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Economic recovery earlier than anticipated

The Deloitte 2010 CFO survey results confirm recent positive economic data that South Africa’s recovery is indeed here for 2010 and likely to continue into 2011.

Deloitte South Africa has announced the results of the second CFO survey covering the full industry, turnover and experience spectrum of 200 of South Africa’s top organisations nationally, including listed and unlisted entities in the private sector as well as major state-owned enterprises. This enabled the firm to examine the economic outlook of South Africa’s corporate landscape through the eyes of CFOs.

During the worst of the recession, despite global pessimism, South African finance executives stubbornly trusted that South Africa would not experience the full negative impact which hit other economies. CFOs placed their faith in a sound banking system, the counter-cyclical effects of infrastructural spending, the 2010 Soccer World Cup and the breathing space afforded by a delayed impact on corporate South Africa’s earnings.

“We have been particularly pleased to see this optimism rewarded with an earlier than anticipated economic recovery,” comments Hugh Harrison, Leader of the CFO Programme at Deloitte. “Developed and developing countries alike have applied unprecedented fiscal and spending stimulus packages of $6 trillion, whilst significantly relaxing their monetary policies. All these measures have been designed to restore global trade flows and coax confidence back into consumer spending. Together with ongoing growth in China and India, these factors have at least temporarily shored up the global economic system and potentially averted sovereign defaults by over-indebted developed nations.”

The recovery has not been uniform and in several industries, economic performance remains fragile and exposed to significant risks. 2012 sees a marked tapering off in optimism due largely to the twin perils of political uncertainty and the unavoidable reality that South Africa’s performance continues to be inextricably linked to the fortunes of the global economy.

Fears of the impact of the sovereign debt crisis in the EU together with the almost too-rapid recovery in financial asset and commodity prices contribute to fears of a double dip recession. The limited extent of true structural reform to the global economic system and continued weak labour markets add credence to the fragility of the global recovery.

Key themes for 2010 include opinions regarding the impact of the Soccer World Cup, the interaction between business and politics, as well as the effects of the downturn on CFOs’ roles and personal job stresses.

The recession served to mask many underlying structural flaws and myths in the economy, such as the electricity situation. Volatility in markets, commodity prices and exchange rates will continue to test organisations’ resilience, whilst margin pressures and the effects of increasing competition are increasingly exposing significant threats to the sustainability of historic corporate business models in South Africa. Opinions are mixed as to whether an overvalued Rand poses a real risk to the economy. Leading CFOs are not unaware of these powerful forces and challenges. They are often simply too caught up in the short term performance demands and increased stress of their roles to be able to focus adequately on the application of their strategic and catalytic capabilities for the long term sustainability of their companies.

CFOs’ positive outlook and confidence for 2010 and 2011 holds the promise of further improvement for their own organisations and the economy at large, albeit a slow but sustained recovery. They are more cautious and less optimistic for their own organisations than the economy at large, with performance being driven by large companies and mid-tiers more negative.

Political risk and lack of faith in government’s commitment to creating a sustainable economic framework weighs heavily on business uncertainty despite policy predictability. Corruption, the management of parastatals, education and its impact on the future skills pipeline as well as delivery capability are a debilitatingly slow puncture.

CFOs have personally weathered the storm well and become more adept at dealing with the challenges but at the cost of increasing pressure of accountability for poor organisational performance, role enlargement, and excessive responsibilities. The immediate demands of the downturn forced CFOs to prioritise the traditional, internally-focused components of their role, namely as Steward and Operator despite recording a preference for a higher allocation to the Strategist and Catalyst components. CFO levels of stress have increased markedly, particularly as a result of being held accountable for poor performance and role enlargement. The requirements and expectations of their role account for more than half of CFO stress levels.

CFOs share a realistic and relatively neutral expectation of the impact of the Soccer World Cup remaining positive towards the sentiment and reputational benefits of hosting the tournament. Only 28% foresee a positive impact on their own organisation’s earnings as a direct result of the event and even fewer expect a long term benefit. At the other end, only 19% anticipate a negative impact, and this view is held irrespective of the expected disruption to businesses.

“Two primary reasons appear to drive these perceptions,” says Harrison. “Firstly, much of the revenue has already accrued in advance of the tournament, largely through construction investment, advance and rescheduled travel arrangements and the investment in working capital and inventories. Secondly, the material benefit to those sectors most directly impacted by the event is expected to be offset to some extent by the additional risk associated with the need to recoup the higher working capital levels in the face of uncertain visitor numbers and spending,” concludes Harrison.

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