The inflexibility of the local labour market means we probably have not yet seen the full extent of unemployment
The reality is that the SA economy is likely to continue to struggle. The country entered the Covid-19 crisis in a precarious fiscal position with an economy that has been in a state of decline for several years. Given the length and severity of the lockdown — one of the harshest globally — it should be no surprise that GDP contracted 51% in the second quarter of 2020 based on annualised, quarter-on-quarter numbers.
This contraction came on the back of three successive quarters of contraction and an average growth rate of well below 1% over the past five years.
The consequences of this contraction will be lower tax collections, a ballooning budget deficit and limited options available to the government for financing this deficit. Despite several announcements that the government will kick-start economic growth with an investment in infrastructure spending, it is unlikely that in this environment it will be able to look to infrastructure spend as a mechanism to revive economic growth — unless it is prepared to implement structural reforms required to attract investment.
These structural reforms require, among other things, that government reduce expenditure. This includes reducing the bloated public sector wage bill, which appears unlikely in the current environment. Other structural reforms it needs to implement include ensuring policy certainty, removing regulatory red-tape, and ensuring SA becomes more competitive globally.
Business confidence is at an all-time low, which has a knock-on effect on investment. In recent months, a number of companies have shelved plans for further investment in SA, including SAB, a division of AB-InBev, which has put a halt to a planned investment of about R5bn, in part as a result of the prolonged ban on alcohol sales. Meanwhile, Consol Glass has indefinitely suspended construction of a new glass manufacturing plant valued at R1.5bn, while Heineken has also shelved its investment plans, valued at just under R1.5bn.
Exacerbating poor business confidence is growing unemployment. In July alone, the Commission for Conciliation, Mediation and Arbitration received 190 large-scale retrenchments referrals, along with 1,307 small-scale retrenchment referrals. The inflexibility of the local labour market means we probably have not yet seen the full extent of unemployment. It is likely that more companies will be retrenching staff in the coming months.
A debt trap is no longer a risk but a reality for SA, which could lead to a sovereign debt crisis. Although the ANC has long had an ideological aversion to an International Monetary Fund bailout
Unfortunately, SA’s unemployment situation is likely to be structural in nature compared to the US experience where unemployment spiked then fell rapidly as labour was reabsorbed.
The reality is that SA’s fiscal position is going to be difficult to manage. The government does not have the means to stimulate and support the economy in the same way that more developed countries do. This means many more businesses will fail, particularly those in the tourism, retail and hospitality sectors, which will not survive this period, worsening unemployment figures.
Corporate earnings will continue to be under pressure. The JSE’s apparent post-coronavirus recovery has not been broad-based and has been dominated by tech counters such as Naspers and mining stocks. The rand price of gold, for instance, has been a huge advantage for gold miners. However, domestic property, financials and SA industrial stocks are on average down 40%-50% from their pre-coronavirus highs.
Unemployment figures will add more pressure to the fiscus in terms of higher social welfare needs and less — and lower — contributions to personal income tax. A debt trap is no longer a risk but a reality for SA, which could lead to a sovereign debt crisis. Although the ANC has long had an ideological aversion to an International Monetary Fund bailout as it would result in a loss of sovereignty, its options are becoming increasingly limited.
Given this there is the very real risk that social pressure will increase as a result of the poor economic outlook. Not only is this likely to have political ramifications within the ANC but it could also impact the broader political landscape.
So, where does this leave investors? The strengthening of the rand should not necessarily be seen to be indicative of improvements in the local economy, but rather as an opportunity for investors to ensure their portfolios are diversified at appropriate levels.
A global diversification strategy is key in this environment. While the tech market has largely driven the local market recovery, there is a risk to being overly concentrated in the local market. While markets are high, we still believe there is a case for equities. Interest rates globally are expected to stay low for longer, particularly given the recent US Federal Reserve announcement on policy. At the same time, stimulus measures will, in all likelihood, see a rebound in global GDP that will support investments in equity.
However, investors need to be aware that market entry risk is a real issue given the current market levels.
• Duvenage is MD of NFB Private Wealth Management.