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Displaying items by tag: South Africa’s Economy

JOHANNESBURG - South African markets are pricing in the possibility of an interest rate hike this year as the rand falls, even though economists say this is unlikely as inflation expectations have not breached the upper end of the central bank’s target range.
 
South Africa’s rand has slumped nearly 9 percent against the dollar year to date, hurt by global risk-off sentiment and poor domestic economic data. It fell to a 7-month low last week.
 
Capital Economics senior emerging markets economist John Ashbourne said the currency fall has raised speculation that South African policymakers would follow some emerging market countries that have started raising interest rates.
 
Some have moved as a pick-up in their economy or other factors push up inflation, while others are being forced to act to steady their currencies.
 
South Africa’s forward rate agreements are implying a 25 basis-point hike in interest rates by the end of the year.
 
But a Reuters poll found last week that economists expect the South African Reserve Bank to keep its repo rate unchanged at 6.5 percent until 2020.
 
“We think that markets are getting ahead of themselves by pricing in rate hikes in South Africa... We do not think that this is likely,” Ashbourne said in a note.
 
“Policymakers have explicitly said that they will not react to currency moves until they see a lasting effect on domestic inflation. And the pass-through between currency moves and inflation is weaker in South Africa than in many other EMs.”
 
The central bank said in May it would maintain its vigilance to ensure inflation remained within the 3 to 6 percent target range, and would adjust the policy stance should the need arise.
 
The bank currently forecast CPI to average 5.1 percent in fourth quarter 2018, and 5.2 percent in the last quarters of 2019 and 2020. The next interest rates decision and inflation forecasts are due on July 19.
 
South Africa’s consumer price inflation slowed to 4.4 percent year-on-year in May as the rise in food prices eased.
 
“A weaker currency makes (the central bank) more fearful but it depends on how it impacts inflation twelve months out,” Citi economist Gina Schoeman said.
 
“We don’t think we will see rate hikes in 2018. It doesn’t mean there is no risk of it, and the market is correct to price for that.”
 
Schoeman said rate hikes over the past five years happened when the inflation forecast for twelve months out had breached 6 percent and stayed above that for two or three quarters.
 
“So it has to not only breach 6 percent, it has to also breach it for a sustainable amount of time. If it is not doing that, then we don’t have a risk of interest rate hikes,” she said.
 
Mexico’s central bank raised its benchmark interest on Thursday in a bid to counteract the effects of a peso slump and keep a downward inflation trend on track.
 
Argentina, Turkey, India and Indonesia are among the other countries hiking rates.
 
-Reuters 
Published in News Economy
Monday, 25 June 2018 15:20

SABS under fire for costing SA R4bn a year

The SA Bureau of Standards (SABS) has been strongly criticised by business, which says the entity is losing the country at least R4 billion a year in exports in the manufacturing and engineering sectors alone.
 
This comes after years of businesses complaining about a lack of testing by the SABS, resulting in manufacturers losing contracts because they are unable to obtain the SABS mark timeously, or they have been unable to renew 2 600 permits to use the mark.
 
Trade and Industry Minister Rob Davies is assessing representations from the SABS board on why he should not go ahead with his intention to put the entity under administration for not performing to its mandate. The SABS falls under Davies’ department.
 
Steel and Engineering Industries Federation of Southern Africa economist Marique Kruger said the lack of testing and certification by the SABS within the required time frames was a concern, as certification was often needed for products to be sold locally and internationally.
 
Kruger said trade deals being delayed or cancelled due to a lack of testing hit smaller businesses the hardest and caused a loss of billions in exports a year in the manufacturing and engineering sectors.
 
“The impact on the domestic production value chain is also huge,” she said.
 
Director at GAP Holdings, Theuns van Aardt, said manufacturers in the solar water heating industry were “tearing their hair out” because they “cannot get a system approved by the SABS”.
 
He said the piping, pump and valve industries were similarly affected, and were “being put at massive risk”.
 
Business development manager Carolien van der Horst of the SA Capital Equipment Export Council said the SABS was also failing to audit the local content of products supplied in government contracts as stipulated in government’s Industrial Policy Action Plan.
 
