Nazmeera Moola discusses the announcement this week that South Africa’s first-quarter GDP fell by 2.2%.
Lindsay Williams: South Africa’s gross domestic product figure for Q1 2018 was released late this morning and it wasn’t a particularly pretty picture. Unfortunately, SA’s economy, as measured by GDP, shrank the most in nine years in the first quarter. Compared to Q4 2017, GDP contracted minus 2.2% and it grew 0.8% on an annualised basis between Q1 2017 and Q1 2018.
Now – on the line now rather to describe the shock figure is Nazmeera Moola, Co-Head of Fixed Income at Investec Asset Management in Cape Town. Was it a shock to you, as it seems to have been to everyone else, Nazmeera?
Nazmeera Moola: Good evening, Lindsay. I think we were all expecting a bad number but this was even worse than we expected and I think the breadth of the weakness in the economy is also a bit of a shock.
Lindsay Williams: Yes, it really is. Let’s have a look at some of the grim numbers: mining down nearly 10%; manufacturing down 6.4%; and construction down 1.9%, but the cyclicality and the plunge in agriculture, nearly 25% weaker, was a complete shock.
Nazmeera Moola: It wasn’t a complete shock. I think the magnitude was the shock but, remember, we had a massive harvest last year. We had the best harvest for maize, that we had ever seen, in 2017. So, to some extent, this is just the normalisation of that. Add in the fact that a lot of the planting was late this year because the rains came later in our grain-producing areas and I think that’s a lot of what is behind the number and, with hindsight, it shouldn’t have been as big a surprise because we had that magnitude of a growth last year.
Lindsay Williams: Yes.
Nazmeera Moola: But I think even I had expected a contraction of 12-14% quarter-on-quarter annualised in agriculture, not 24%.
Lindsay Williams: No, indeed. If you have a look at Q4 2017’s GDP number, we expected therefore, as you explained earlier, for us to have a negative number in Q1 of this year but not of the magnitude. What does that imply then for the next quarter because we have to look ahead now and try and put this behind us?
Nazmeera Moola: Well, I think statistically it gives you a lower base for Q2, which means you should get some reasonable pick-up into Q2. I think the question is what’s going to happen in your key areas, notably mining volumes, which contracted quite substantially in Q1 of this year and it is not entirely clear why that is the case.
So that is the first area we are watching but the second area is whether we start to see some proper pick-up in domestic demand. Fixed investment remains weak. After some signs of returning positive through the back-end of last year, we have now had a very weak print in Q1 and the uncertainty that we see around land, around the Mining Charter isn’t going to help that. Despite the fact we have a lot of improved confidence, a much better working relationship between government and business, we do need to see certainty on some very key issues in order to see fixed investment coming through.
Lindsay Williams: Yes. This must be a total shock as well for Mr Ramaphosa and the brief moment of ‘Ramaphoria’ that we had after his election and all the good things that he said. We never expected it to be translated into a positive GDP number in Q1 but this is a real setback. Do you think that, even though it’s only a 3-month figure, there will be some people sitting down and saying: okay, we need to do more now and we need to change a couple of our policies that we have been mooting?
Nazmeera Moola: Well, just expedite the resolution of them. I think what started to worry me a little bit in the last couple of weeks is that, while we came into this new presidency after President Zuma resigned finally at 11 p.m. on Valentine’s Day, President Ramaphosa hit the ground running, we have started to see less urgency in the last couple of weeks. The public sector wage negotiations are stuck in limbo. The promise to consolidate the budget by constraining expenditure seems to have slipped a little bit. The need to get the Mining Charter finalised, to make progress on that – I think if this growth number just provides a bit of a shock into the system and reminds everybody that retaining investment grade from Moody’s was not the end game; getting growth going is the end game, it actually will serve a positive purpose.
