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As the global economy potentially rolls toward the back end of what many have labelled “the greatest recession of modern times”, we reflect on the lessons we have learntThe markets have changed, conglomerates were brought to their knees, and pensions and savings have been wiped out in the blink of an eye. Global markets were rocked to the core on the back of irresponsible lending, and an overall lack of financial security and compliance that has exposed the intricate connection which financial markets play in a world ever increasingly based on globalisation.
With somewhat more stringent credit acts, many have felt that South Africa was better placed than others to cushion the blow of an economic recession; however, it too has clearly felt the effects as an ever increasing number of citizens joined the unemployment queue.
While the rest of the world shouted “recession” from the rooftops, the reality is that South Africa only officially entered a period of recession in the first quarter of 2009. To put it into context: the actual level of decline can easily be compared through economic indicators having recorded that South Africa’s economy contracted at a rate of 6.4% in the first quarter of 2009, in comparison to the same period in 2008.
Statistics South Africa was given the task of calculating the latest figures and has also stated that the slowdown in manufacturing and the mining sector had been the primary factor responsible for this economic contraction, with mining firms having been hit by a falling overall demand in commodities.
Output within the mining sector shrank by a massive 33% within the final quarter of 2008, recording its largest ever decrease on record.
The manufacturing sector (which, together with retail, accounts for about one-third of South Africa’s gross domestic product output) declined by 22%, further maintaining this trend.
Financial experts have indicated that although the Treasury had relaxed exchange control more than two dozen times since 1994, remnants of earlier controls might indeed have cushioned the South African financial sector from the worst of the initial toxic debt-driven crisis.
With that said, however, there was never any prospect of South Africa’s real economy dodging the effects of the subsequent global recession.
The government’s response to the financial crisis was dependent heavily on measures agreed to before it even began. There are four main elements that it believed would be the correct course of action in steering the country through these trying times:
• Negotiating a framework for a unified response by business, government and trade unions, with an emphasis on avoiding, where possible, retrenchments;
• Interest rate cuts;
• Proceeding with a three-year infrastructure investment programme; and
• Proceeding with an Expanded Public Works Programme.
December 2008 saw a framework agreed upon by the South African government that was aimed at preventing job losses, creating two million new jobs as well as providing emergency food and other relief to households in distress.
Interestingly, however, this ‘framework’ adopted a somewhat docile tone towards the private sector, which it asked “to maintain and improve wherever possible their levels of fixed direct investment”.
The recession has also brought numerous issues to the fore regarding the private sector.
Overall, private investment comprises about 70% of total national investment and without a major upturn in demand – as evident through periods of this slump – corporations active in South Africa are unlikely to increase levels of investment. The government’s core response to this crisis will be its three-year R787-billion (US$98-billion) public infrastructure expansion programme, which focuses on upgrading and expanding transport, boosting electricity production, repairing a public health system crippled by the effects of a rapidly rising HIV/Aids population, as well as the expansion of water and sanitation projects.
A point highlighted during the decline has been the social effect on the black middle class. Many experts feel that with this group having been left reeling in the aftermath of the downturn, this vulnerability could have serious implications on whether the country’s transformation policies get an extended lease of life.
Professor Carel van Aardt, analyst at the Bureau for Market Research (BMR) was quoted in a September issue of Business Day as saying that of the 475 000 job losses so far, most of these affected black South Africans earning between R100 000 and R300 000 a year.
The reason for this, he went on to explain, was that the reversal of the economic gains made by this segment of the middle class are likely to be more devastating because most have not yet had a long tenure in the middle class – which means they have not yet built up savings and other assets that would cushion them during these harsh economic times.
As reported by Business Day in September, “The emerging black middle class, coupled with an unstable economic landscape, are not the culprits; South Africans in general save very little of their income”.
Many experts also believe that in order to pull them back up again and help them consolidate their position, would require much more than keeping affirmative action and BEE on the legislative books, and that the emerging middle class should use the opportunity and lessons learnt from the recession to build assets, both from a social as well as financial standpoint.
