An overwhelming amount of information has been made available to South Africa over the last few days, where we are seeing a deluge of numbers being reported, that all indicate a negative growth environment in our economy. Added to this is Zuma’s most recent State of the Nation Address, which focused on the country’s two big hindrances at the moment – unsettled labour and  an unreliable energy supply. It is difficult to see the proverbial ‘wood for the trees’ in an environment where sensationalism paired with real fears of a recession, may leave you grappling with difficult decisions to make based on the information. Dave Mohr, Chief Investment Strategist at Old Mutual Wealth, has an in-depth look at Zuma’s address, as well as the state of the economy, where he clarifies the reality of the situation, without any fear-mongering. We may have a tough time ahead of us, but it might not be as bad as we think. – LF
ALEC HOGG:  Well, President Jacob Zuma addressed two of the most significant problems in the economy in his State of the Nation speech last night: South Africa’s energy constraints and instability in the mining sector. Joining us now for more on the State of the Nation Address and the state of the economy generally, is Dave Mohr, Chief Investment Strategist at Old Mutual Wealth. It’s good talking to you, Dave. Let’s start off with State of the Nation. Mr Shapiro was a little concerned it took our President an hour-and-forty-minutes to do what could have taken him under an hour, he reckons, but that this is more of the same. We hear the talk, but we don’t see the delivery. Is there a credibility issue when someone like you looks at this kind of address?
DAVE MOHR:  I think one has to be honest. There is certainly that element to it. If you look at what has been promised in these addresses over the last few years, and how the economy has performed, it does create a problem with credibility, certainly.
ALEC HOGG:  So what do we do? How do we then interpret something that is as heavily promoted and publicised as an address like this, from the President, if the credibility isn’t there?
DAVE MOHR:  Well, if the credibility is not there then government has to realise they have to do something to try to improve that. Because the economic performance has lagged for such a long time, that is the key problem with the credibility. If you look at the address last night, he obviously spent a lot of time on economic issues and particularly, the two that you mentioned in terms of the platinum strike and the electricity shortages that we’ve got. In a sense, although those are huge problems for the economy, I think there’s a positive in that it has created that sense of crisis within government, that it’s not merely a question of sitting back and promising that ‘we’re going to deliver five million new jobs over the next few years’. These issues focused the attention on where some of the real problems lie in the economy, which is certainly with labour relations as well as the longer term planning, the rollout of our infrastructure, and the critical role that plays in our economy, and if there’s a constraint there, what the economic cost of it is.
ALEC HOGG:  Well hopefully, this crisis won’t be lost or go to waste, but I do recall Dave, only a couple of years ago, sitting in a room in Davos and hearing Mildred Oliphant, the Labour Minister claim that South Africa’s Labour Policies are the best in the world, even though that same organisation ranks us stone last at 148. Has the penny dropped?
DAVE MOHR:  Certainly, if you look at the damage that the platinum strike has caused to the economy, the Reserve Bank Quarterly Bulletin that came out this morning suggested that economic growth in the first quarter would have been one-point-six percent, had it not been for the platinum strike. I think this clearly demonstrates that you cannot claim that our labour relations in South Africa is the best in the world or some of the best in the world, because here you can calculate the real economic cost of the problem that we have in our labour market in South Africa.
ALEC HOGG:  Indeed. Today, we had the inflation figures coming out at six-point-six percent. I saw a tweet that someone sent through to me asking ‘please, can we get the Reserve Bank to bump up its limit of up to a maximum of six percent, to somewhere between six and eight percent’. Do you think that would help, Dave?
DAVE MOHR:  I’m not in the camp that thinks if we now start tampering with the target ranges for inflation rate in South Africa, that it will contribute anything positive to our economic outlook. I think the fact that we have the range between three to six percent is generous enough already in terms of where inflation should be. Over time, I think it allows for enough flexibility from the Reserve Bank’s side in terms of conducting monetary policy. To increase the top range from six to eight percent…what then happens is when you get above eight percent? I think from that point of view, we should stick to this. I think we’ve seen the benefits of having an inflation target of three to six percent. It does anchor inflation expectations. It does make it easier to sell government debt at a reasonable price/at a reasonable yield, which government can afford over time, so we should not underestimate the positive contribution to the economy from having this target range between three and six percent.
ALEC HOGG:  Of course, that assumes the selling of government debt at a reasonable yield that we’re going to retain our rating and not be downgraded further. Looking at the growth picture for the second quarter…looking at the current account deficit – again, another important number that came out today. Are the warning lights flashing more brightly?
DAVE MOHR:  I’m from the camp that if you look at the first quarter’s number – and yes, it was a negative number – but we shouldn’t go into a flat spin in trying to predict whether the second quarter is going to be negative or not, or whether we’re going to see a technical recession in South Africa. We should look at the slightly longer-term prospects for the economy. However, having said that, the outlook is nowhere near positive. We’ve seen all the growth forecasts being revised down to a low two percent. At Old Mutual, we’re also in that camp of thinking that it probably will be below two percent for this year. Certainly, from that point of view, the situation is serious. I think we should avoid a recession this year, but it will probably be a close call because our economy is vulnerable. I’m not only referring to the platinum strike and the electricity shortages. We’ve seen a broad-based downswing in the local economy and if there’s going to be any further external shock to the economy for example, world growth decelerating rapidly, we could end up with a full-scale economic recession in South Africa.
ALEC HOGG:  I suppose the problem in all of this Dave, is we can look across our borders – not directly north, but to other parts of Africa – from a South African perspective, see low growth here, much higher growth there, and business working accordingly or voting accordingly. We heard yesterday with Invicta’s Arnold Goldstein, when he said he’s looking to Africa, and in the next three years, to take their profits from 22 percent (non-South African) to 50 percent. In three years – that’s quite a push. He’s not the only one.
DAVE MOHR:  No. Absolutely, you have to look at all the quoted companies on the JSE. The Africa strategy is almost part and parcel of every company’s business strategy at this point. It does make sense because business does tend to go to where there’s potential growth. From that point of view, it’s very worrying and it illustrates the seriousness in South Africa, that if you’re in a low growth situation, you can get this knock-on effect that the situation can worsen because businesses tend to leave your country and expand elsewhere instead of in your own economy.
ALEC HOGG:  That was Dave Mohr, Chief Investment Strategist at Old Mutual Wealth. Thank you, Dave. It was good talking to you again.
