SACCI Business Confidence Index

SOUTH AFRICAN CHAMBER OF COMMERCE AND INDUSTRY Business Confidence Index February 2018

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SACCI Business Confidence Index – February 2018

Content:  The SACCI Business Confidence Index (BCI)  This Month’s BCI Results  Impact of Business Climate Indicators  Economic Commentary  General Economic Indicators

Because of information lags and changes in expectations, the dynamics of the business mood, at times, may be at variance with the economic environment. As a result, always read the BCI with other economic data and the accompanying economic commentary. For notes on the BCI, see the SACCI website at www.sacci.org.za.

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SACCI Business Confidence Index – February 2018

The SACCI Business Confidence Index 2015=100 Month

2011

2012

2013

2014

2015

2016

2017

2018

January February March April May June July August September October November December

119.4 118.0 120.6 118.7 117.2 118.5 114.6 114.2 113.9 112.9 112.8 114.7

112.4 115.2 110.8 109.2 107.4 109.9 105.2 110.0 106.2 106.5 106.2 107.7

108.8 107.7 104.7 106.9 104.7 104.4 105.0 104.8 105.8 105.5 105.1 106.4

104.5 106.4 107.3 107.2 102.9 103.8 101.8 103.0 103.3 102.8 105.1 102.2

103.4 107.4 103.2 104.1 100.6 97.9 101.8 97.6 94.5 102.3 95.1 92.2

92.6 92.7 94.0 95.5 91.8 95.1 96.0 92.9 90.3 93.0 93.9 93.8

97.7 95.5 93.8 94.9 93.2 94.9 95.3 89.6 93.0 92.9 95.1 96.4

Average

116.3

108.9

105.8

104.2

100.0

93.5

94.4

SACCI Business Confidence Index 150 Upward Phase of the Business Cycle

140

BCI 2015 = 100 130

Index

120 110 100 90 80 Source: SACCI

SACCI BCI Volatility 10

5

-5

-10

-15

-20 Source: SACCI

-25

Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18

index points difference y/y

0

2

Jan-18

Jan-17

Jan-16

Jan-15

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

Jan-95

Jan-94

Jan-93

Jan-92

Jan-91

Jan-90

Jan-89

Jan-88

Jan-87

Jan-86

Jan-85

70

99.7

98.9

SACCI Business Confidence Index – February 2018

This Month’s BCI Results The SACCI Business Confidence Index (BCI) upheld the improvement of business confidence but pulled back by 0.8 to 98.9 in February 2017 after recording a relative high level of 99.7 in January 2018. The BCI number of 98.9 for February 2018 is 3.4 index points higher than in February 2017. The BCI kept to levels above 95 since November 2017 after experiencing a slump and depressed levels between March 2017 and October 2017. The improved business mood is backed by a better performance by notably real economic activity where the annual comparison particularly reflected higher real activity levels. The financial environment was also easier than a year ago although the monthly situation tightened marginally. However, the direction of various indicators is still positive although the pace of improvement has slowed from the exceptional positive mood in December 2017 and January 2018. Although the present business confidence contains substantial positive sentiment, investment decisions will soon have to become reality to create sustainable higher economic growth and employment prospects. Six of the thirteen sub-indices that comprise the SACCI BCI, had a negative monthly impact in February 2018 – declining from exceptional improved levels in January 2018. Seven sub-indices were either positive or unchanged on January 2018 levels of which three are part of the seven real activity sub-indices and four belong to the six financial subindices. A small positive monthly contribution was made to the BCI by lower inflation while the relative large negative monthly effects came from lower merchandise trade export and import volumes, and real retail sales. The annual improvement of the BCI in February 2018 was the result of eleven of thirteen sub-indices that either improved or being unchanged on a year ago. Two sub-indices made a negative impact on an annual basis. The largest annual positive contributions to the business climate were from lower inflation, increased merchandise import volumes, improved new vehicle sales and increased manufacturing output. The high real cost of financing and less merchandise export volumes had a negative annual effect on the BCI. Only one of the six financial sub-indices and one of the seven real activity sub-indices had a negative annual effect on the February 2018 BCI. This is an indication that the lower turning point of the business cycle has probably been reached.

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SACCI Business Confidence Index – February 2018

Impact of BCI Sub-indices on the BCI

Previous Month

Energy Supply

o

-

Manufacturing

+

o

+ +

Exports

-

-

+ + + + + +

+ + + + +

BUSINESS CLIMATE INDICATORS *

This Month

Previous Month

y/y Changes

This Month

m/m Changes

o

+ + +

Inflation¹

+

Share prices

-

Real private sector borrowing

o

+ + + + + + +

Real financing cost

-

-

-

-

Precious metal prices

o

o

Rand exchange rate

+

+ +

+ +

Imports Vehicle sales

o

Retail sales

-

Construction - buildings

o

o

+

* See notes on BCI on www.sacci.org.za 1. Excludes petrol, food and non-alcoholic beverages.

