Is it really as bad as everyone believes?
A national conference earlier in the week for dealers in a specific retail segment produced some startling evidence just how poor the overall economy is. Between some fifty delegates, not one was found who did not complain about so-called adverse market conditions. In short, every dealer’s profit margin was squeezed, some more severe than others.
Later in the week, another despairing business owner offered the equally frightening information that at one particular commercial bank, approved deals of some three billion dollars, are all dormant since the applicants have changed their minds, waiting first to see which direction the economy is taking.
Since the finance minister confronted us with economic reality on 27 October, I have been inundated with enquiries, all basically along the same line. Everybody wants to know how bad the economy really is.
This is a difficult topic to put into perspective. In a recent presentation, I pointed out that according to the finance minister’s own calculations, revenue for this year will be 8% short of the budget projections. This is another startling fact, and it is vividly confirmed by the budget deficit estimates now on the table.
Earlier this month in a private conversation with a banker, I learned that the government’s revenue increased by between 18% and 20% from 2010 until the end of 2014. It was this relentless growth that provided the confidence to continue budgeting at this level.
But there are many other facts showing the contrary. I suspect the finance ministry realised just over a year ago that state revenue will underperform while our cost of borrowing will continue to rise.
This is corroborated by one overriding statistic in the expenditure side of the budget. At the end of February this year, the budgeted expense for this year was for all practical purposed the same as for 2015. This is the first telltale sign the government realised the gravy train was grinding to a halt.
The reality was still papered over by the launch of a very ambitious Harambee, despite many questions from the private sector how this will be financed. After free education and a 40% increase in old age pensions, the kitty was no longer a Kit Kat, so to speak.
There are many reasons why economic growth has halved but the underlying malaise, again was worded beautifully by the finance minister when he said the fiscal space has been used up. The troubles we are in now are because of sustained, large budget deficits, all of which had to be financed in some way. And that venue has become expensive since the second half of last year.
At this moment, confidence has evaporated and general business sentiment is negative. But business run in cycles and there are a few indicators that show we may already be through the trough. Although I do not expect fireworks for the remainder of the fiscal year, I sense the government’s fiscal position has stabilised and it is now only a matter of securing financing at rates that we can afford.
It is difficult to restore confidence when both the government and the private sector are finding it hard to make the books balance. But sentiment usually lags reality, often by as much as six months. So, presumably, all those businesses that had a terrible first semester, need to see more than just four months of improved performance, before they start believing trade has picked up.
Sentiment is an impossible thing to counter. It depends to a large extent on history and when the immediate history was poor, sentiment tends to stay on the poor track. Sentiment is also hugely influenced by opinion and popular perception. In our case, the sentiment will not change overnight and it will not become positive before the underlying narrative has not changed. For that to happen, companies will want to see a fair improvement between now and next year March.
We are in economic limbo. I argue that some indicators have turned marginally positive, or rather less negative, while business owners are still waiting for this to show up in sales figures. To a very large extent this depends on individual persons’ willingness to take on new debt, and while this reticence continues, private sector credit will not see a major move.
Building on the positive momentum generated by the President’s October visit to Gauteng, his subsequent investment tour in New York, and the recent international investors conference, now is the time for the finance ministry to come forward with another bold move, illustrating to us we are again the dandy of the magical capital market.