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Namibian
Outlook for 2008 |
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Namibia's
overall economic momentum remains relatively
firm, although evidence of a slowdown is
emerging. Corporate earnings delivery was
robust and equities remained the
best-performing asset class. The earnings
base expanded by 65% in 2007 as favourable
economic conditions, locally and globally,
boosted corporate profitability. However,
this is unlikely to be repeated in 2008 due
to increased economic headwinds. Interest
rates have risen due to higher inflation and
global growth is expected to weaken.
Volatility and weakness have engulfed
financial markets as global markets reflect
concerns about to sub-prime mortgage losses
and fears of a US recession. Although
economic conditions have worsened, they
remain conducive to reasonable growth. |
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Output growth
has remained buoyant, but signs of the
effect of higher interest rates on demand
growth are mounting. Mining output,
particularly of uranium and diamonds,
continues to expand briskly, manufacturing
activity is benefitting from metal-refining
activities and agro-processing, while
business confidence has fallen, albeit
moderately, remaining close to its all-time
high reached in fourth-quarter 2006. |
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Chris Hart
Head: Market and Economic Research |
The
inflation rate remained high around
7% in the fourth quarter as food and
fuel-price pressures remained
elevated. Currency weakness and high
international oil prices suggest
inflation will remain high in 2008,
although it is likely to ease
somewhat due to the high base
established in 2007. The Namibian
dollar has weakened considerably
since the beginning of this year,
dropping to its weakest level since
fourth-quarter 2006 against the US
dollar, while it reached a record
low against the euro and the
Australian dollar.
Although Investment Solutions
expects growth to weaken moderately
in 2008, the Bank of Namibia
projects the economy to expand 4.7%
in 2008 from an estimated 3.8% in
2007 as strong growth in mining,
manufacturing and services offsets
slower expansion in agriculture and
fishing. Construction, underpinned
by government's increased spending
on infrastructure, is projected to
expand 9.5% in 2008 from 9.3% in
2007. The Bank, however, has
highlighted that local demand is
already slowing and the outlook for
global economic growth is uncertain,
hence it left the bank rate
unchanged at its meetings in
December and January.
Investment Solutions expects overall
economic growth to remain reasonably
strong because of government's
increased spending on infrastructure
and high commodity prices. The
company thus maintains the current
challenges are cyclical, not
structural. While growth is
projected to remain reasonably
upbeat, further disruptions to the
regional power supply, a notable
decline in commodity prices as the
global economy slows, as well as
tighter global credit-market
conditions, would significantly
reduce growth, negatively affecting
equity markets. So although equity
valuations appear attractive,
increased risks -- mainly that of
slower earnings growth -- suggest
equity returns are likely to be
lower in 2008. |
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SA
Outlook for 2008 |
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The
second half of 2007 proved seriously
challenging for the South African
and global economies.
Inflation has been at the top of the
economic agenda in SA, but 2007
started quite tamely, with the SA
Reserve Bank (SARB) taking a break
from interest-rate increases after
four from June to December 2006. At
the time, it was felt these
increases would prove sufficient and
that the next move in interest rates
could be down. However, by mid-year
inflation surged, CPIX breached the
upper 6% target limit, and rates
increased again from June to
December 2007. |
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Further increases are possible, with
CPIX threatening to rise possibly
even above 8%. The increases have
started taking their toll on
consumers. Retail sales growth has
dropped to its lowest level in five
years and could drop further with
car sales in recession since
February 2007.
Politics may also prove problematic.
The Zuma trial will begin this year
and all indications are that
politics will intrude in the
judicial sphere. If this is
successfully resisted by the
judiciary, SA will emerge a
constitutionally far more robust
country. However, the ascendency of
Zuma to the ANC presidency has
advanced communist influence in the
ruling party and a leftward shift in
the direction and substance of
economic policy could erode investor
confidence. One way or another,
political promises will be broken --
either to the investor/business
community if consistency and
continuity of economic policy is
broken, or to the masses, to whom
different promises were made. The
key policy shifts to look for are
whether inflation targeting and
fiscal discipline are retained.
Investor confidence has been on the
rise and the prosperity has been
evident. A lurch to the left could
result in a reversal of gains made
during the past decade, with the
budget again in deficit, debt levels
rising along with inflation, and
investor flight again becoming part
of the economic landscape. The
choices the ruling party makes will
have a profound influence during the
next decade. Pragmatism has been a
key consideration of policy during
the past decade, and at this stage
the same can be expected for the
next one. The key will be decisions
around inflation targeting and
budget surplus. |
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The
consumer is consequently under siege
and the SARB may feel the need to
further increase interest rates,
which would result in a significant
slowdown. The deteriorating current
account position may become a
problem due to the combination of
various other factors. Deterioration
in the current account is usually
associated with an expansion of the
economy and slower growth will not
be as attractive for investors. The
financing of the current account is
therefore at risk. Add the problem
of politics to the mix and the
attraction of SA over the short term
as an investment destination is not
great. The rand is therefore at its
most vulnerable and at a high degree
of risk. Politics may provide the
catalyst for a bout of significant
rand weakness. If the newly elected
ANC officials start tampering with
economic policy and shift it in a
more populist and collectivist
direction, the external financing of
the current account will cease.
Global and SA investor flight will
be a strong consequent possibility.
