Ongoing interest rate hikes and the dire state of local municipalities are the reasons for SA’s moribund building and construction sectors, according to economist Roelof Botha.
Commenting on the Afrimat Construction Index (ACI) covering the fourth quarter of 2022, Botha said higher interest rates are often inversely correlated to GDP and, as a “general rule”, leads to subdued construction and property market activity.
“It is not surprising, therefore, that new mortgage bond approvals administered by BetterBond [SA’s largest bond originator] started on a declining trend from the end of 2021, when the Reserve Bank’s hawkish monetary policy kicked in,” he said in a statement.
“Since then, the cost of credit and capital as measured against the prime overdraft rate has increased by 54%,” he added.
The higher cost of borrowing appears set to continue when the Reserve Bank meets later this month after the US Federal hiked its interest rates by another 0.25 percentage points on Wednesday.
The ACI declined 2.2 points quarter on quarter, but improved by 1.9 points year on year to 120.9. Still, the index remains well below the record of 143.6 reported in the third quarter of 2016.
The index is compiled by Botha on behalf of Afrimat, the JSE-listed building materials and construction mining group, and uses nine indicators to provide a more comprehensive composite index to gauge activity in SA’s building and construction sectors.
The biggest short-term gain was greater salaries and wages paid, as is often the case towards the end of the year as a result of Christmas bonuses and more overtime as project managers try to make up for time lost during other holidays.
On a year-on-year basis, wholesale construction materials sales were the best performer in the fourth quarter, rising 9.3%.
The worst performer was the value of buildings completed, which fell 8.7%.
Botha believes part of the problem of less public sector spending on infrastructure lies in dysfunctional local municipalities, despite Sars collecting R95bn more in taxes than it expected.
According to the government’s budget for 2023/2024, the three tiers of government plan to spend R157bn on infrastructure, excluding state-owned enterprises, with 39% earmarked for provincial and local government.
But local municipalities are unable to spend money as many of them are bankrupt, insolvent, plagued by maladministration and corruption, have incompetent and unqualified staff, and are bogged down by cadre deployment.
The government’s most recent state of the local government report found 175 of the country's 257 municipalities were in financial distress, up from 66 in 2010/2011.
Auditor-general Tsakani Maluleke in June derided the poor state of local government as the number of clean municipal audits improved slightly from 32 to 41 during the 2020/2021 financial year, while 64% of municipalities incurred unauthorised expenditure totalling R20.45bn.
Of the R20.45bn, R13.25bn was for non-cash items, meaning municipalities spent money that councils had not provided for in their approved budgets, or that the spending did not meet the conditions of a particular grant.
According to Botha, it is therefore “fairly obvious that the majority of the country’s municipalities are simply not in a position to spend transfers from National Treasury earmarked for infrastructure in a manner commensurate with the needs of their respective communities”.
He added in an interview with Business Day that failing municipalities also affected the building and construction sectors as individuals and companies struggle to gain the approval for projects from incompetent public officials even as public infrastructure falls into disrepair and decay.
The solution, he believes, is to get the private sector involved with the repair, maintenance and expansion of public infrastructure.
Afrimat CEO Andries van Heerden said the operating environment in SA remains difficult and that the decline in the public sector’s contribution to fixed investment and, in turn, infrastructure “remains a concern”.
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