BUSINESS DAY TV: Economy in for tough times
Stanlib economist Kevin Lings discusses the possibility of South Africa entering a technical recession following weak manufacturing and retail sales data for February
KevinLings is an economist at Stanlib.
BUSINESS DAY TV: Mining production numbers for February out today have rounded up a week of rather mixed economic data for South Africa. Of course we had some commentators saying we could be headed for a recession. Absolutely and to get his view, joining us in the studio now, Kevin Lings, chief economist at Stanlib.
Kevin, so we had the Business Day running with the headlines ‘the hope of South Africa escaping recession rests on mining’, to what extent does the sector really have the ability to pull this economy in the other direction where of course it only accounts for 6% of GDP but where gains here do translate into other sectors like the manufacturing space?
KEVIN LINGS: Sure, on its own it’s fairly small so it can’t really lift South Africa’s growth rate meaningfully. It’s been less than 10% of this economy actually for a couple of decades and if anything over time it’s structurally getting smaller.
We are getting a little bit of an uplift it seems, the last two numbers, I thought February’s number was quite good today. January number is actually not too bad. Remember at the end of last year we had a very difficult fourth quarter of the year, so it looks to me like the data is improving but not enough to lift the weakness in retail and the weakness in the manufacturing sectors. It would have to grow enormously to compensate for that.
BDTV: Of course we saw contractions in retail and manufacturing for February and this of course came before the events of March and the credit ratings downgrades more recently. I should imagine those are going to affect a number of those sectors negatively going forward, probably not the mining sector though because the weaker rand will assist them.
KL: Yes, that’s the point, these are all January or February numbers and so far the economy on the whole seems quite weak. It’s very close to being in what we call a technical recession because the last quarter of last year was a decline. We could have a small decline. If there is a decline for the first quarter it will be small but then the headlines are going to be South Africa lapses into a recession. Which would be technically true. So all of this is before the effects of the cabinet reshuffle and the credit rating downgrade and so you would have to argue that that’s going to dent confidence, business and consumer confidence.
Potentially, and remember we still haven’t really seen the effect of the tax hikes that were announced in the February budget, we’ve still got that effect, we’ve still got next month, a very big petrol price increase coming, so all of that probably is likely to further dampen economic activity in the second quarter of the year.
BDTV: We’ve heard reports today that new Finance Minister Malusi Gigaba is meeting Moody’s to offer reassurances. How successful do you see him being on that front following what’s actually come through from S&P and Fitch already?
KL: Moody’s will downgrade irrespective of the meeting. They’ll still keep us at investment grade, remember they’re two notches above investment grade with the negative outlook, so they’ll take us down one notch, still on investment grade but I think with a negative outlook. And that will round up a fairly poor result from the ratings agencies and then it’s going to depend on what policies we implement for the rest of this year.
Whether the minister of finance can stick to the expenditure ceiling, that’s going to be critical. Do we control ultimately the granting of credit or guarantees to the state-owned enterprises? That’s going to be critical. And then we’re going to look forward to December, whether or not we can hold on to the weak credit ratings. There’s still a risk that you can get downgraded further if there is significant fiscal slippage.
BDTV: Fitch has put us on a positive outlook at the moment, S&P [Global Ratings] has kept that negative outlook so it’s ready to move again I’m sure?
KL: Fitch has us not on a positive but they have it on a stable outlook, which is positive in the sense that they’re indicating that they’re not looking to whether or not they have to downgrade. But they have taken our domestic and our international rating into junk status. S&P has us on negative outlook for both domestic and international and so what they’d be looking at is a couple of things. Does the growth rate pick up, we can’t ignore that? If we have a recession this year or even small growth that’s not going to be enough. Do we get some degree of fiscal slippage, do we control the expenditure ceiling, the things that are in our control? Does tax revenue keep up with the budget projections?
If all of these things start to deteriorate significantly further then you would argue let’s say in a year’s time around about June of next year, it’s very possible S&P would take us down another notch. That certainly happened to Brazil. Brazil’s credit rating followed a similar pattern to us. They didn’t respond appropriately when they got the initial downgrade and really six months to a year later they were down below investment grade by two notches. So there’s a lot of risk built into this and it’s a question of how you respond to the ratings downgrade, not the actual downgrade itself.
BDTV: Absolutely, you’ve been talking about fiscal policy, what about monetary policy because of course further credit downgrades could force the South African Reserve Bank to hike rates from here on out?
KL: That’s right, the Reserve Bank has made it clear that when they look at other countries around the world, where they’ve gone through credit rating adjustments, in general, interest rates have to rise following that adjustment. So that’s a clear warning that we can’t be considering interest rate cuts which we were talking about, literally feels like two or three weeks ago. I think the interest rate cut debate has gone away.
For the moment interest rates will probably remain on hold, as long as possible and I don’t think the Reserve Bank wants to necessarily hike rates unless they’re forced to. But let’s assume that the economy goes into a recession, but the currency continues to weaken and the Reserve Bank feels that it’s been increasingly difficult to attract foreign investment, they’ll be forced to hike rates. And yes we’ll say, but the economy is in recession and how can you hike rates? They’ve got to ultimately protect the value of the currency, the internal and external value, which is the currency, the exchange rate, coupled with the inflation rate. So they would have no choice if we see a deterioration in the exchange rate to hike rates, even if it means that the economy weakens further.
BDTV: Just finally, there’s been lots of criticism of western ratings agencies and whether we should care what they do and I think that what we’re seeing now is that it matters very much.
KL: Yes, ratings agencies are not infallible, we know that they’ve made many mistakes over time. Just look recently at the financial crisis. There was no doubt that the ratings agencies were rating instruments AAA, that were at the heart of the biggest financial crisis in 100 years and you would have to say that you got that wrong. And there are many other mistakes ratings agencies have made. The point though is that that is the system. It’s not as if we have a viable alternative, they are the ratings agencies that people look to, to guide them with regards to international investment therefore their decisions have an impact on South Africa. And while we want them to improve overall it’s having a meaningful impact right now.