All indications are that South Africa’s economy is on a more confident trajectory than it was before the national elections in May. While high inflation and interest rates have weighed on consumer confidence in the past few years, the successful formation of the government of national unity, the absence of load shedding, a stronger rand and lower inflation have combined to boost consumer confidence. The latest FNB/BER Consumer Confidence Index achieved its highest reading in the third quarter since 2019.
In its latest World Economic Outlook, the IMF upgraded its growth forecasts for South Africa to 1.1% for 2024 and 1.5% for 2025. Business and government recently launched the second phase of their partnership after focusing on addressing the energy and logistics crisis in the first phase. Although various financial and skills challenges remain in state owned enterprises (SOE), assistance from the private sector and a commitment to see South Africa succeed has generated a return on investment.
Finance Minister Enoch Godongwana is set to deliver his medium-term budget policy statement (MTBPS) later this month, supported by a more positive economic outlook. Key areas to watch will include any changes to allocations for provincial and local governments, as well as for security and water infrastructure. While the fiscal position has improved compared to six months ago due to better revenue collection, it is essential to continue cutting some government spending. This will help reduce the deficit and work towards achieving a better credit rating from international agencies, ultimately lowering the cost of South Africa’s debt.
Inflation and interest rates tracking in the right direction
Encouragingly, inflation is tracking in the right direction: consumer inflation dropped to 4.4% in August from 4.6% in July, producer price inflation eased to 2.8% from 4.2% in July, while the Producer Price Index decreased by 0.3%. In September, the Reserve Bank cut interest rates by 25 basis points. Although the cut was minor, it appears to indicate the start of a rate-cutting cycle with further cuts predicted at the Monetary Policy Committee’s November meeting. There is a school of thought that future cuts should be more aggressive to assist consumers and businesses.
In June 2024, 63,6% of consumers were in good standing across all credit categories (Credit Bureau Monitor, NCR). However,12% of credit-active consumers had adverse listings, illustrating the economic obstacles consumers face. The easing of interest rates will benefit households, but it will take time to flow into the economy.
Education budget cuts impact public schools
Education in South Africa is facing possible budget cuts as the treasury tries to manage its most significant expenses. Although budgets allocated to Basic Education are expected to increase in the next three years, this is not keeping up with inflation and the education infrastructure needed to improve South Africa’s basic education delivery.
Fee-paying public schools are also grappling with the introduction of the BELA Bill, which aims to centralise the management of schools at a provincial level. However, many struggle to collect outstanding school fees. In the third quarter of 2024, 54,7% of fee-paying public school accounts were in good standing, up from 49,9% in the previous quarter. This means only half of school accounts were up to date by the end of September 2024, while 36,5% of parents made no payment towards their school fee accounts, negatively impacting the ability of schools to supplement shrinking education budgets.
Two-pot reform provides some relief
Despite inflation slowing down and the recent interest rate cut, household disposable income remains under pressure. Many consumers have taken advantage of the introduction of the ‘two-pot’ reform, which came into effect on 1 September 2024, to make early withdrawals from their retirement savings. SARS reported that it processed almost 2,500 tax withdrawal directives on that day alone, representing around R103 million worth of withdrawals.
Sanlam Corporate, which typically processes between 7,000 and 8,000 retirement, withdrawal or retrenchment claims a month, reported that by 20 September, it had received more than 66,000 claims, totalling over R1.3 billion. Momentum Group said it had received more than 112,000 withdrawal claims valued at R1.7 billion by 16 September, with the most requests for withdrawals coming from those aged 30 to 49 years. The greatest number of withdrawals are being made by those aged between 35 and 45. Early indications are that most withdrawals are used to reduce debt and provide short-term financial relief.
TPN will closely monitor credit, rental and school fee payment data after these withdrawals to understand if they were used responsibly by consumers. Current rental and school fee payment behaviour data show a marginal improvement.
While the Reserve Bank expects that the reform will boost the economy over the next two years, the long-term implications for retirement savings, particularly the ability of retirees to afford accommodation in their twilight years, remain to be seen.According to the latest TPN Tenant Survey, nearly half (49%) of tenants aged 60+ indicated they cannot afford to purchase property. A minority (4,8%) say they rent because they have an impaired credit record. Residential tenants aged between 30 and 49 follow a similar trend, with 46,8% renting because they cannot afford to purchase property, while 12,2% can’t purchase property as they have a poor credit record.
Should consumers allocate their retirement withdrawals wisely, like paying off debt or making bigger deposits on property purchases, we could see more than the 19,3% of tenants aspiring to purchase property in the next year, investing in a long-term fixed asset.
Real disposable income has fallen 44% since 2016
Higher interest rates and living costs have taken a toll on consumers, with real disposable income crashing 44% since 2016, according to DebtBusters. Its second-quarter Debt Index Report reveals that consumers spend 62% of their income on debt repayments. The Altron FinTech Household Resilience Index for the second quarter reveals that the average debt cost burden is at its highest level in 15 years.
