Will credit crunch be over by summer?

The world economy will recover within the next three to six months, and South Africa will follow suit, growing at 5% a year while agriculture faces a period of prosperity. So says Roelof Botha, joint MD of research company Gopa Group SA, former economics lecturer at the Universities of Pretoria and Johannesburg, 2005 Sake24/ABSA Economist of the Year and son of former foreign affairs minister Pik Botha. The period 2006 to 2008 was defined by unprecedented commodity price increases. Inflation figures doubled as world economies responded with rising interest rates, and the cost of credit increased by 50% to 100% in the G20 countries. In the resulting situation, marginal homeowners in the US couldn’t afford their bond repayments, and lower demand meant houses were temporarily worth less than the amounts outstanding on their bonds. But these are still structurally sound houses in good neighbourhoods with municipal services efficiently delivered. They’re a sound asset and a few months of slower residential development should restore the imbalances – possibly as soon as in the next three months. Many observers are comparing the current situation with the depression of the 1930s, but the global economy is structurally different now. Developing economies where globally negligible then, but now 50% of global trade is conducted outside the traditional US and EU powerhouses. Countries such as Mexico, India, China, South Africa and modern-day Russia are trading with one another regardless of what happens in the traditional world economies. Between 1992 and 2007, per capita income increased more than ever before, with individuals becoming 40% richer on average. The next 10 years will see a further 60% increase in per capita wealth. This is good news for governments, which all collect tax, generally in a ratio proportional to income. It explains why traditionally rich countries have either huge budget surpluses or very small and manageable deficits. Governments now have enough money to fix the current problem before it spirals out of control. On the home front Since 2008, commodity prices have been declining but the stabilisation and recovery of agricultural commodities are already evident. Lower yields are predicted in the US, and Argentina’s drought will affect its output too. This bodes well for South African producers. First National Bank predicts a prime interest rate of 10% to 10,5% at the end of 2009. Each percentage cut puts another R3,7 billion per month in the pockets of South African consumers, who will spend 40% of that money on food. My prediction is that the interest rate will remain low for the next three to five years, and South Africa will continue to grow at an annual rate of 5% once the credit crisis is over. Only structural inadequacies such as Eskom, Transnet and water infrastructure prohibit even higher growth. Government plans to spend billions on infrastructure programmes over the next few years. Add the spin-offs from the 2010 World Cup, and I believe South Africa will grow at 6% annually from as early as 2012. I think agriculture is in for a “sunrise” period, contrary to the “sunset” it experienced since 1994. Jacob Zuma has a willing ear for agriculture, and with increasing political competition, it can only be to farmers’ advantage. African countries such as Angola and the Congo are craving our commercial farmers, improving agriculture’s bargaining power locally. The rand is still too strong and will remain so for the next two years, after which it will be more favourable for exporters. South African consumers will become more affluent over the next decade, and producers should use the opportunity to do more value-adding, as the market for convenience food will continue to grow. – Wouter Kriel Fax Roelof Botha on (012) 346 5449 or e-mail [email protected]. |fw