Construction activity rebounded in the second quarter, according to the Afrimat Construction Index, with seven of the 10 indicators that make up the index turning positive. Factors that supported the turnaround included a load shedding free winter, the firmer rand and relative confidence around the government of national unity. For a closer look into the sector and the sustainability of the rebound, CNBC Africa is joined by Dr. Roelof Botha, Economic Adviser, Optimum Investment Group.
Our final interview for today, just looking at construction activity here in South Africa that rebounded in the second quarter, and that is according to the Afrimat Construction Index, seven out of the 10 indicators that make up that index turning positive. Factors that supported the turnaround included a load shedding free winter, the firmer rand also and also relative confidence around the government of national unity. But for a closer look into the sector and the sustainability of the rebound, I am joined by Dr. Roelof Botha, Economic Adviser at Optimum Investment Group. Dr. Botha, thanks so much for your time. So time to jump for joy at this turnaround right now, or do you reckon we still need to move ahead with a bit of caution? Yes, it's a little bit too early. The quarter on quarter improvement in the Afrimat Index looks fantastic, almost nine percent. Very few sectors of the economy have done as well. Although the value added by construction quarter on quarter was down as well. But if we look year on year, there's only one of the 10 constituent indicators, only one, the wholesale trade sales of construction materials that actually is in positive territory. It's down the whole index almost two percent year on year. And it's actually frightening if you if you look around you and you see the huge latent demand for housing, especially at the lower end of the scale and the state of the infrastructure, then the construction sector in this country is supposed to be growing like a rocket. It's supposed to be acting as a as a leading catalyst for other sectors of the industry, because it is the most labor intensive sector of them all. But if you just look at the factors then that spurred this turnaround, I mean, you got the low chilling free winter and we do know what the team at ESCOM, as well as the minister saying about trying to maintain that record at worst case scenario, will definitely not be going back to stage six. It will be a stage two during the summer. You've got the firmer RAND and by all accounts, it looks like the RAND could maintain relative stability at these levels so that could continue to be supportive. And also the government of national unity, which you do state in your statement is a bit of a confidence booster for the sector. So I suppose, notwithstanding the fact that it's too soon to jump for joy, do you reckon that the worst is over, given the major supporting factors in the second quarter remain with us? Yes, the dilemma is that some of these indicators in the second quarter did quite well, like buildings completed 18.7 percent increase in real terms. That looks stunning. But year on year, it's down 20 percent. So from a low base, you know, there was a nice improvement. We're grateful for that. And even if rates come down and they should, they should come down significantly, they should eventually, in a relatively short period, come down by at least what the bond yield has come down by, which is 200 basis points. And interestingly, the bond yield needs to drop by another 100 basis points and then we'll be exactly where we were before COVID. And I believe that will happen in the next couple of months. There are positives, as you've indicated, certainly, but the trigger for the recovery of construction, construction has not recovered from COVID, not fully recovered. The trigger will be lower interest rates. There was absolutely no reason why the prime rate had to go to 11.75 percent if it was 10 percent and too high before COVID. So quite frankly, the Reserve Bank is essentially right now they're 200 basis points behind the curve. The prime rate today in South Africa should be technically 9.75. Sure, sure. I hear you, Dr. Rulof, and I think that the investment community is well aware of your views on interest rates being too high. It's not a new view and it's one that we do appreciate that you are quite passionate about. But you also know the central bank, the South African Reserve Bank. You also know the approach that the governor does take to managing inflation in this economy against the interest of growth. And it's a cautious one. And so 200 basis points, probably I'd love that. But I mean, I was just speaking to the CEO of First Rand a little bit earlier, and they've got 75 basis points baked in as their forecast in terms of the amount of cuts that we could see this year. And that's actually on the lower end and the higher end at most. I have heard about 100 basis points. So in this scenario, the most likely scenario, sir, that we don't see interest rates coming down by the 200 basis points, even 300 basis points that you suggest they should come down by. What does that mean for the state of