A sluggish economy along with corruption, mismanagement and price fixing means South Africa’s construction industry is struggling
The first thing you notice after stepping off the plane in South Africa is the big sky - it is truly a wonder to be behold.
Quickly, thereafter you also find that your British Pound goes a long way. In fact the South African Rand has weakened 25% against Sterling in the past 12 months (to £1 = ZAR 17.5) and by more than 70% since the end of 2010.
This means you can buy a pint for around £2 and an apartment in Cape Town for 10% of the cost of one in central London.
A Football World Cup hangover is partly to blame (the Rainbow Nation hosted FIFA’s 19th tournament in June and July 2010). In addition, international investors have fallen out of love with a number of emerging markets generally; for example the BRICs - Brazil, , Russia, India and China - plus the likes of Argentina and Turkey.
Economic growth in South Africa is also poor. Last year GDP rose by just 1.9% and, in 2014, the South African Reserve Bank (SARB) is forecasting 2.6% (down from a previous estimate of 2.8%).
However, Oxford Economics is on 2.2% (also down from 2.8%) and speaks of “a potent cocktail of high unemployment, stubborn inflation, fractious labour market relations, slowing credit extension and miserable consumer confidence”.
For the record, Consumer Price Inflation (CPI) was 5.9% in February and unemployment was at 24.1%. Note, too, that the unemployment rate in South Africa averaged 25.3% from 2000 until 2013; and the consensus view is that GDP growth needs to be 5% just to make a dent in the jobless tally.
To make matters worse, SARB increased interest rates by 50 basis points to 5.5% in January (the first move in five years) in an attempt to protect the Rand’s value and with a weather eye on the inflation rate (it wants the rate to stay below 6.0%).
No surprise, then that the building industry has not enjoyed a banner period either. As Business Monitor International (BMI) notes: “Following the 2010 World Cup, government finances were pushed to the limit in order to complete projects on time. Hence, a drawback in funding and subsequent activity was noticed almost immediately after the tournament.”
Real growth decelerated from 7.8% year-on-year in 2009 to 0.9% in 2010. It finally bottomed in 2012 and “timidly returned to growth” in 2013 (+2.2%). Going forward, BMI talks of “a cautiously positive growth story” with annual real growth averaging 3.8% between 2014 and 2018.
But, the “downside risks remaining prevalent - namely difficulty in raising capital for projects, currency fluctuations, social unrest and poor policy making”.
A key element here, too, is 2012’s National Infrastructure Plan (NIP) which has earmarked Rand 827 billion (around £47 billion at today’s exchange rate) for infrastructure development through 2017.
Of this around half should come direct from the government - with the balance from State-owned enterprises such as Eskom and Transnet. Work is set to include new power stations and transmission lines plus rail, port, water-transport and airport upgrades.
But as Timetric observes: “While the large number of projects announced provides hope for the construction industry, corruption, mismanagement and price fixing threaten to undermine the proper implementation of these developments”.
Tony Williams is founder and chief executive of Building Value