Economists say the recent spate of liquidations are a sign that an 18-month recession is over. Donna Block and Mungo Soggot report
The gold price has slumped below $300 again, there is a spate of liquidations and world markets are jittery – but economists remain bullish about South Africa’s growth prospects next year.
The liquidations, they say, are simply a sign that the country is at the end of an 18-month recession with damagingly high interest rates. But they also warn that the high rate of liquidations will continue for several months.
The economy went into recession last year when major institutional investors fled emerging markets worldwide after their investments in Asian markets were wiped out in a crash.
The currencies of these emerging markets – including South Africa – were hit as investors sold frantically, prompting central banks in those countries to raise interest rates to lure money back in. South Africa’s prime rate skyrocketed to a high of 25,5%, squeezing consumers and businesses.
In the second half of this year, as emerging markets started to recover and investors started looking again for high growth, South Africa again became one of the markets of choice. Interest rates started falling, the rand stabilised at around R6 to the dollar, and consumer and business confidence picked up.
But in the past two weeks, two major companies – medical supplier Macmed and hotelier Karos – have filed for provisional liquidation, while one of the banks that had a large exposure to Macmed, FBC Fidelity Bank, was put into curatorship this week.
Tony Twine, a director of Econometrix, says high interest rates normally take about 18 months to result in liquidations.
“It would be unusual if this were not happening. Growth in liquidations has accompanied every other upswing in the early days,” Twine said, adding that he expected liquidations to bottom out only by the first half of next year.
There are fears that the provisional liquidations of Macmed and Karos could be the beginning of a spate of similar corporate collapses.
Luke Doig, an economist who specialises in liquidations at Credit Guarantee, is not positive about liquidations tapering off. “I am concerned that they [insolvencies, liquidations and civil debt] could remain at these levels.”
As for the gold price, most economists say they have not been basing their growth forecasts on a bullion price above $300 per ounce – which means they are unfazed by this week’s price movements.
Gold’s fortunes have historically had a disproportionately large affect on sentiment in South Africa considering its declining importance in the economy. It would have had to go as high as $400 to bring about an increase in actual gold production.
Twine says the gold price had not gone high enough for a sufficiently long period of time for overconfidence among consumers to develop.
He says that the drop in the gold price could in fact make recovery more sustainable by dampening “exuberant expectations. If the gold price had zoomed ahead it would have led to over- ambitious expectations. As a result we have retained a band of sanity among consumers and businesses – less exciting, but more sustainable.”
Nico Czypionka, the chief economist at Societ General Frankel Pollak, said that the economic recovery was not being thrown off track, “but obviously it would have benefited from a higher gold price”.
One aspect of the economy that is directly affected by the price of gold is the value of South Africa’s exports, of which gold accounts for about 16%.
In the wake of restored confidence in emerging markets, the Johannesburg Stock Exchange (JSE) has risen 30% since the beginning of the year. But the major markets in the United Staes and in Europe, which have a direct impact on sentiment at the JSE, are growing jittery after indications that interest rates in those countries are starting to rise.
There is also fear that a major crash on Wall Street and the effect on sentiment of the Y2K bug could torpedo the JSE’s recovery in the short term.
But assuming there are no major external shocks and the South African economy maintains its growth patterns, the JSE could rise 30% to 40% next year.
Economists think there could be scope for a percentage point decline in interest rates by next year, possibly a half-percentage point cut by the end of the year.
Meanwhile, there are a number of indicators that show that the economy is warming up. Property prices are finally starting to increase after two years in the doldrums, and retailers are looking forward to a bumper Christmas.