Cyclical Moves of Selected BCI Sub-indices 160

120 100 80 60 40

SHARE PRICES

RETAIL SALES

BUILDING PLANS

MAN PRODUCTION

VEHICLE SALES

EXPORT VOLUMES

4

Jan-18

Sep-17

May-17

Jan-17

Sep-16

May-16

Jan-16

Sep-15

May-15

Jan-15

Sep-14

Jan-14

May-14

Sep-13

Jan-13

May-13

Sep-12

May-12

Jan-12

Sep-11

May-11

Jan-11

Sep-10

May-10

20

Jan-10

Long-term Trend = 100

140

SACCI Business Confidence Index – February 2018

Economic Commentary Looming Window of Opportunity During the World Economic Forum (WEF) meeting in Davos in January 2018, the President of South Africa (then Deputy President), promoted South Africa as an investment destination assuring investors of a secure and stable investment environment. The litmus test for the 2018/2019 budget and the State of the Nation address (SONA) therefore was whether these two events would sufficiently address the challenges of inadequate economic growth compounded by low business and consumer confidence, low rates of fixed capital formation and a worsening public sector debt burden confronting South Africa. Many of the policy proposals should thus be targeting concerns of international credit ratings agencies as well as those for potential local and international investors (see chart below).

Foreign Investment in South Africa end 2016 6000

5000

R billion

4000

3000

2000

1000

FOREIGN TOTAL

FOREIGN DIRECT

EUROPE TOTAL

EUROPE DIRECT

AMERICAS TOTAL

AMERICAS DIRECT

ASIA & OCEANIA TOTAL

ASIA & OCEANIA DIRECT

AFRICA TOTAL

AFRICA DIRECT

0

South Africa's President had to illustrate to international and local investors that government would embark on reforms to take advantage of global economic developments and speedily make domestic economic adjustments to utilize looming opportunities. The urgent implementation of fiscal and structural reforms was an imperative to retain investor support. The calamitous situation of unemployment affecting the youth is one of many serious challenges that necessitate urgent attention. Additionally, South Africa has problems that emanate from bad fiscal control and macro-economic instability. This resulted and continues to cause high public sector debt (see figure), deteriorating revenues collected by the fiscus and unaffordable demand for social upliftment programmes and services. This scenario also informed the 2018/19 Budget that was delivered by the then Finance Minister, Malusi Gigaba.

Budget 2018/19 to the Rescue The three major credit rating agencies all gave positive comments about the budget speech where economic growth came into focus in an effort to address fiscal imbalances. The Finance Minister expects growth for the 2017 fiscal year to improve from a previous estimate of 0.7% to 1%, and to 1.5% in 2018. The forecast growth is to increase to above

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SACCI Business Confidence Index – February 2018

2% by 2020. The Minister admitted that the economy needs urgent policy interventions to ensure that an opportune environment for investment, growth and employment is created. Despite the improved outlook for growth, the economy is still experiencing a revenue gap in the current year, which passes on to the medium-term. In addition, the additional higher education and training spending announced in December 2017, necessitated major reallocations over the medium term. The government made changes to the fiscal framework that includes new tax measures and a spending ceiling that was moderately revised downward from the MTBPS presented in October 2017. The 2018/19 Budget was more of an effort to manage a desperate situation than a resolve to turn the economy around. The Budget was trying to prevent the worse outcome that was structurally on the cards and awaiting a downgrade to below investment status by all the reputable rating agencies. Summary of the National Budget 2018/19 R billion Consolidated1 budget revenue Consolidated budget expenditure Consolidated budget balance

Budget Estimate 1490.7 1671.2 -180.5

Percentage of GDP

-3.6

Despite these desperately needed interventions, the following features emerged from the Budget that have special implications for business:   

    