Van der Horst said this resulted in companies possibly supplying imported products when servicing tenders from state entities. However, she said it seemed that no one wanted to pay for the SABS to conduct these audits.
 
SABS CEO Boni Mehlomakulu hit back at industry and the department of trade and industry this week, saying she was fulfilling her mandate according to policy that was implemented in 2005.
 
She said the issues affecting industry were inherent in the policy, which emerged from the 2004 National Economic Development and Labour Council (Nedlac) report, titled Modernising the South African Technical Infrastructure.
 
Informed by a department of trade and industry position paper in part authored by Lionel October, who was then the department’s deputy director-general, Nedlac agreed that the SABS should split into a commercial testing and certification entity, and its statutory standards setting body should be funded by government.
 
Previously, the SABS was the only testing entity, and business wanted policy changed to allow private testing laboratories to be able to compete with the SABS.
 
She said that, to protect the SABS from litigation where products had failed on the market as only select components had been tested, partial testing – up until then a norm – had been stopped in 2015, which elicited an outcry from industry.
 
There were also expectations that the SABS maintain 32 laboratories established in the 1970s – which Davies has said would take R1.6 billion to upgrade – and conduct the full array of tests for all compulsory standards, contrary to its commercial mandate.
 
Mehlomakulu added that there were certain companies that required a test once a year, and the SABS was expected to maintain the facilities and retain the expertise to conduct those tests, yet it was still required to be profitable.
 
She said she felt the department was not supporting its own policy: “For me, what’s unfair is the fact that no one wants to own the policy position, no one wants to talk about it.”
 
When questioned about the SABS’ R44 million loss in the 2016/17 financial year, she said the department pulled R55 million from its budget at short notice, so the loss was budgeted for and the SABS’ commercial arm was having to fund its statutory entity.
 
Mehlomakulu said the backlog of expired permits had been dealt with and she had developed a corporate plan to approach private funders to raise the capital to upgrade infrastructure because previous requests to Treasury had been turned down.
 
Regarding the auditing of local content to comply with recommendations in the Industrial Policy Action Plan, she said government entities saw it as another auditor-general activity and complained that the SABS was too expensive, while on the verification of local content on Transnet’s 1 064 locomotive purchase, the SABS “was blocked, totally blocked”.
 
“They would rather give the work to a private company because there aren’t all of these rules for transparency, reporting and all of that.”
 
Asked whether she believed private companies were getting paid off to produce compliant audits, she said: “I’ve seen it.”
 
Source: News24
Published in Bank & Finance
Inflation eased to 4.4% for May compared to 4.5% in April, despite the implementation of a VAT hike implemented in April.
 
This is according to Statistics South Africa (StatsSA), which on Wednesday released the consumer price index figures for May. The index increased 0.2% month-on-month.
 
The market consensus was for CPI to accelerate to 4.6%, and in a market update on Wednesday RMB economist Isaah Mhlanga had projected an increase to 4.8% having considered the VAT pass-through.
 
Mhlanga also expected the fuel price and weak rand to impact inflation. “The oil price and a weak rand have had a huge impact (on inflation), but the second-round effects will only be visible in the months to come and they are difficult to quantify and separate from the first-round effects,” said Mhlanga.
 
He expects the current account deficit data due on Thursday to be a “shock to the currency”, RMB projects it to be 5% of GDP.
 
By 10:23 the rand was trading 0.44% firmer from the previous close at R13.68/$. 
 
Contributors to May's inflation include food and non-alcoholic beverages which increased 3.4% year-on-year. Inflation for restaurants and hotels increased by 5% year-on-year.
 
Transport contributed to the month-on-month inflation, the index increased 1.2%.
 
In May the CPI for goods increased by 3.5% year-on-year, unchanged from April. The CPI for services increased by 5.3% year-on-year, also unchanged from April
 
South: Fin24
Published in News Economy
Eskom's current load shedding due to the impact of protest action by workers will add to the weakness of the South African economy which is already battling, Economist
 
"Load shedding is unfortunate, because South Africa already has serious economic problems. Load shedding will take away consumer and business confidence as South Africans are already struggling to make ends meet," said Schüssler.
 
