End of first semester – what are the prospects for the second?
At the end of the first calendar semester this Friday, few people worry about the overall economy. The most pressing issue for most is to get those tax returns handed in before the Receiver closes its door for the week, the month and the tax year.
But while the economy is seemingly in a lull, it is noteworthy that slowly, gradually its overall condition has stabilised and there is some semblance of renewed activity. This does not mean that the consolidation period is over, no, that will continue well into 2018 but it does show that the crisis period is something of the past.
By making this statement, no way do I imply that it is all champagne and roses, on the contrary, but the uncertainty and hesitation to invest, no longer dominate every meeting and every get together. When I talk to business people, I sense an expectation of improved economic conditions albeit at a much lower level than the 2010 to 2015 joy years. It is certainly far more positive than last year.
Although the ails of 2016 are still very much with us, it would be remiss not to start focussing on the positive trends that are slowly manifesting. Sure, private sector demand for credit is still very subdued and any construction company that relies for the bigger part of its income on public projects, still has serious cash flow issues, but the extreme gloom of December last year and the first two months of this year, has now abated, making way for cautious optimism from those contractors who mostly work for non-govenment commissions.
Since the end of June is only the end of the fiscal first quarter, the jury is still out on the government’s overall financing requirements. But I do not see this as a negative. Wherever we deal with ministries, agencies and parastatals, there are clear indications of budgets becoming available and a propensity to resume normal operations, and by that I include “normal” spending.
Even in the construction sector with an abnormally large backlog, I receive reports from many companies saying they are slowly, piecemeal, being paid for work done in the last quarter of 2016. Under any other circumstances, this news would not be positive, but in our case, I believe it is. There was a period of at least three months, i.e. the entire calendar first quarter, when all payments froze. Now at least, there is some perceptible improvement in government liquidity, and this should soon be seen in bank liquidity.
An analytical report I digested earlier in the week provided some insight into overall liquidity based on proper data and not only on anecdotal evidence. It showed that while bank liquidity is still far below the 20-year mean, it has somewhat stabilised over the past quarter and is comfortably higher than the deepest part of the trough last year.
However, that same report showed a stagnant housing market, plummetting vehicle sales (up to May 2017), and very tight credit rules at all the banks. Growth in retail sales has also turned negative but this I believe is a function of indebtedness and not of liquidity. Disposable incomes are still under pressure and will remain so for the rest of the year as the consolidation continues.
This must be expected. Still, it is necessary that the economic consolidation phase and the impact of government spending be put into perspective. First, we have avoided a sovereign downgrade by the ratings agencies, despite the negative outlook. Second, the finance ministry has secured major bridging finance to transition us from recession to growth, and finally, both the external reserves and the deficit on the trade balance have improved.
Perhaps the only really good news at this point comes from the diamond industry. Another chart I had the good fortune to see this week, showed a remarkable recovery in sales which started tentatively in December last year but build stronger momentum during the first quarter of this year.
And since we do not sell our diamonds to ourselves, it is a good proxy for what we can expect from a global view for stable growth this year.
We will be well into a recovery before it shows up in the statistics. But that is normal, and while many companies continue to be affected by negative cashflow, I believe the tide has already turned. I do not expect an immediate turn-around and it will not show in the third calendar quarter, so do not overbargain on a reversal before the final quarter (starting October) but by then I suspect we will see a substantial boost from the tourist season, and we will be on the doorstep of our own best trading quarter.
If I am correct in my second semester outlook, December 2017 will look a lot different than December 2016.