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SA’s construction sector has ‘turned a corner’

Economist Dr Roelof Botha is optimistic as the Afrimat Construction Index rises by 3.1%.

NOMPU SIZIBA: The Afrimat Construction Index for the second quarter ticked up 3.1%, according to Dr Roelof Botha, who compiles the report. The positive increase reflected improvements seen in the retail sales of hardware. Employment on the construction sector was seen up some 1.8%, with wages up 15.2%, while the value of buildings completed was reported up some 15.8%.

To expand further and talk about the challenges and possible solutions, and the outlook for the sector, I’m joined on the line by economist Dr Roelof Botha. Thanks very much, Dr Botha, for joining us on the show this evening. The Afrimat Construction Index rose by 3.1% in the second quarter. That’s by the same margin as economic growth recorded in the second quarter. Where does the index level currently sit from a number perspective, and what factors gave the index a boost?

ROELOF BOTHA: Compared to our base period, it’s that type of composite index, which is of the first quarter of 2011, it has increased by roughly the same – almost 14% in real terms. That is literally on the nose the same as the country’s GDP. But it had been a lot more volatile. There were times when it was considerably stronger than the GDP, and then obviously times, such as recently, when it took a bit of a knock.

We were thrilled by the new record for the value of buildings completed in the second quarter. That was absolutely terrific. It’s now headed to the R15 billion mark, which is really good stuff.

NOMPU SIZIBA: In terms of the factors, you talk about buildings completed, was that the only category that pushed the number up, or were there other categories?

ROELOF BOTHA: The wages in construction in the second quarter also increased by double-digit rates, which was quite surprising because the value added in construction did not increase at all. So, we can only assume that there were some fairly significant contracts where the workers were paid bonuses to try to finish them on time, because otherwise there are huge penalties that kick in.

NOMPU SIZIBA: Those wages were huge, up 15% or something.

ROELOF BOTHA: But of course it was also correlated to an increase in construction employment in the second quarter, and that was also very, very welcome. Any job that gets created in this country should be applauded.

NOMPU SIZIBA: Yes, indeed. Broadly speaking, what are some of the challenges the building and construction sector currently faces, whether at a policy level, and we’ve also been hearing about the construction mafia as well. So, broadly, what are the challenges?

Read: How the construction ‘mafia’ business model jumped to other sectors

ROELOF BOTHA: Yes, the security issue is a huge concern. But to get the industry really up and running again, I believe we’ve turned the corner, possibly. One would need significantly lower interest rates. The Reserve Bank has been dragging its feet. There is no demand inflation in this economy, I can assure you of that. And our average real central bank rate, the repurchase rate, is about 250 basis points higher than the average for our trading partners. So, there is a message for them in that they really need to lower interest rates a little more rapidly, and I’m convinced that the sector would really take off then.

Then we need deregulation. I think most of the players in the construction sector would be delighted with National Treasury’s new growth plan. It is sort of a summary of the National Development Plan. It’s quite pragmatic and it talks to deregulation as well.

NOMPU SIZIBA: When you talk about lower interest rates being some 250 basic points too high relative to our emerging market partners, obviously the argument will be: Well, if we cut interest rates too quickly, down too far, then we are not going to be able to benefit from a carry trade, which obviously assists in being able to pay for our current-account deficit.

ROELOF BOTHA: Well, the point is this. If we get the economy growing, then the tax situation improves dramatically – and also that stimulates growth. That means that investors or equity markets can look forward not only to our dividends, but also to some capital gains. The portfolio investment interest will certainly, as well as the foreign direct investment, show the improvement that we are seeing in the balance of payments. So, the Reserve Bank cannot use that argument. It’s a flawed argument.

NOMPU SIZIBA: You’ve given the thumbs-up to the National Treasury’s latest economic plan. Assuming it gets implemented soon, because we do know that in South Africa there are lots of plans where implementation is always a bit of problem – what about it enthuses you, and gives you hope that the construction sector can gain from it?

ROELOF BOTHA: Government did some surveys in the past couple of years among delegates at Gibs and various forums where they are presented, asking them, what are the major obstacles, short-term obstacles to growth? There is virtual consensus that our labour legislation is just crazy. It doesn’t fit a developing emerging market. So, what really excited me about National Treasury’s plan is talk about maybe a benchmark below which small and medium companies can be exonerated from labour legislation, and perhaps other regulations. We have a fairly over-regulated economy at this stage.

NOMPU SIZIBA: So, when we look at the extent of a lack of investment in new infrastructure, and even maintenance thereof, what are some of the backlogs that you think need to be attended to as soon as there is a budget for them?

ROELOF BOTHA: I’m very excited about Sanral’s announcement of a R40 billion investment in road maintenance and new road building, which would be a huge boost to construction. That’s already started. Some of those tenders have already been issued.

Read: Sanral to issue R40bn in road-building tenders

And then there are some other major projects. The one was announced in KZN today [Wednesday] or last night, I believe – the R1 trillion one, which also has to do with transport logistics. So, it does seem as though the future is a lot rosier. Last year we had the third-highest foreign direct investment in our history, and we have to thank the new leadership at national government level, Mr Ramaphosa’s vision, for this.

NOMPU SIZIBA: Yes. Do you think that he’s making the right noises, because every so often there is a despondency in the economy, and also we keep on seeing the business confidence index gauges go down and down. What are your thoughts?

ROELOF BOTHA: These confidence indices, some of them are just surveys which are based on respondents’ sentiments, and I must tell you it contradicts your, for instance, key indicator, capital formation, which increased by 18% in the second quarter of this year. It’s absolutely magnificent. And that’s money going into new productive capacity. So, I’d rather trust the Stats SA capital formation figures, I must be quite honest.

ROELOF BOTHA: What about our understanding that in order for serious capital investment to take place, you need the necessary confidence before that happens?

ROELOF BOTHA: I agree with you. And policy certainty has everything to do with that. So, we need a lot more policy certainty, we need the National Treasury plan to be put into specific projects. If they can do this in such a way that they have the cooperation of the private sector – and one can see signs of that coming through – then we are home and dry.

NOMPU SIZIBA: From what you are saying you do sound very optimistic about the future. Do you expect the Afrimat Construction Index to notch up going forward?

ROELOF BOTHA: Absolutely. We believe that we may have turned the corner. You can also see that in the volume of building materials produced, which a very important indicator to Afrimat. There are so many other green shoots. Retail sales have picked up, we’ve got an all-time record for mineral sales in the first six months of this year – so let’s coin it while the gold and platinum and iron-ore prices are where they are.

NOMPU SIZIBA: Thank you, Dr Botha, for your time today.

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