increments will simply be a more prolonged upward cycle. The real repo rate remains negative at present, meaning that despite rising nominal rates monetary policy still remains accommodative.
REPO RATE VERSUS INFLATION
Given that rates may be raised only 25 basis points at a time, we are likely to see the real repo rate remaining negative for some time. Against a background where the US Federal Reserve has already started ‘tapering’ its quantitative easing programme and is expected to start hiking rates in 2015, South Africa may see either further upward pressure on interest rates next year, a further weakening of the currency, or some combination of the two. Although the rand has already weakened significantly – by an annualised 14.5% a year since the end of 2010 – and can no longer be considered overvalued, we feel it remains vulnerable. Labour strife and low growth dampen confidence for potential fixed asset investors, and South Africa’s still large twin deficits (the current account and fiscal deficits are both over 4% of GDP) worry financial asset investors. In turn, continued rand vulnerability will keep worries about inflation front of mind as well.
RAND/DOLLAR
Although a significant part of South Africa’s lacklustre growth of the past few years can be blamed on a similarly pedestrian performance in the global economy, the past year or so has seen the international economy pick up while South Africa has continued to muddle along. To a large extent, this has been due to labour strife. However, political uncertainty has also dampened business confidence (and therefore investment). In addition, even without the impact from the strikes, consumer spending has been apathetic amid high levels of indebtedness and squeezed real incomes (as inflation rises). A more settled labour market environment is key to a near-term ability to start taking advantage of improving global growth, while in the medium term structural factors (such as deficiencies in education and skills) remain crucial to lifting the country onto a higher growth plane.
