Manufacturers show more confidence in SA but remain apprehensive

CONFIDENCE among local manufacturers improved during the third quarter of 2016, with fewer respondents rating the general political climate as a serious constraint on their businesses.

According to the manufacturing survey released by Absa and the Bureau of Economic Research (BER) on Wednesday, manufacturing business confidence rose to 30 index points in the third quarter, up from 23 in the second quarter.

However, despite the improved sentiment, the majority of manufacturers remained troubled by prevailing conditions.

Producers expect the level of investment in the sector, which dropped by the most in six years during the first half of the year, to recover over the next 12 months.

Seven out of 10 respondents surveyed reported subdued confidence as weak domestic demand, lower sales volumes and a moderation in domestic selling prices weighed on the business mood.

Tensions between government officials worsened during the third quarter on reports that President Jacob Zuma and Finance Minister Pravin Gordhan were embroiled in a power struggle over spending at state-owned companies and plans for a multibillion dollar nuclear power programme.

Ratings agency Moody’s cited the political standoff as a risk to SA’s sovereign rating. Several specialist investors, including the Old Mutual-owned Futuregrowth, also announced plans to curtail the funding of parastatals due to governance issues.

However, manufacturers in the beverages, electrical machinery, food and chemicals sector reported increased sales volumes during the third quarter, said BER economist Lisette IJssel de Schepper.

As producers of mostly nondurable goods, these sectors fair better during tough economic conditions as consumers tend to forfeit spending on "luxury" items, such as furniture and cars, to meet their basic needs.

Manufacturers also benefited from the easing in supply constraints, according to Barclays Africa economist Miyelani Maluleke.

"Electricity is no longer a constraint to growth and drought conditions are receding," he said.

On the export front, manufacturers delivered a mixed performance during the third quarter.

A weaker rand, which made South African goods cheaper to the rest of the world, helped increase export sales volumes.

However, export orders declined in the low global growth environment and profitability also came under pressure from a significant deceleration in average export selling prices.

Looking ahead, manufacturers anticipate an improvement in most of the underlying activity indicators in the fourth quarter, the survey showed.