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 Meteorological and economic drought poised to end in 2017


 Just like the latest rains hold the promise that at last the drought may be broken, the signs are everywhere that South African business owners can, for the first time in quite a while, look forward to a year in which the economy will start flowing forward again, says Ben Bierman, Managing Director of Business Partners Limited.

In fact, the breaking of the drought is one of the factors that makes Bierman optimistic that the local economy can achieve growth in the year ahead of between 1,6 and 1,7% – by no means spectacular, but still a vast improvement on the near-recessionary environment of much of the past year.

“Even though the South African agricultural sector contributes less than 3% to the GDP directly, it remains important as it is a labour intensive industry and is a growth stimulus due to its forward and backwards linkages with other economic sectors,” says Bierman, who believes that while food prices will probably not come down, food inflation will no longer contribute to the risks of an interest rate increase.

But there are factors beyond the breaking of the drought that also feed into Bierman’s optimism. The global economy is expected to grow by 2, 5%, driven by a 5, 2% growth in Asia, and, of more direct importance to many South African businesses, a 3% growth in sub-Saharan Africa.

Another sign of global economic vitality is the rise in commodity prices such as steel and also oil, which has crept back to over $50 a barrel. So far, the downside of a higher oil price for South Africa – namely inflation due to more expensive petrol – has been neutralised by a weaker rand.

For all the surprises that 2016 brought to the American political scene, chances are that Trump’s surprise victory might boost the US economy in 2017, which remains the engine of the world economy, says Bierman.

Closer to home, the ratings agencies’ stay of South Africa’s credit-rating downgrade has postponed the immediate dangers of the political uncertainty gripping the ruling party, allowing other factors to signal a better year for business owners.

Despite the political uncertainty, or perhaps in reaction to it, a strong consensus has emerged in broad sections of South African society that economic growth is the first priority, says Bierman. As a result, collaboration between labour, the public sector and the private sector is strengthening. At the same time, a groundswell of outrage in South African civic society and other quarters seems to have placed a damper on the questionable political decisions and appointments, making a repeat of something like “Nenegate” unlikely.

The change in atmosphere may just embolden investors and entrepreneurs to grab lucrative opportunities in South Africa that have been ripening for a while.

Bierman specifically points to the education sector as probably the greatest of these. Compared to other parts of the world, South Africa has a poorly developed private schooling sector. This factor, combined with the ongoing challenges in public schooling and a burning demand in the market for quality education provides a huge business opportunity.

Tourism is another sector that just keeps on growing, providing seemingly endless opportunities to local, owner-managed businesses.

Small manufacturing will still be able to exploit the weakness of the rand in the foreseeable future. Barring a downgrade, Bierman expects the rand to hover between R13.50 and R14 to the dollar, a level which can give South African exporters a much-needed edge.

Continued developments to South Africa’s immediate north provides lucrative opportunities to well-developed industries in South Africa. For example, the unprecedented electrification of sub-Saharan Africa presents a major opportunity for the local switch-gear industry, engineering works that deal with the transformation of electricity from high-voltage transmission wires to useable terminals.

Bierman cautions, however, that it is still too early and too volatile to definitively say that the tide has turned. Even if all goes well, the economy might “tread water” for a while before things start moving.

As for the risks of a setback, there are many.

On the milder side, talk of a minimum wage could come to fruition this year, although it is unlikely to affect business owners much, says Bierman. Most will probably find ways of scaling back employment through productivity improvements and continued automation. If anything, a minimum wage set too high, while good for bridging the gap between the rich and the poor, is likely to hurt the already unemployed, he says.

Greater dangers lurk in the prospect of a downgrade, which has not disappeared. In the intensifying leadership struggle inside the ANC which will culminate at the end of the year, the ruling faction could try a desperate scorched-earth strategy. Populists may succeed in hijacking civic discontent, and legitimate movements such as the student protests could continue to spiral out of control. On the world stage, Trump’s protectionism may boost US growth in the short term, but hurt world trade.

These risks are real, says Bierman, but so are the forces poised in favour of a good 2017. It could just take one positive development – the first good harvests for instance – to get the economy moving once again in a virtuous circle.




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