Warning! This is simply a forecast based on an analysis of the evidence at hand not a prophecy. If I could see into the future I would have bought shares in Naspers in 2003.
We’ve all had enough time to break our New Year’s resolutions and the summer vacation is fast becoming a distant memory. That means it is time to take a look at the year ahead and ask “What will 2017 have in store for us?”
Last year was pretty rough (as were 2015 and 2014) and most South Africans probably feel that they’re going backwards, financially speaking. The data backs this sentiment: thanks to inflation outpacing wage increases, unemployment surging and Rand weakness most of us are worse off, in real terms, than we were a few years ago.
And this year? Well, it probably won’t be worse than last year and there are some indications that various sectors of the economy will see improvements. That being said most of us might not notice anything different (let alone an improvement) until much later in the year. This means that you should still keep those belts tight and be disciplined in your spending wherever possible.
Here are some of the key factors that will have the greatest impact on the economy, the interest rates and property in South Africa in 2017.
Global Uncertainty: A case of Good Trump/Bad Trump
The world is an unpredictable place and, at least in 2017, that unpredictability will be supercharged by the policies of Donald Trump, the new US President (in case you’re reading this as you come out of coma and didn’t know).
Even as the first days of his presidency blur past us in a whirlwind of appointments, firings and executive orders it isn’t at all clear what the outcome of any of these actions will be. As yet there isn’t a discernible pattern and we are all simply left asking: What will he do next? And we’ll probably be doing that for most of 2017.
Without getting political I will say that Trump’s apparent unwillingness, or perhaps inability, to soothe fears and provide clarification until the very last second will stoke higher levels of anxiety in the markets (and societies) of the world. The danger in this is that with high anxiety comes irrationality and this can turn a downturn or economic setback into a damaging market panic like the one we saw in China in 2015.
We also still require clarity on what exactly his foreign policy will look like. If he puts his rhetoric into action on the global arena the trend toward greater economic integration, developed since the fall of the Berlin Wall, will be halted, if not reversed. And it is a “we” as traders, CEOs and economists are increasingly joined by private individual investors who, collectively, are exerting increasing power on the market but unlike professionals are prone to panic (and those professionals are scarcely immune either).
So, the global economy is likely in for a bumpy ride, it is true, but it is important to note that market forces have a history of ignoring what even powerful nations like the US, let alone individual world leaders, want them to do. We have seen hints of a true recovery in recent months and Trumps policies would likely slow but not reverse this.
Local Uncertainty: Succession hustle and a cabinet shuffle
In 2017 the ANC turned 105 and will elect, at its 54th national convention in December, its 13th party president. As the ANC has governed the country since the end of Apartheid this person will likely go on to be the President of the Republic of South Africa in 2019.
Despite the apparent continuity and stability in the paragraph above the electoral process is likely to be a turbulent one as the growing factionalism in the ruling party comes to a head. I won’t pretend to know what is happening behind closed doors but the December convention is critical to the future of the ANC. A successful candidate could heal divisions and rejuvenate the party or polarize it further thus continuing the steady decline of the once proud organization. A truly controversial candidate might see more factions break away from the ANC (as we happen with the formation of COPE and the EFF) the most likely candidate in this scenario being a worker/communist faction.
What I believe is certain to happen, however, is President Zuma’s continued concerted efforts to ensure that he sees out his term, avoids criminal prosecution and secures his family’s fortune and influence. It is highly likely that the battle with Pravin Gordhan will continue and there will be redoubled efforts to discredit him. Zuma’s legal wrangling to avoid corruption charges has seen his attorneys take his case to the Supreme Court and a loss here will be a significant blow to his exit plans making him vulnerable and desperate.
In response to these pressures and vulnerability Zuma has (forgive me) a trump card: a cabinet reshuffle. While it is unlikely the country, investors and rating agencies would tolerate Gordhan and Ramaphosa getting the chop as it stand now, the likes of Minister of Tourism Hannekom, Health Minister Motsoaledi and Science and Technology Minister Pandor are definitely on the block after casting votes in favour of recalling President Zuma during an ANC NEC meeting last year.
Drought dissipation (at least in the North):
Summer rains in the North and East of the country have already dramatically improved projections for the grain harvest this year. This will help to decrease input costs on food products. Everything that relies on grain (or similar plants) from bread to chickens will see inflation decrease significantly BUT we will likely only notice this in the second half of the year. Producers and retailers are often quick to pass cost increases onto consumers but they are far more reluctant to pass on savings when costs decrease.
In the parts of the country (Northern Cape and Western Cape) that rely on winter rain the drought continues to bite. As these provinces limp toward the relief promised by winter fresh produce and livestock production will suffer. Inflation in these categories will therefore likely remain high for the rest of the year and well into 2018 even if rainfalls are significantly better than projected.
The continued drought in the Western Cape will not cancel out the benefits of the relief in the rest of the country as grain is by far the most important crop category. So again: we will see inflation relief but not to the degree we really need and we won’t notice anything until the second half of 2017.