It appears South African consumers are following government debt trends, which, as of March 2024, was 74% of GDP. As consumers continue to struggle to recover from higher interest rates and high inflation, the first interest rate cut – while welcome – will not significantly impact the property market in the third and fourth quarters of 2024. A further interest rate cut is expected in November. However, these cuts are only likely to be felt in 2025.
Demand for rental properties in well-run municipalities is expected to continue growing. Conversely, poorly run municipalities will struggle to collect and grow their rates and taxes base, exacerbating their already tenuous financial position. Across the country, many municipalities grapple with inadequate skills, cash flow problems, governance failures and a lack of accountability, which is reflected in poor service delivery. There has been a continued decline in municipal audit results. Of South Africa’s 257 municipalities, only 34 received clean audit outcomes in the 2022/2023 financial year.
Amidst rapid urbanisation to cities, demand for affordable and social housing is expected to grow. Currently, demand exceeds supply in this sector.
Commercial property investors and tenants overcome ongoing challenges
The June 2024 SARB quarterly bulletin shows decreased business credit extensions. Faced with economic and political uncertainty, private companies decreased their capital formation, slowing their investment in fixed assets. This also significantly impacted the property sector, with most listed property funds looking to international assets to diversify risk and deliver growth.
Service delivery, infrastructure development and maintenance are crucial for the recovery of the sector. While the government has embarked on an infrastructure development programme, inefficient expenditure to maintain the infrastructure and a lack of skills could result in many initiatives failing to deliver long-term. The impact of Eskom’s past failures continues to be felt in various sectors, including property, as significant private investments were necessary to keep the lights on, which detracted from the expansion and growth of property and fixed assets. Since the operational recovery of Eskom, property investors have been directing funds towards water security.
Renewed business and investor confidence are reflected in an improved listed property space. The SA-listed property index is up more than 26% this year, outperforming bonds, equities and cash so far this year. Industry body SA REIT Association agrees that the sector is poised for further growth, particularly given the likelihood of additional interest rate cuts.
There has been growing demand for prime commercial space this year. Both Mall of Africa in Midrand and the V&A Waterfront in Cape Town have seen a surge in demand for retail space. These two specific areas are well serviced through CIB structures and direct property owner investment in bulk infrastructure that local government mostly fails to provide. As is the case with residential property, secure areas that are maintained and offer their occupants and users an enhanced experience will attract both local and international investors.
Commercial tenants in good standing are improving, with 75,44% of tenants in good standing at the end of the second quarter of 2024, up from 74,42% in the first quarter. The commercial good standing by rental value band shows that small businesses are struggling. Only 71,96% of tenants paying less than R10,000 per month were in good standing in the second quarter of 2024. Those paying between R10,000 and R15,000 monthly had a good standing of 75,87%. Larger tenants, paying between R25,000 and R50,000 per month, had a good standing of 93,54%. Occupiers of larger rental commercial properties paying more than R50,000 per month had a good standing of 96,12%. All commercial rental value bands improved their payment behaviour as less cashflow is needed to keep businesses operating. This should bode well for both property investors and government tax collections.
The impact of the wage bill on the fiscus
Any budget adjustments to the public sector wage bill will be particularly important to watch out for in the upcoming medium-term budget. Public sector trade unions have demanded a 12% wage increase for 1.3 million government employees for the 2025/2026 financial year. The government has pencilled in just more than R750bn for the 2025/6 wage bill—around 4.5% higher than the previous year. Cutting jobs in the public sector will be the only way for the government to meet the trade unions’ demands.
Economists have warned that above-inflation salary increases that don’t align with productivity growth will fuel inflation. South Africa’s public sector employees are amongst the best paid in the world. The public sector wage bill accounts for more than 30% of the country’s budget and is the third highest government wage bill as a share of GDP compared with 20 major global economies, according to the Centre for Risk Analysis. High public sector wage increases places significant pressure on the fiscus which is already under strain as a result of high debt servicing costs.
Economists are hoping to see a continued commitment to cost-cutting measures in the medium-term budget to stabilise the debt-to-GDP ratio. They expect an update on the efforts to restore the country’s financial reputation and remove it from the Financial Action Task Force’s ‘grey list.’ For too long, government has permitted significant increases in public sector remuneration, which has led to troubling cuts in education and healthcare budgets. To achieve its GDP growth targets, the government needs to readjust spending to create a better balance between consumption and investment.
Conclusion
While the economy is showing encouraging signs of recovery, economic risks remain. Although the recent interest rate cut offers some relief for consumers, it will be important to monitor its long-term impact on the economy, household finances and retirement savings.
The upcoming MTPBS will be opportunity to assess how effectively government is managing its finances and how realistic its 3% per annum GDP growth target is – or if the IMF is closer to the mark with a growth forecast of 1.1% for 2024 and 1.5% for 2025?
