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What is the state of SA's economic recovery right now?

by , 08 July 2021
What is the state of SA's economic recovery right now?
It's a year since 2020's hard lockdown ended.

We're back in level 4 today.

But life has changed a lot. We've adapted to the pandemic and its effects on our lives and businesses.

So, what's the state of the South African economy today, and how does it affect your investments?

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One of the most unexpected results of the pandemic – SA’s highest savings rate in 11 years
 
The first quarter of 2021 saw South Africa’s highest savings rate in 11 years.
 
The rate of national savings as a ratio of gross domestic product climbed to 18% from 14.2% in the three months through December, according to the South African Reserve Bank’s Quarterly Bulletin.
 
That’s the highest since 2010 and reflects caution among corporates in distributing dividends to shareholders and in the spending patterns of households amid uncertainty over the coronavirus pandemic, the central bank said.
 
For one – professionals working from home no longer have fuel and car maintenance expenses. They are also saving on restaurant bills more than likely, and the low interest rate means less interest on home loans. So, if you didn’t take a pay cut, and kept your job, you are likely ending the month with more money in your bank account.
 
Corporates on the other hand are paying off more debt – as they are trying to limit interest rate risk if there’s a turn in rates. They are doing this by curbing in spending, and cutting costs.
 
According to the SARB: “Though we are still ‘officially’ in a downward phase, it is quite possible that the cycle has turned already, given the extreme depth of the contraction in economic activity in the second quarter of 2020 and the subsequent recovery up to the first quarter of 2021”.
 
Another positive economic indicator just out
 
Data released last week shows that sales of 227 440 vehicles in the first six months of this year are 40.1% higher than the 162 346 units sold in the corresponding period in 2020. However, sales in the first half of this year are still 11.7% lower than the 257 610 units sold in the same six-month period in 2019.
 
Basically, the main reason car sales haven’t recovered to pre-pandemic levels fully yet is all down to car rental companies.
 
Car rental companies are some of the largest buyers of new cars in SA. And with the tourism sector being in ICU and travel restrictions still all-around car rental companies are in limbo.
 
The recovery in car sales is very encouraging. But we’ll probably only hit pre-pandemic levels late 2022, or early 2023.
 
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Commodities are saving our economy
 
The agriculture and mining sector are the star performers in our economy – as they are mainly selling into international markets.
 
If it weren’t for them, there’d be no economic recovery to speak of.
 
The Agbiz/IDC agribusiness confidence index reached a record high in the second quarter of 2021.
 
Favourable weather conditions and higher commodity prices have boosted farmers' incomes and sentiment. This is set to lift production and increase prospects of a bumper year, as yields rise and demand accelerates in one of the leading sectors of SA’s economy, which contributes about 3% to GDP and is responsible for close to 900,000 jobs.
 
Iron ore, coal, precious metals and base metals are also all at record levels in rand terms (or dollar terms, or even both).
 
And thanks to that companies like Kumba Iron Ore, Glencore and Royal Bafokeng Platinum are seeing record profits right now.
 
The mining industry’s output surged 18.1% in the first quarter compared to the previous three months, helping buoy growth more than forecast. The sector accounted for 9% of gross domestic product during the period.
 
Sales of PGMs, which are in demand as stricter emission rules boost their use in vehicle auto catalysts, raked in R190 billion ($13.3 billion) amid a rally in palladium and rhodium prices.
 
South Africa’s terms of trade – a measure of export prices relative to import costs – increased 12% over the past year and more than 20% since the end of 2018, as the global economic recovery from the pandemic pushed up demand for commodities, according to HSBC Bank Plc economist David Faulkner.
 
We should have these favourable commodity prices at least until end 2021, and some commodities will remain strong in 2022 as well. Which gives the SA economy a breather till tourism can pick up again between 2022 and 2023…
  
Even economic reform is showing early positive signs
 
When it comes to economic reform, I’m never eager to be overly optimistic.
 
But at last President Ramaphosa seems to be doing the right things.
 
Semi-privatisation of SAA is on the cards. The National Ports authority has been created to look after our ports which have been ailing under Transnet control.
 
We’re hearing the split of Eskom’s main three businesses should start by end of 2021 – which will help the company fix its debt problem and hopefully make controlling expenses and irregular expenditure a bit easier.
 
While Eskom’s new CEO, Andre de Ruyter has done some questionable things, such as the coal agreement for Duvha, overall, it at least seems like he is intent on stamping out corruption and irregular expenditure. Eskom’s debt level fell by R83 billion for the year, after reaching a high of R484 billion in 2020.
 
Eskom, which I have said before is the single greatest threat to SA’s economy, is also embarking on a cost cutting exercise and says it will be able to cut R13.5 billion in costs in 2021. This together with debt reduction will bring the company back to financial viability.
 
But the problem of NOT ENOUGH ELECTRICITY still remains. And we need more independent power producers to fix this. And that brings me to another reform by Ramaphosa – companies can now build up to 100MW power projects with less stringent licensing requirements. This is a positive for many mining and even forestry companies who stand to produce power for themselves – and for the grid.
 
In the end – our economy is recovering. By end 2022 we should be back at pre-pandemic levels.
 
But recovery isn’t growth. Companies on the JSE seeing the greatest growth are the ones with offshore businesses or income. And at least for now that trend is set to continue. You can find details on my top five here.
    
Here’s to unleashing real value
 
Francois Joubert
Editor, Red Hot Penny Shares


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