Inflation targeting and the budget
surplus are top of the new guard's
hit list. |
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Another trigger could be a further
interest-rate increase. The current
account has been mainly financed
through risk-seeking investor flows
(ie capital attracted by falling
interest rates such as shares,
property, FDI, etc) and that
yield-seeking capital has largely
been absent since the 1998 rand
crash.
A further interest-rate increase,
along with greater evidence of a
slowdown, may see some of this money
pulled out of the country. |
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The
economy has consequently shifted
from a virtuous cycle to a vicious
cycle. Investment Solutions believes
this will be relatively short but
fairly “violent”, and SA faces the
worst in the first half of this
year. The third quarter may be when
SA starts to shift back into a
virtuous cycle, but that will be the
earliest. One problem is inflation
targeting, which is focused entirely
on monetary policy. This means the
SARB is virtually the only inflation
fighter, with other government
departments virtually completely
ignoring this policy. |
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The
SARB's response to high inflation
levels will be to increase interest
rates, which works well when
inflation is driven by supply/demand
dynamics and demand has moved ahead
of supply. Increasing interest rates
reduces demand, therefore taking
away the cause of inflation, and
price balance is restored.
Interest-rate increases to date have
done exactly that. However, the
outlook for inflation has continued
to deteriorate. |
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This
provides strengthening evidence that
the current bout of inflation is a
cost-driven phenomenon. Here,
interest rates do not remove the
cause of the inflation. If anything,
higher rates add to costs, therefore
adding to the problem. If a hammer
was the cause of the headache, the
cure is not more hammer!
Unfortunately, the economy may well
see more hammer and if the rand
weakens, more increases are possible
exacerbating currency weakness due
to the nature of the capital flows
that have supported the rand during
the past several years.
The growth rate at this point is
being sustained by the acceleration
of major capital works in various
sectors such as electricity and
other infrastructure. This
expenditure will help lay the
platform for the next cycle of
growth as capacity constraints
exhausts the current one. The capex
programme is unlikely to be affected
by the slowdown and the addition of
capacity to the economy with the
expansion of infrastructure will
help generate higher levels of
growth over the longer term.
Government economic policy is to
boost capital expenditure to beyond
25% of GDP from the current 19%.
Skills shortages are a major
constraint in building up capital
expenditure but the build up will
help expand the skills base over the
longer term.
The net result is that 2008 could
prove a year of two parts, with
difficult and deteriorating
conditions in the first part,
followed by improving circumstances
in the second.
Global
The sub-prime problem that has been
festering for some time broke into
the open with its negative effect on
global markets. The situation was
helped by central banks stepping up
to the plate and adding liquidity to
the financial markets to avoid a
complete meltdown. But by August
that was proving inadequate and the
US Federal Reserve cut interest
rates, which helped revive the
markets. However, this only helped
in the short term, and by December
the 0.25% cut proved inadequate and
markets were again under pressure.
At the start of first-quarter 2008
major financial institutions already
faced more write-downs of their
assets because the extent of the
problem had been underestimated. The
sub-prime debacle has developed into
a systemic problem and has put the
global financial system at risk. It
can also be regarded as a
developed-market problem and it now
is apparent that the global economy
has turned full circle following the
bout of emerging market problems a
decade ago.
The dollar was also a casualty in
2007 and there is every indication
that a similar pattern will unfold
this year. The greenback weakened to
a record level against the euro but
the flip side was that the price of
gold responded spectacularly, with
new record highs achieved early this
year. The sub-prime problem in the
US is increasingly expected to
culminate in a recession there,
which will reduce global growth.
Further interest-rate cuts and
dollar aversion are likely to lead
to further dollar weakness at least
for the first half of 2008. |
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A
consequence of the weak dollar has
been the relentless rise in the oil
price, which briefly touched
$100/barrel at the start of the new
year. This has raised inflationary
fears in the global economy but the
sub-prime problem has to be the
priority.
The central bank dilemma is whether
to face down inflation risks (which
means increasing interest rates) or
deal with the sub-prime problem
(which means lowering them). This
carries a growing risk of
stagflation, where the sub-prime
problem reduces the growth rate but
the remedy stimulates inflation. |
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While
$100/barrel prices have been met
with dismay, the rise in the price
of oil and other commodities is in
part a reflection of success in the
global economy rather than disaster.
Emerging-market economies,
spearheaded by China and India, have
been leading global growth. In the
past, higher oil prices have been
associated with geopolitical crises.
South Africa, which has also enjoyed
excellent growth of around 5% during
the past few years looks a laggard
when compared with growth rates of
sometimes double that in other
emerging markets. However, the
success that has led to the rise in
commodity prices is (from a cyclical
point of view) leading to the
exhaustion of this cycle as
inflation fears start to take hold
of the collective mindset.
Weakness in the US will also
negatively affect emerging markets,
but de-coupling during the past
several years will see this effect
muted. Geopolitically, this may
prove a problem in 2008. Chinese
strength, along with US weakness,
may result in the Chinese taking a
strong stride forward in their quest
to be more dominant in global
affairs. One area may be the push to
secure commodity supply, and its
sovereign wealth-fund resources and
politically driven decision making
mean prices could be bid upwards for
resource companies. Already their
intentions are evident, with a
domestic policy of export taxes on
various raw materials. |
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©
Investment Solutions Limited, 2008 |