Economy growth in SA:
The economy of South Africa is projected to grow at 1.2% this year. Nowhere near what is necessary to reduce poverty and unemployment and it is important to note that in the last three years the economy has actually under performed projections made by the SARB and IMF at the beginning of the year. If it does come in anything close to the projection it is a significant improvement over 2016’s figure.
Contributing factors to growth will be the rise in commodity prices, avoiding major labour disputes, continued power security, a lack of political upsets and a less volatile Rand.
After significant losses in the wake of Nenegate at the end of 2015 the Rand recovered and stabilized at levels it achieved before the crisis/scandal. The Rand however has tested the level of R13.20/USD multiple times and has not been able to break through this ‘barrier’. This suggests that without further, unexpected (and unlikely) improvements in the economy and in local politics this year the Rand’s recovery is unlikely go much further.
This relative stability, if it continues, will be a boon for consumers as import cost pricing comes in relatively cheaper but it will likely also facilitate continued capital outflows. The underlying problems negatively impacting the investment case for the country have not been solved and investors are therefore likely to take advantage of the relative Rand strength to continue move funds offshore and much better rates than this time last year.
A tumultuous political situation because of the ANC succession battles or cabinet reshuffles could see the Rand easily slip back to (or even beyond) the worst levels of 2016 (R16/USD).
Since I started writing for this blog the Reserve Bank has been in a tremendously tricky position and this will continue in 2017 though they will find that they have slightly more breathing room than in previous years.
Inflation will remain close to (if not above) the upper end of the 3% to 6% band it has set as its target. This inflationary pressure will continue to come in spite of low growth. Manipulating the repo-rate will therefore remain a difficult decision as South Africans face high costs of living while relying heavily on credit.
But there is that breathing room offered by slightly lower inflation (thanks to an end to drought and a stronger Rand). Which will see the reserve bank maintain rates at current levels which would keep prime lending at 10.5% during most, if not all of 2017. If by the end of the third quarter we see inflation having a sustained dipped below 6% the SARB will likely be a position to reduce the rate in November this year.
Impact of Property Sector in South Africa: What does this all mean?
Uncertainty and home loans and property in SA:
Uncertainty results increased difficulty in creating reliable projections which in turn negatively impacts a bank’s efforts at risk mitigation. This in turn forces the bank to price for risk.
Last year we had the very real threat of a sovereign downgrade which would have been, by all accounts, disastrous for the economy. The bank’s interest rate concessions and appetite for home loans was impacted by this. While that risk seems to have dissipated somewhat the underlying flaws in our government and economy remain and a messy succession or political gambit could reignite downgrade fears.
To a lesser degree Trump’s disruptive effect on forecasting will also impact risk pricing until it becomes clear the extent to which his policies will impact our financial institutions.
What this all means is that interest rate concessions (the discount or premium on the prime lending rate) from the banks will likely remain subdued. In addition I believe that the banks appetite for lending in 2017 will follow trends set in 2016: clients with impeccable credit scores, established and good relationships with the banks and a sizeable (10% to 30%) deposit will receive preference over more risky clients.
SA property trends:
By the end of 2016 property price inflation in South Africa started to flatten out and by the end of the year had stagnated in real terms (that is prices were not beating inflation) in much of the country. The major metros bucked this trend however with the City of Cape Town maintaining a healthy property price inflation.
Price stagnation outside of the big metros is likely to continue in 2017 but there will again be a different story in the bigger urban centres. Even with a greater number of new developments coming onto the market this year the demand still exceeds supply, particularly in Cape Town. There may also be an uptick in demand in Tshwane, PE and Johannesburg if the DA can implement their campaign promises.
Additionally the trend toward densification and the construction of mixed use (residential, commercial and retail) buildings will continue in and around the Cape Town City Bowl and depending on the reputation and skills of the builder and the managing agents these developments may provide enormous growth in the medium term.
Demand in certain areas will remain high. Urban centres will see good rental returns throughout the year.
Prices in urban areas will continue to track higher, although at a slower rate, do not expect to make your fortune from flipping properties this year.
The news that property prices are stagnating still has to reach the ears of many sellers who are expecting unrealistic returns in less popular areas.
That being said, demand in popular suburbs (like those with access to desirable schools, transport etc.) will remain high and competition among buyers will be fierce.
Banks will likely continue to price higher for risk and uncertainty but competition for ‘good’ clients will be stiff. Good clients are high earners (or potential high earners) with good credit histories and sizable deposits.
Densification projects might provide fertile ground for those looking to purchase rental stock. But do your homework on the developer and managing agency (check into their previous projects)!
Competition for property will remain heavy. If you’re going to buy you will need to be prepared. Get pre-qualified and make sure your documents are in order to avoid disappointment.
Pay down or pay off your debts and start living more frugally. The bad times are not quite over yet.
When making your calculations and looking at purchasing property plan for interest rates above 10% (this includes rate concessions aka discounts).
If you’re buying for investment buy in secure complexes or apartment blocks near CBDs and other established business hubs.