One percent drop in the interest rate now essential

The next Monetary Policy Committee meeting is likely to allow a 0,5% drop in the bank interest rate - but, says Bill Rawson, Chairman of Rawson Properties, the cut should be at least 1% if any significant change in the economy, the growth rate, job creation and in residential property sales is to be achieved.

Several interrelated factors, says Rawson, now point to the need for a cut of this size.

The first of these, he says, is the disappointing GDP growth rate which is far lower than most economists predicted. This lack of growth can, says Rawson, in large part be attributed to a serious lack of credit and funding, over regulation of industry and commerce and a dire shortage of technical and commercial skills in the vast majority of the population.

“It was expected,” says Rawson, “that the growth rate would reflect the R93 billion spent on the provision of facilities and the running of the superb World Cup and on making the event the success it was. However, the current GDP growth rate is only 3,2% and, although Zuma and others appear to think that a 7% growth rate by the end of next year is possible, most economists would agree that without the stimulus of long-lasting, cheaper credit this is simply unrealistic. A 1% cut is now, therefore, a necessity.”

The argument in favour of such a cut, says Rawson, is strengthened by the exceptionally latest price index rate, which, again, is far lower than most economists predicted. (The CPI has recently come in at 3,7%.)

“It has been said,” says Rawson, “that the effect of excessive countrywide wage increases and the greatly increased electricity costs will raise the inflation figure - but at 3,7% we do have a considerable margin to play with and the risk of increased inflation will have to be lived with.”

Looking at the credit supply situation, Rawson says that the banks, with their hands now tied by the National Credit Act, are still unwilling or unable to lend money at anything like the required rate. What is more, if they do come up with a loan, he says, the conditions attached to it are often on such difficult terms that it cannot be accepted.

In the housing sector, he says, the number of bonds issued has dropped by almost 50% and in his view it is time that the criteria of the National Credit Act were reviewed.

On the regulation issue, says Rawson, over regulation is now evident in many industries and the pendulum has swung too far in favour of labour. What is more, he says, the labour forces of South Africa are by and large insufficiently skilled and therefore unproductive.

“Despite this they are able to ruin the investor confidence locally and internationally and challenge the government with ongoing countrywide strikes. All this poses a serious threat to the government which must be aware that it is heading for trouble. Let us be quite clear on this: the loss of orders in the motor industry as a result of strikes is just one of the inevitable results that will follow from labour being now too powerful. Every other industry will feel the effect and from my own overseas sources it is clear that there is already a serious lack of international confidence.”

Discussing the skills issue, Rawson says that private enterprise must be given tax relief for ongoing training.

“Apprenticeships are no longer in fashion, but as the educational system in South Africa is on the whole inadequate many jobseekers will require one to five years of training if they are to become really useful. This was one of the objects of Services SETA, but so far they have not achieved great success.”

In China, by contrast, says Rawson, 70% of school leavers in the free enterprise zones have been trained for a job by the time they are 18. Additional ongoing training with their employers and a total lack of strikes makes them very productive.

A 1% drop in the interest rates would, says Rawson, probably give a further 10% to 15% of middle class South Africans the ability to qualify for a bond and become homeowners. It would also facilitate a much needed revival of the home renovation and home improvement industry.

“Those of us in property sales know that the demand is still there, but what we are finding is that month after month many people lose heart and give up the ambition of becoming homeowners because they no longer believe they will qualify for a bond. This has to be changed.”

Regular renovations and upgrading of properties, adds Rawson, have traditionally been part of the South African housing scene and are always a good investment provided that the homeowner does not overcapitalize – but the lack of funding has hit this market too.

South Africa, says Rawson, can probably look forward to far better growth than most of the First World countries which, in his view, will struggle for at least another five to ten years before they can really claim to have left the economic collapse right behind them.

In the Rawson Group, he says, sales are now back to 2007 levels, but his group is the exception rather than the rule.

“We are a young growing group diversifying into all sorts of new areas and territories. Others with mature, more staid businesses focusing on traditional established areas have sometimes had to accept a 40% to 50% drop in sales.

“Nevertheless, all of us now need, and in fact have to have, the big interest rate cut which, we are convinced, will give the economy and the housing sector the stimulus it needs.”

Article by: www.rawson.co.za