Economic woes: Not all doom and gloom
14 June 2016
Posted by: Author: Amanda Visser
Author: Amanda Visser (IOL)
South Africa's economic woes increased with news of a widening current account deficit and contracting real growth in the latest Reserve Bank Quarterly Bulletin.
Owing largely to the widening deficit on the services, income and current transfer account, the deficit on the current account deteriorated from 4.6 percent of gross domestic product in the fourth quarter of 2015 to 5 percent of GDP in the first quarter of 2016.
This does not bode well for the country that has budgeted for a current account deficit of just over 3 percent. The Reserve Bank adds GDP contracted at an annualised rate of 1.2 percent in the first quarter.
"This disappointing outcome also dragged the growth rate over four quarters down to a negative value - the first year-on- year contraction since 2009, when economic conditions were dominated by the global financial crisis," the Reserve Bank says.
It adds production in the primary sectors (agriculture and mining) declined sharply in the first quarter.
The widespread drought has had a "debilitating impact" on the agricultural sector and mining output falling on account of weak global demand and subdued commodity prices.
Read also: SA’s current account deficit widens
South Africa received a temporary reprieve from the three major credit rating agencies in recent weeks when all reaffirmed their investment-grade sovereign ratings for the country.
Fitch Ratings, the last to reaffirm its rating, said in a statement last week political risks on the economy and public finances remain a threat.
Prophets of doom
Doom prophets continue to predict that South Africa will be downgraded either in December or early next year. However, PSG investment economist Dawie Klopper does not share the negative sentiment about possible downgrades.
"We will obviously have to achieve our 2016 budget targets, of which a budget deficit of 3.2 percent of GDP remains the most important," he says.
However, this will require for the economy to grow at a much faster pace than the current pace. Klopper is convinced that this is achievable.
"We need to stop this negativity (about the country and the economy). Nobody has even considered the recent positive figures from the Institute of Supply Management (ISM) which compares with the best in the world."
In South Africa the latest Barclays Manufacturing Purchasing Managers' Index (PMI) lost some of the ground gained in April (54.9 points) and fell back to 51.9 points in May.
The headline PMI managed to remain above the neutral 50-point mark for a third straight month.
Read also: Poll: SA faces 45% chance of recession this year
The PMI compiled by the Bureau for Economic Research (BER) and sponsored by Barclays, is based on the widely used PMI produced by the Institute for Supply Management (ISM) in the USA.
Barclays Manufacturing PMI is a monthly survey of purchasing managers in South Africa's manufacturing sector. The index provides leading indications of business conditions in the sector.
A reading above 50 percent indicates that the manufacturing economy is generally expanding, and below 50 percent indicates that it is generally declining.
According to the Reserve Bank's Quarterly Bulletin output in the manufacturing sector picked up moderately in the first quarter of the year.
The real value added by the manufacturing sector increased at an annualised rate of 0,6 per cent over the period.
The higher production levels in a number of subsectors contributed to an increase in the utilisation of production capacity in the manufacturing sector from 80,6 per cent in November 2015 to 82.2 percent in February 2016.
The SA Institute for Business Accountants (SAIBA) is also upbeat about the country's prospects.
SAIBA CEO Nicolaas van Wyk says rating agencies use their own model and assumptions to determine a country's status, which is often not a true reflection of the situation on the ground.
He adds, despite the current political turmoil and economic climate in South Africa, the global body for chief financial officers announced last week that South Africa will host its 46th World Congress of CFOs in November.
The International Association of Financial Executives Institutes (IAFEI) represents more than 20 member countries.
IAFEI Chairman Fausto Cosi said in a statement there is reason to be optimistic about the global economy. "The rationalisation programs implemented by companies over recent years are producing positive results, just as government reforms are helping companies reduce production costs and encourage the recruitment of young people."
Van Wyk says in the current economic climate there is enormous pressure to take shortcuts. CFOs must follow a strict ethical approach to business. They must lead by example in the private and public sector.
Keith Engel, CEO of the South African Institute of Tax Professionals, says it is relieved to see that South Africa has survived this round.
"However, we are keeping our eyes on December with growth expectations being key," he says.
This article first appeared on iol.co.za.