SA “mired in mediocrity” – FNB’s Sizwe Nxedlana

Business confidence in South Africa has improved over the last two years. But honestly, that's not saying much given just how negative things were back then. And while confidence has improved substantially, it's still not what you'd call optimistic. As FNB's chief economist Sizwe Nxedlana points out, while confidence in the construction industry has improved by leaps and bounds, the plain fact is that it has moved from -80 to 0. In other words, it has improved from "really pessimistic" to neutral. This is good news, of course, but it's not the same thing as buoyant animal spirits. As Nxedlana argues, things in South Africa simply don't warrant real optimism. While major worries like political instability and the country's overall macroeconomic trajectory are a thing of the past, there are a host of smaller, microeconomic issues that are keeping the country, as Nxedlana puts it, "mired in mediocrity." – FD

GUGULETHU MFUPHI:  Construction confidence index fell by 11 index points since the first quarter of this year, despite the fall the majority of respondents were satisfied with prevailing business conditions.  Joining us now for more is Sizwe Nxedlana, Chief Economist at FNB.  The only reason I'm introducing you is that Alec can't say your surname.

ALEC HOGG:  No, not at all, we're brothers from a different mother today with our ties.

GUGULETHU MFUPHI:  Nonetheless, coming back to our confidence index, the Budget Speech, which took place in the first quarter of this year: did that have an effect perhaps on confidence taking a bit of a dip?

SIZWE NXEDLANA:  I don't think so.  I think it's the actual underperformance, particularly coming from state-owned enterprises of what is actually spent, relative to what was said to have been spent.  If you look at the construction confidence numbers, we think it ties in very nicely with the official fixed investment numbers, which show very strong growth in actual fixed investment by the private sector as well as fixed investment by the general government, but very weak fixed investment coming from SOE's.  If you tie that back to the government figures, you see that Treasury always says SOE's are going to spend a certain amount, but what actually ends up being spent is a lot less.

ALEC HOGG:  I'm looking at the construction sector index over the past few years and it really tanked badly in this year, 2014.  How would that correlate with the findings you have in your survey?

SIZWE NXEDLANA:  Well, if you look at the survey, you'll see that we're still a negative territory in terms of overall confidence, particularly if you look at business activity – the actual amounts of work available – peaked at almost 70 or 80 index points in 2006 and 2007, obviously in the lead up to the World Cup.  They bottomed; I think, at -80 in terms of the actual demand for work around 2010…in fact, during the World Cup so presumably, all the work had been done by then.  Over the last three years, we've seen confidence almost triple, but from -80 to almost zero, so we're almost at break-even point now.  The expectations, if you look at the forward-looking expectations of civil contractors, they keep saying they're expected to go into healthy positive territory.  It improves a little bit, but disappoints those expectations and that has rather been a trend, which we've seen over the last while.

ALEC HOGG:  The stock market forecasts what's coming 6/9/18 months ahead and at the moment, it's saying to us 'it's not looking good – what's on the horizon', but from the real economy you're saying that the picture is a little more positive.

SIZWE NXEDLANA:  Well, the picture is a little bit more positive in the sense that it's less negative than what it was before.  Going by the confidence numbers, if you look at the actual fixed investments…  Remember, there's a difference between the building confidence, which looks at building, pipelines, from architects to quantity surveyors to contractors that you'd be looking at there, as well as to sub-contractors that are part of the building supply chain such as your plumbers and electricians etcetera.  There are also your retailers and manufacturers of building materials, so that's the building survey we released last week.  This week's one looks particularly at the civil – the infrastructure work – so that's telling us that relative to two years ago, it's a lot less negative than it was before.  I suppose it may therefore tie in with the stock market, which hasn't rebounded.  Of course, if you also look at the fixed investment numbers, there we're starting to see news that is slightly more positive.  Fixed investment last year actually accelerated, funnily enough.  It grew to five percent.  If you look at who is doing the fixed investment, it's general government: municipalities and to a lesser extent, provinces, and the private sector.  If you look at what's being invested in, the private sector's investing in machinery as well as in a little bit of infrastructure.  If you're looking at which sectors of the private sector are investing, its construction, and manufacturing.  I think the theme that appears, is that because of labour, the manufacturing sector is mechanising and there are also some infrastructure investments as we reach the limits of capacity utilisation.

GUGULETHU MFUPHI:  For those who might not be best positioned to take advantage of these presumably mundane confidence levels locally, does this make other markets, perhaps in Africa or anywhere else, a little bit more attractive?

SIZWE NXEDLANA:  Well, I think so.  If you look, for example SA non-financial corporate FDI, you'll hear the story that private sector fixed investments in South Africa are starting to recover, but if you look at corporate credit extension, it has been relatively strong.  If you look at where the FDI and corporates has been going, it's been going overseas.  If you therefore look at the FDI of non-financial corporates in South Africa since just after the credit crisis, it surged exponentially.  If you look at the jurisdictions where the FDI is going, it's to the rest of the continent.  That's across the board, from retailers in South Africa, construction firms in South Africa, as well as, for example, financial services tracing their own clients.

ALEC HOGG:  It's a sobering message.  It's a sobering message for those who make the rules here.

SIZWE NXEDLANA:  Well, you spoke about Drift in your previous interview.  I think one of the most apt ways to describe the South African economy is 'being mired in mediocrity'.  If you think about it, the South African Reserve Bank calculates potential GDP at about three-and-a-half percent.  In 2012, we did two-and-a-half.  Last year, we did two.  We're probably going to do two to two-and-a-half again this year.

ALEC HOGG:  So you support Russell's view that we're drifting to standards that we really, as a proud nation, should not be accepting.

SIZWE NXEDLANA:  Well, from a macroeconomic perspective, it's in the numbers.  I don't have to say it.  It's staring you in the face.  Again, no longer macroeconomic policy's a problem.  It's not really, I would say, political instability.  We sorted those two things in the 80's and the 90's.  I think its microeconomic reforms, which, at the end of the day, are a function of leadership.  Those are the things…we speak to clients in the productive sectors of the economy, and they pretty much – be it agriculture, manufacturing, or mining – complain about the same thing.  It's difficult for us to produce things here, to transport them from inland to the coast, and to go and sell them overseas.  That's a function of infrastructure, consistent regulation, rules and regulations that don't change, and labour that's productive.