"Investors have pulled out of South Africa and continue to do so. South Africa has so many protest actions. It really hurts the economy."
 
He believes it will be harder for the local economy to catch up on whatever pace it loses now, due to the impact of load shedding. It would also make it harder for the country to avoid going into a recession.
 
"South Africa is sending out a message that we have severe interruptions in economic activity, and that we are not quite as open for business as we'd like to advertise," said Schüssler.
 
"We are creating a reputation of not implementing what we claim we will do. We say we will create a certain number of jobs and that we are open for business, but then Eskom implements load shedding."
 
'Totally irresponsible and grossly negligent'
 
"If this is the way Eskom's new management wants to run the power utility, then they must not be surprised that we are having load shedding and blackouts. In my view, it is totally irresponsible and grossly negligent of them to operate the national energy supplier in this way. This is very serious," said Blom.
 
He thinks Eskom's management could even be held personally liable for losses due to load shedding.
 
"They knew what was coming and know how vulnerable the situation is. We are heading for dark days and if Eskom wants to bully its workers and bully analysts critical of its management, the public should act as watchdogs," said Blom.
 
Earlier this year, Fin24 reported Blom as warning that load shedding could likely be expected this winter. Eskom subsequently denied that possibility.
 
"Eskom will remain vulnerable until it sorts out the labour and coal issues - which will not be soon. Furthermore, I hear of plant breakdowns," said Blom.
 
Credit: Fin24
Published in Opinion & Analysis
Barclays Africa Group Ltd. may halve the number of top jobs at its South African retail and business bank as it reorganizes after its British parent cut its stake, according to a person familiar with the matter.
 
The Johannesburg-based lender started talks to consult executives on a plan that may result in the reduction of top management roles in the unit to 12 from 27 to flatten the company’s management structure, the person said, asking not to be identified because the matter is private. Once the consultation process is completed, the jobs will be advertised and executives who aren’t selected will be considered for employment elsewhere in the company, the person said.
 
Barclays Africa is reverting to the Absa Group name and revamping its strategy after Barclays Plc cut its controlling stake to below 15 percent to trim back its international operations. Chief Executive Officer Maria Ramos is embarking on a second round of top management changes after announcing in April that she is refocusing the company around four main divisions -- retail and business banking, corporate and investment banking, rest of Africa, and wealth management and insurance.
 
The South African retail and business banking division “is the first to commence a process of overhauling its structure” so that it fits with an organizational culture built around entrepreneurial drive and accountability, while “restoring market leadership in our core businesses,” Barclays Africa said in an emailed response to questions. “The aim is to create businesses that are agile” and collaborate well, it said, declining to comment further until the process is complete.
 
On the Payroll
 
The lender is seeking to double revenue from its business in the rest of the continent to 12 percent, while regaining market share among consumers in South Africa, where the retail and business banking unit accounts for more than half of the group’s earnings. Arrie Rautenbach, the CEO of the retail and business bank, will keep his job, the person said.
 
Plans to cut the number of executive jobs come a month after Deputy CEO David Hodnett, who in May last year was put in charge of the retail bank, resigned before completing a two-month sabbatical. Each person affected by the changes could remain on the bank’s payroll for up to three months before making a decision to either stay with the company or move on, the person said.
 
Craig Bond, the CEO of partnerships, joint ventures and strategic alliances, stepped down on Thursday after choosing to take early retirement, according to an internal memo, which was seen by Bloomberg News. Bond decided the time had come to “pass on the baton to new leadership,” it said.
 
The Costs Challenge
 
Barclays Africa’s operating expenses rose 2.9 percent faster than revenue growth in 2017 as the lender struggled to boost income amid an anemic South Africa economy and unemployment at a record high. Gross domestic product shrank 2.2 percent in the first quarter of this year from the prior three months as Jacob Zuma’s scandal-ridden tenure came to an end, with Cyril Ramaphosa replacing him as president in February. The central bank expects the economy to expand 1.7 percent this year.
 