Lindsay Williams: Indeed. The rest of the world is doing very well. We saw that with the jobs numbers from the United States of America and again people will be saying: look, we have been invited to the party but we just haven’t turned up. Now I don’t know if we are going to be able to turn up in the future because of the effects of the tax increases which are going to filter through in the next few months, if not even sooner. We have got electricity prices I think mooted to go up or predicted to go up rather and we know for a fact that petrol prices are going to consistently hit record highs in the next couple of months, which is a real break on the economy. So we have got some headwinds apart from what we have just seen, which is, of course, retrospective.
Nazmeera Moola: Well, I think perhaps we were all a bit too optimistic on the speed of the translation from the positive sentiments into spending and, yes, all the headwinds that you list are real. You have still seen savings rates in the consumer pick up substantially over the course of the last year. The banks that we are speaking to say they have not seen any sign of a pick-up in borrowing and we need to start seeing that come through in order to see growth accelerating. So as long as we get some pick-up in the reform momentum coming through again, I think there is room for growth to pick up in the second half of this year but, for that to happen, we need certainty on some key issues, notably the Mining Charter and land, but also just consumers to start feeling better.
Lindsay Williams: Yes, it would be nice to feel better but you must feel a little bit depressed if you sit down and have a look at these numbers and look at the factors that we have just been speaking about. What about the markets – did they get depressed on the release of this figure?
Nazmeera Moola: Well, the rand certainly didn’t like it so you saw the currency going from sort of 12.40/12.50 earlier on today to around 12.70 currently but it has been around these levels for most of May, so it’s not a break-out number. It is just it did react to this number with some weakness.
Lindsay Williams: And the capital markets, the bond markets, the government bonds?
Nazmeera Moola: The bond markets as well not particularly happy with the number, which you can understand. So remember, from the bond market perspective, they will be looking at this, saying: what does this mean in terms of government revenues going forward and does this raise a risk to the government’s ability to repay its debt and it does at the margin. It doesn’t help.
What I would say though is that, while last year’s growth, the number looked okay at 1.3%, the fact that agriculture accounted for half of growth meant that it wasn’t particularly favourable for government revenues. Whereas this year, even if growth doesn’t reach the 2, 2.5% number that was suddenly being mooted by a few in the last couple of months, even if it’s only somewhere more like 1.7 or 1.8%, which is the number that we had since early January, the composition of growth will be much more favourable for government revenues this time around.
Lindsay Williams: Speaking of growth, you must be having to sit down now and overnight and sit down with your team and say: right, we have got to revise our growth projections for 2018. Have you already pencilled in a number?
Nazmeera Moola: I still think the number that we have had for a while is possible, Lindsay. So we didn’t push up the number dramatically as the optimism of March built. We kept the 1.7, 1.8 and I think that still seems like a plausible number. I think you will get a nice pick-up in Q2. I think and I am hopeful about the second half of the year.
The government is still talking about introducing that certainty that I was talking about in some key areas so I think you will see fixed investment translating. For example, when we talk to companies that supply some of the big miners or other areas of the economy, they note that there is a desire to invest by those companies provided they achieve certainty on the regulatory environment.
Lindsay Williams: So, Nazmeera, this was a huge setback and it was a shock. Some of the commentators that have sent me their initial reports say: no, don’t worry about it because it was a seasonal factor and you have got to take into account this and that and everything will be fine in the second and third and fourth quarters of this year. The message then is I suppose don’t panic too much, no knee-jerk reactions, although we have seen that with the banking shares on the JSE and the bond market and the rand, but you are not going to sit down again – apart from having a look at the growth predictions for 2018, you are also not going to change your portfolio construction immediately because of what you have just seen?
Nazmeera Moola: No, I am not going to change the number immediately. I mean there are some areas we want to take a look at. Most notable for me was the sharp contraction in public sector, so government and parastatal, fixed investments in Q1, which was down over 9% quarter-on-quarter annualised. I just need to look at that and figure out whether that continues, given the strain we are seeing amongst public sector enterprises. Beyond that, it is largely in line with our expectations.
Lindsay Williams: Nazmeera, thank you very much for your time this evening. That was Nazmeera Moola, Co-Head of Fixed Income at Investec Asset Management, commenting on the Q1 GDP data from the South African economy.