Small improvements in labour relations are feeding through into the FNB BER construction confidence index. That’s the message from one of South Africa’s top economists, Sizwe Nxedlana of FNB.
In this interview with Alec Hogg and Gugulethu Mfuphi, on the CNBC Africa Power Lunch, Sizwe explains the six-point improvement in confidence in the third quarter. He’s cautiously optimistic things are looking up for the construction sector, but warns that we’ve still got a way to go to get back to pre-World Cup levels of enthusiasm. – JC
Watch the interview here
Gugulethu Mfuphi: The latest FNB BER construction confidence index increased by six points from 45 to 51 in the third quarter of this year. Now this shows that confidence in the construction sector is rising despite there being lower building activity. Joining us now on the line to explain a little bit more is Sizwe Nxedlana, Chief Economist at FNB. Sizwe, taking a look at these numbers; confidence increasing – I’m a bit surprised by that. I thought that the construction sector was in turmoil.
SIZWE NXEDLANA: Ja. Well if you look at where the current levels are it’s indicative of an
equal split between those respondents from the construction industry that are satisfied with current business conditions and those that aren’t satisfied, so we are neutral. We’ve come from a situation where confidence levels were sitting at about 25 percent two to three years ago, so we’ve doubled since then but we are still significantly below the peak levels that occurred in the lead-up to the World Cup where we had confidence levels approaching 100. So we’re at very neutral levels at present and I think it’s indicative of some improvement relative to two years ago, but obviously still a long way to go.
Gugulethu Mfuphi: Sizwe, taking a look at the construction sector we know that recently the Competition Commission fined several of those companies for colluding and not only that, but Aveng lost its Chief Executive Roger Jardine. Are you say that the only way is up, now?
SIZWE NXEDLANA: Well, I’m sure that now, in terms of for example, earnings visibility for the sector given the fact that we’re almost over that Competition Commission run, that looking forward earnings visibility is likely to improve and that should be better in terms of conditions for the civil construction industry. Of course that also is reflected in the fact that we are seeing a slight up-check in margins going forward and this is reflected in the fact that within our survey there’s been some resilience in the question on profitability which has not declined even though we’ve had the Competition Commission issue and even though we saw in the quarter a light moderation in the demand for work in the civil contractors.
ALEC HOGG: Sizwe, while you’ve been talking we’ve had on the screen, a graph showing the way that the confidence index has been rising. Do you think it’s possible that with a R4Tr (R4 trillion) the country is supposedly going to be spending soon on infrastructure, that we can get back to those record levels of 2006/2007?
SIZWE NXEDLANA: We haven’t seen significant evidence of that coming through, unfortunately, Alec, but I think that that would be the game-changer; that, coupled with improving mining CapEx. But if we actually look at the underlying numbers we don’t think that confidence by the general government and also CapEx by the public corporations is going to be very strong over the next couple of months. Certainly the fiscal numbers are showing a moderation and the private sector numbers are also quite moderate, so that four trillion we don’t see coming through and also in the private sector side in terms of mining CapEx we also don’t see that coming through at present. So we expect these confidence levels to possibly remain range-bound around the levels that we’ve seen over this calendar year, which is essentially between 40 and 50 – so around neutral.
Gugulethu Mfuphi: Sizwe, we know that labour unrest is a constant feature in many sectors in the South African economy. We also see it having a negative impact with regard to our vehicle manufacturers. Is it still a concern for the construction companies?
SIZWE NXEDLANA: I think it’s been a very big concern. I think the lag-down in confidence that we saw during the third quarter – essentially the second quarter – was a function of this protracted labour unrest, particularly within the construction sector. But I think part of the reason why we saw a light pick-up in the third quarter was because there has been some abatement in terms of the labour strike. We know that Neumann-Sachs have signed a new agreement that ended the construction strike on the 12th of September. We also know that coal sector employers also signed a two-year wage agreement which averted the disruption of pole supplies to Eskom and that Eskom itself also signed a new wage agreement on the employment side or the Kusile/Medupi side – construction side. So we think there is a bit of an abatement in the labour unrest that’s likely to occur over the fourth quarter of this year which started in the third quarter, and perhaps that’s why confidence improved slightly despite the fact that activity levels declined.
