You can also listen to this podcast on iono.fm here.

JIMMY MOYAHA: Earlier today Rand Merchant Bank released their Business Confidence Index. They put this out quite often and it’s very insightful to see what it is that businesses are reporting on. We’ve got a similar report coming out from the South African Chamber of Commerce [and Industry] tomorrow, but for today I’m joined by the chief economist at Rand Merchant Bank, Isaah Mhlanga.

Good evening, Isaah. As always, thanks so much for your time. Where do we stand at the moment? Are businesses feeling confident?

ISAAH MHLANGA: Thanks for having me. I think if you look at business confidence, there was a marginal improvement in the third quarter. The survey was done among about 1 050 business executives across the five sub-sectors between August 16 and August 31.

Within that period, there have been some developments that we saw, and over the period preceding that we saw the strike in Cape Town and the burning of trucks that would have impacted the outcomes. Nonetheless, we saw an improvement [in the Business Confidence Index] to 33 points from 27 points previously.

Read: SA business confidence edges up after GDP surprise

What it means is just about 70% – or we could say two-thirds of business executives – remain dissatisfied with prevailing business conditions. So still very low levels of confidence, even though we have seen some improvements this quarter relative to the previous quarter

JIMMY MOYAHA: Isaah, what were some of the main reasons why 70% of the executives didn’t feel that we were where we should be? Did load shedding have anything to do with this and, if so, where do we now sit given that load shedding was relaxed and we saw slight improvements – and now we’re back at Stage 6 [load shedding]. Is this going to affect us going forward in further business confidence readings, because executives are seeing no light at the end of the tunnel? Sorry for the bad pun.

ISAAH MHLANGA: I think if we look at the sub-sectors, building contractors comprise the only sub-sector that saw a marginal decline from 43 points to 41, which means just about 60% of business executives are dissatisfied with business conditions currently. If we look at the other four sub-sectors which saw some improvement, the biggest improvement was in the retail sector, where we saw a 12-point increase from 20 to 32. But again, still two-thirds of executives are dissatisfied.

But if we just go a little bit deeper in the retail sector, what we see is the players in the non-durable sector saw an improvement, and we also saw players in the semi-durable sector seeing an improvement.

But the durable sector, which accounts for 21% of the total sector, saw a decline. The durable sector is really the big-ticket items, which normally tend to be financed by credit. The increase in interest rates will have weighed down there, particularly on furniture and hardware.

Outside of that, if you look at wholesalers, that also improved by six points. New vehicle dealers, which is also a very high interest-sensitive sector, saw an improvement of seven points. One would have expected this sector to underperform or to see its confidence moderate, given the high interest rates.

But I think the inflation that we saw falling to 4.7% might have provided some confidence, in the sense that the cost of financing going forward is not going to continue to increase. So it might have boosted confidence somewhat.

Read:
Too soon to celebrate the drop in inflation
Kganyago says job ‘not yet done’ on inflation
Sarb to kick off easing cycle early next year: economists

And then the manufacturing sector is quite dependent on electricity production. To your point, the less severe load shedding than what had initially been promised – we didn’t see Stage 8 load shedding, which would’ve contributed negatively – might have boosted confidence to 23 from 17. It’s quite important to note that this sector remained the lowest-performing sector across all the sub-sectors.

So the squeeze is still on, even though we have seen some building of resilience. And the GDP numbers that we saw yesterday also offend this performance. Manufacturing contributed positively, even though if we look over confidence remains quite low.

Read: GDP: Second-quarter growth beats forecasts

JIMMY MOYAHA: Isaah, I like that you brought up the inflationary picture, because I always get your inflationary expectations. The last time you and I spoke I think we were still north of 6%. We were at that 6.3% reading in May. We then did the 5.3%, and now 4.7%. Are we anticipating that this is under control, because the central bank governor certainly said it’s not?

And if we are to then assume that this will continue to moderate towards the end of the year, is there a realistic hope, again, of interest rates remaining at these levels or interest rates coming down? We still have that rand picture to contend with that could rear its ugly head in terms of keeping interest rates at these elevated levels with a weaker rand.

ISAAH MHLANGA: As far as inflation is concerned, we think that inflation is going to remain broadly contained within the Reserve Bank’s target. We might see some reversal from the previous trend of 4.7%. You would know if you went to fill up your petrol tank or diesel tank, that you’re paying a lot more this month than in the previous month. That is going to come through into the inflation numbers.

Read: Fuel prices to take the spring out of your step

But also oil prices. If you look, futures prices have breached $90 per barrel; that is going to come through again in the next month which means we might see some reversal. But still, we expect overall the CPI to be well contained, which then suggests that the Reserve Bank is unlikely to continue to hike rates.

We actually believe at 8.25%, the authority is at peak. But we don’t expect any cut anytime soon. So the concerns that come from these upside risks is that we are going to see last-for-longer interest rates, but not an increase.

It just means we expect cuts to come only in the second half of next year.

But there are many other sectors that will contribute to that, and one of those is the direction that the US Fed is going to take. If they cut earlier, then we might also see cuts earlier on, but that’s not our core view.

JIMMY MOYAHA: So then where does that put us from a business confidence point of view, Isaah? What are the scenarios that we’re looking at, going forward? I know it’s obviously very difficult to map things out because there are so many variables that are beyond our knowledge and our control. We could be up to Stage 10 by tomorrow morning. You and I don’t know this, but what are some of the permutations that could result in improved business confidence? Or what have some of the executives cited as things they would like to see improve in order for them to have more confidence in the South African picture, both locally and internationally in terms of factors?

ISAAH MHLANGA: I think some of the aspects that might have weighed or that continue to weigh down the pace of economic reforms [are that the rand] has been too low, but the continuation of the addition of electricity generation by the private sector will continue to play a positive role in a sense that the private sector is increasingly becoming less dependent on Eskom supply. That might improve business confidence.

But overall, I think we just need to see economic reforms being implemented. Look at bulk goods transporters from the mining sector, agribusinesses – we want to see the rail lines operating and much more efficient ports which will facilitate trade.

But more generally [it’s] the cost of fuel. If companies can’t get electricity, they burn diesel, which is much more costly.

So the sooner we end load shedding, the better business conditions can be. The faster we implement all these economic reforms that are being implemented at a very slow pace, the more we can see business confidence improve. That will bode well for private investment and growth going forward. But so far the pace remains [much slower] than we would want to see.

JIMMY MOYAHA: That’s quite interesting, Isaah. You’ve basically just said we need the government to do their part and [chuckling] I don’t know how much of that we’re going to get out of that. But we live in hope, and business also lives in hope. We adapt to the situations that we have and we hope that the next time you and I speak about this number, it’s a lot higher than where it’s sitting now.

Thanks so much, Isaah. Isaah Mhlanga, chief economist at Rand Merchant Bank, has been giving us a sense of the Business Confidence Index report that came out today, and what it all means for South Africa.