Consolidation of spending amounting to R1.67 trillion implying a nominal increase of 6.9%, or 1.9% in real terms. Economic growth of 1.5% anticipated for 2018 - rising to 2.1% in 2020. Various tax proposals including: 1. An increase in the value-added tax rate from 14% to 15%, from 1 April 2018. 2. Less than inflation increase in personal income tax rebates and brackets and greater relief for those in the lower income tax brackets, 3. An increase in the ad-valorem excise duty rate on luxury goods from 7% to 9%, 4. A higher estate duty tax rate of 25% for estates greater than R30 million, 5. A 52 cents per litre increase in the levies on fuel, made up of 22 cents per litre for the general fuel levy and 30 cents per litre increase in the Road Accident Fund Levy, and 6. Increases in the alcohol and tobacco excise duties of between 6% and 10% The deficit before borrowing to decline from 4.3% of GDP in 2017/18 to 3.5% in 2020/21. The primary deficit (before interest payments) declines over the medium term and stabilise the gross government debt-to-GDP ratio at 56.2% of GDP in 2022/23. Carbon tax to be implemented from 1 January 2019. Six special economic zones will make qualifying companies subject to a lower corporate tax rate and enable them to claim an employment tax incentive for workers of all ages. The dividends tax rate remains unchanged at 20% while the maximum effective capital gains tax rate for individuals stays at 18%.

1

Flows between national, provincial, social security funds and public entities are netted out. Source: National Treasury

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SACCI Business Confidence Index – February 2018

 

Five percentage points increase of the offshore allocation limits for institutional investors. Government officials not paying suppliers on time to be charged with financial misconduct.

The 2018/19 Budget should be regarded as a holding operation, which could perhaps be compared to an economic situation similar to where reconstruction of the economy has to take place. The Budget was a first step towards prudent and consistent economic policy to re-establishing long-term investor confidence. The appointment of the latest cabinet on Monday 26 February 2018 was seen as part of a corrective approach, although there was scepticism whether maladministration has sufficiently been addressed.

Conclusion The lower inflation and a stronger rand exchange rate together with a Budget indicating government’s resolve to turn back from the fiscal cliff, could imply interest rate cuts that should be very topical in the coming weeks leading up to the SARB’s MPC meeting in March 2018. This could enhance the economic performance over the short-term. However, pivotal to a sustainable and inclusive economic growth performance over the longer-term is a substantial increase in fixed investment by local and foreign investors. . Greater economic policy consistency and predictability should add to the present improved business confidence level.

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SACCI Business Confidence Index – February 2018

General Economic Indicators Indicator

Consumer inflation headline urban (%) Consumer inflation urban - excl. food, bev. & fuel (%) Money supply M3 eop (% Δ Y-o-Y) Private sector credit eop (% Δ Y-o-Y) Real prime overdraft rate eop (%)* Prime overdraft rate eop (%) Liquidations number sa Bond yield 5-10y govt eop (%) R / US$ average R / Euro average

Indicator

Period

Direction

Latest

Jan-18 Jan-18 Jan-18 Jan-18 Jan-18 Feb-18 Jan-18 Feb-18 Feb-18 Feb-18

Date

4.4 4.0 5.8 5.4 6.0 10.25 113 7.40 11.81 14.58

Direction

Latest

Previous

4.7 4.1 6.4 6.4 5.9 10.25 153 7.82 12.20 14.88

Previous

2017

5.3 4.8 6.4 6.4 5.2 10.25 1868 7.88 13.31 15.04

2016

2012

5.6 4.9 5.2 10.4 3.4 8.50 2716 6.50 8.21 10.55

2011

Income & wealth tax / GDP (%) saar Total tax / GDP (%) saar Public sector borrowing requirement / GDP (%) Public sector expenditure / GDP (%) Budget Balance / GDP (%)

q3-17 q3-17 q3-17 q3-17 q3-17

14.6 27.3 6.7 41.3 -9.4

16.3 29.3 6.9 28.5 -3.2

15.1 28.2 3.8 28.4 -4.2

14.1 26.0 4.2 27.1 -4.0

Imports / GDE (%) Exports / GDP (%) Net foreign investment flows / GDP (%) Current account balance / GDP (%)

q3-17 q3-17 q3-17 q3-17

28.1 29.1 2.5 -3.7

29.1 30.0 3.3 -1.6

30.2 30.3 4.8 -3.3

29.9 30.4 3.4 -2.2

Gross domestic saving / GDP (%) saar Gross capital formation / GDP (%) saar Net fixed capital formation / GDP (%) GDP growth (% Δ Y-o-Y)

q3-17 q3-17 q3-17 q3-17

16.3 18.7 0.8

16.2 18.6 1.3

16.1 19.4 5.4 0.3

17.5 19.7 6.2 3.3

Δ=change; eop=end of period; Y-o-Y=year-on-year; q=quarter; sa = seasonally adjusted; saar=seasonal adjusted annual rate; GDP=Gross Domestic Product; GDE=Gross Domestic Expenditure. *Deflated by inflation excl.food, bev. & fuel.

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