construction activity as you see it? Yes, I want to distinguish between what they will probably do and what they should do. I want to repeat that the prime rate was 10 percent before Covid. Inflation was just below 5 percent. So we had a 5 percent real prime rate, which was hopelessly too high. Now, inflation is 4.6, prime is 11.75. And we have the highest real prime rate in the world, 7.1 percent. It's an increase of 130 percent. What they should do is eventually over the next 6 to 12 months to lower it by 200 basis points. And if the bond yield drops by another 100 basis points, they probably won't have another choice, but they are being overly cautious. The fact of the matter is that the manufacturing sectors of Africa, the capacity utilisation in manufacturing is still lower than before Covid. It hasn't fully recovered. The irony here is that if the Reserve Bank were to lower rates more aggressively and people were to buy more stuff because that's going to release a lot of demand in the economy, the manufacturing will expand its output and your overhead costs per unit would decline. The Reserve Bank's Monetary Policy Committee can actually lower inflation by lowering rates more aggressively. I just want to mention that the Better Bond Home Loan Application Index is down 28 percent since they started to just relentlessly raise interest rates, despite the absence of demand inflation. Sure. Talking about what's happening in the residential sector, I had a conversation with the CEO of CashBuild about a week or two ago following the release of the company's results. He alluded to the two part system and potential withdrawals potentially helping with renovations and home building, as it were. We've heard from the South African Revenue Services that applications so far in the last 10 days have already reached 4.1 billion rand. So obviously that's not what everyone is going to get, but it just shows the trend in the applications to dip into the pot that is permissible. To what degree do you reckon perhaps two part could support some of the activity in the sector in the third quarter? I'm convinced it will have a positive impact, but one will have to look at the basket, the Consumption Price Index basket, and look at what South Africans spend their money on. Yes, certainly there will certainly be a bit of paint in there, and with the summer approaching, some plans for the garden and things like that. But I reckon a lot of people are going to fix their cars, use that money to upgrade their cars, maybe take a holiday. And I just want to remind the viewers that the average South African, I think, spends twice as much on alcohol than on education. So with a bit of luck, they'll be spending more on education. Oh, wow. Thanks so much for the light hearted approach there and the humour. Dr. Boerte, we'll leave it there for now. So Dr. Rolof Boerte, Economic Advisor for Optimum Investment Group.
Theme: Signs of recovery in South Africa's construction sector amidst ongoing challenges
South Africa's construction sector saw a glimmer of hope in the second quarter, with the Afrimat Construction Index reporting a rebound. Seven out of the 10 indicators that make up the index turned positive, driven by factors such as a load shedding-free winter, a firmer rand, and relative confidence around the government of national unity. Despite the positive signs, Dr. Roelof Botha, Economic Adviser at Optimum Investment Group, believes it may be too early to celebrate fully. While the quarter-on-quarter improvement in the Afrimat Index looks impressive at almost nine percent, the year-on-year data tells a different story. Only one of the 10 constituent indicators is in positive territory, with the overall index down almost two percent year on year. Dr. Botha highlights the latent demand for housing and the state of infrastructure, indicating that the construction sector should be thriving. However, challenges persist, and the sector is yet to fully recover from the impact of COVID-19. Lower interest rates emerge as a crucial factor for a sustainable rebound, with Dr. Botha advocating for more aggressive rate cuts to stimulate demand and drive growth across sectors. The debate on interest rates continues, with Dr. Botha emphasizing the need for a significant reduction to support economic recovery. While the potential impact of the government's two-part system on construction activity remains uncertain, Dr. Botha expects a positive effect on the sector. However, he cautions that consumer spending patterns may vary, with priorities ranging from home renovations to car upgrades and leisure activities. As South Africa navigates the complex landscape of economic recovery, the construction sector faces a delicate balancing act between optimism for improvement and the reality of ongoing challenges.
"The trigger for the recovery of construction, construction has not fully recovered. The trigger will be lower interest rates. There was absolutely no reason why the prime rate had to go to 11.75 percent if it was 10 percent and too high before COVID."
['South Africa', 'Construction Sector', 'Economic Recovery', 'Interest Rates', 'Afrimat Construction Index']