However, in these dark and economically trying periods, people have learnt to adapt in order to see themselves through a crisis. Businesses, and individuals alike, have had to learn to adjust goals and financial strategies in order to achieve maximum profitability.
In September 2009, Finance Minister Pravin Gordhan stated that South Africa would continue with its stimulus package and emerge even stronger financially from this recession.
Speaking after just having attended the G20 Summit in London, he stated that while there was indeed hope and that “green shoots” within the global economy were real, the time to pull back on areas relating to stimulus packages was not yet upon us. The scale of this crisis from a South African standpoint is clear to all.
An already staggeringly high unemployment rate has seen a dramatic shift toward more negative decline, with businesses crumbling at a rapid rate, cancelling out the positive effects spurred on by decades of careless and non-compliant financial lending.
While South Africa’s strict credit acts have seen experts state that South Africa was better prepared for the crisis, one thing that has not been taken into account is the poverty and unemployment evident before the crisis
even began.
Gordhan stressed that banks globally would not be allowed to return to the risky manner of doing business that has helped precipitate the global downturn, however, he also suggested that South African banks should be allowed to reassess and perhaps loosen their strict lending criteria, at least in the short turn, to ‘jump-start’ the economy and save jobs.
The South African public has, without doubt, taken positive aspects out of the crisis.
Overall, there has been a 5% drop in interest rates since December 2008 – with the Reserve Bank’s repo rate now at 7% – aiding in boosting households from a day-to-day financial standpoint. The public has also had to take a step back and assess what constitutes spending from necessity, and dissect what is considered unnecessary spending.
In a global economy built on credit, a crisis such as this was essential in order to underline the direction that the economic sector as a whole was headed, down a path underlined by unregulated credit facilities, lending at levels destined for economic gloom.
However, positive aspects from a South African economic perspective have included:
• Market valuations are once again looking attractive. Share valuations in general are viewed to be at either normal historical levels, or at least very attractive levels. For those looking to invest in shares, while at the same time stimulating growth, now is the time.
• Banks are having to return to ‘old school’ values. Historically, banks stood for prudence, risk management, control and transparency. These very institutions are once again returning to the principles which will, at the end of the day, leave the banking system stronger and better placed to avoid a repeat of
this crisis.
• Spending and saving finally has had to undergo an in-depth analysis. Over the last couple of decades, many countries, including South Africa, have experienced a notable increase in indebtedness, coupled with a dramatic drop in saving rates. This has been brought about by a ‘I want it now’ era, coupled with a perceived view that increases in house and share prices would offset the failure to save.
• A drop in interest rates has provided much needed relief for both the South African business sector as well as the individual. Obviously, good news for those with mortgages, but not so good for investors.
There are numerous arguments as to whether the world is finally emerging from one of the worst economic crises in modern times. Prices and interest rates for the moment seem to have bottomed out, with shares finally bearing witness to volumes of trade not seen over the past 18 months.
The forex market has been a notable victim to the downturn, with transaction volumes down by close to 27% year-on-year.
It is clear that while South Africa has reacted quite well to the onslaught, it is still a long way off the mark with regard to potential growth.
Producer price inflation (PPI) results for September reflected the severity of the South African recession. The PPI, released by Statistics SA in late October, dropped 3.7% in September compared to the same month a year ago, while producer inflation fell 3.2% on a month-to-month basis.
With September marking the fifth consecutive monthly decline in PPI, it is clear that much still needs to be done in order to ensure an attractive economic and investor sphere. Some pundits have predicted that the bottom has in fact been reached, however, there was not likely to be any significant material increase in activity this quarter, with industry experts predicting a modest increase for 2010 fiscal year at best.
However, one thing this recession has taught South African businesses and individuals is to adapt to a unique and severe economic climate – which will hopefully bode well for these very same businesses and markets leading into a period of recovery – whenever that may be.
Adam Currie
