SA business confidence could be on the mend - economist

(iStock)
(iStock)

Cape Town - There are signs that business confidence in South Africa could be on the mend, SA Chamber of Commerce and Industry (Sacci) economist Richard Downing told Fin24 on Monday.

He said a turnaround in the Sacci Business Confidence Indices (BCIs) in June and July this year might indicate that the decline in business confidence in the country has been stemmed. However, at the same time he cautioned that the annual BCI comparison does not indicate any material change in the subdued business climate in the real economy, or the tight financial environment of a year ago.

As for the possible impact on business confidence of the ongoing strike by the Chemical Energy Paper Printing Wood and Allied Workers Union, already in its second week, Dowling said this will likely only be reflected in the Sacci BCI for August.

"The fuel strike is disruptive, but it seems businesses have made short-term arrangements to cope with it. One would, however, have to wait and see what the impact of a longer-term strike would be on business confidence," said Downing.

READ: Union lambastes contractors as petrol strike drags on

Sacci released its BCI for July 2016 on Monday. It recorded 96.0 in July compared to 95.1 in June this year, but is 5.8 index points lower than in July 2015. The main monthly positive contributions to the BCI came, firstly, from the stronger rand exchange rate, secondly from improved merchandise export volumes, and thridly from real retail sales and improved prices for gold and platinum.

On the other hand, building plans passed, new vehicle sales and inflation had the largest negative monthly impact in July 2016.

"Month-on-month we now have an about-turn and one would like to see this continuing, especially if one looks at the peaceful elections and the fact that our democracy has shown signs of maturing," explained Downing.

"Democracy is all about the people, even if it is a coalition type government. One would expect business to gain from this as local authorities are important for local businesses."

The big question in his view, however, is what impact the election results will have on service delivery and corruption over the short term and investor confidence over the long term, as investors will be watching to see how events play out.

"In the SA economy many problems were created during the latter part of last year and the start of 2016 and it takes time to reset the economy, especially with rating agencies watching SA like a hawk. The test will come in December, to see if SA has made the grade and to see if business confidence can gain further traction," said Downing.

READ: SA business confidence lowest in more than two decades

Sacci is, for instance, concerned that the International Monetary Fund and the SA Reserve Bank have lowered their economic growth projections for the country. Sacci believes caution must be exercised on vulnerable economic issues, with the probability of a credit ratings downgrade for SA in December 2016.

The chamber is of the opinion that a concerted effort will be necessary to avoid even tighter economic conditions in 2017 as lower economic growth holds additional repercussions for public finance, unemployment and the real cost of borrowing.
   
Downing explained that the confidence level reflected in the latest Sacci index is mostly based on what is happening to the rand at the moment. Although the stronger currency is due to external factors, he added there are signs that this could help in terms of SA becoming a more internally driven economy.

"The rand exchange rate, however, is a bit of a question mark as it is more due to external factors by default that it is appreciating and not really about what happened inside the SA economy - although exports might have helped a bit, but in short-term shifts," said Downing.

"Apart from a stronger rand exchange rate and improved merchandise export volumes, investor and business confidence have to improve in order to propel the economy to higher activity levels. This could provide the public sector with the necessary resource base to alleviate the pressure on public finances and ease unemployment."

ALSO READ: SA business confidence continues recovery

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