“The economy is weak, so getting top-line growth is going to be difficult,” especially in the retail-banking business, said Adrian Cloete, an analyst at PSG Wealth in Cape Town. “It makes sense that they look at their costs.”
 
Shares in Barclays Africa declined 2.1 percent as of 10 a.m. in Johannesburg, in line with a 2.2 percent drop in Standard Bank Group Ltd., the largest lender in Africa, and a 2 percent drop in Nedbank Group Ltd. Barclays Africa in March said it will control costs while predicting improvements in loan and deposit growth.
 
Source: Bloomberg
Published in Bank & Finance
Thursday, 14 June 2018 10:18

Sipho Pityana to lead Business Unity SA

Sipho Pityana, businessman, Save SA convenor, and outspoken critic of former president Jacob Zuma, is set to take over as president of Business Unity South Africa (BUSA) later in June.
 
Pityana, the founder and chairman of black economic empowerment group Izingwe Capital, was unanimously nominated for election as president. He will take on his new role with effect from June 26, when the next AGM takes place, BUSA said in a statement on Tuesday. 
 
He will take over the reins from Eskom chairperson Jabu Mabuza, who served for two terms. Martin Kingston has been nominated to serve a second term as vice president. 
 
The new BUSA board and elected members will be ratified at the AGM.
 
"It’s an honour to be asked to serve the unified voice of business at such a critical time in our struggle for transformative inclusive economic growth, as we position our country to be a successful participant in the Fourth Industrial Revolution," Pityana said in a statement.
 
Pityana currently holds positions on various boards, including AngloGold Ashanti. He has held board positions at companies listed on the New York, London and Johannesburg stock exchanges, as well as unlisted companies.
 
He was the former chairperson of the National Students’ Financial Aid Scheme, or NFSAS, and is currently chairperson of Council of the University of Cape Town. He was also previously the chair of the Council for the Advancement of the South African Constitution.
 
Pityana also has experience in government, having served as director-general of the Department of Foreign Affairs from 1999 to 2002. He was also director-general of the department of labour from 1995 to 1999.
 
He was one of the founders of the National Economic Development and Labour Council (NEDLAC) and the Council for Conciliation Mediation and Arbitration (CCMA).
 
Pityana has served in a number of other business groupings. 
 
BUSA, in a statement, recognised Pityana's "strong sense of civic duty" which led him to form advocacy group Save SA, after revelations of state capture emerged. 
 
Other elected BUSA board members include Absa CEO Maria Ramos, Managing Director of the Banking Association of South Africa Cas Coovadia, and CEO of the Minerals Council of SA - previously known as the Chamber of Mines - Roger Baxter.
 
Speaking on his term of office, Mabuza said he was confident that he was leaving the organisation in a "stronger state", with business having a credible voice anchored by "constructive engagement" with social partners.
 
"It is critical for business to adopt a proactive and unified stance as it seeks to unlock value in the economy and address poverty, inequality and unemployment. I congratulate the incoming board under the leadership of Sipho," said Mabuza.  
 
 
Source: Fin24
Published in Business

In recent months we have seen some confidence return to our market’s and a mood of optimism reflects in everyday life as we vision a new dawn under the leadership of President Ramaphosa.

A dark cloud still looms overhead in the form of wasteful expenditure and struggling State Owned Entities (SOEs) that have emptied the coffers of South Africa and continue to require funding from the government to remain going concerns. Ultimately, this will need to be funded and a large part of this will need to come through taxes.

In releasing the budget in February this year, government took a brave step to increase the VAT rate, that will have far reaching consequences for both rich and poor. Although this has been positive from an investor perspective, is this something the consumer can afford along with other sin taxes including a newly released sugar tax?  

Much has been said about the budget, but not much time has been spent in quantifying the impact on consumers at different income levels. In a society like South Africa with high disparities between rich and poor, income elasticity plays an important part where any increase in price has an almost immediate impact on buying behavior, with consumers especially at the lower levels switching to cheaper products of possibly inferior quality or stopping buying products from that category at all.

In analyzing buying behaviour it is important to understand consumption patterns across different socio- economic levels, as this defers significantly. This is summarized below:

SA Canback graphic 1

                                                                               Source: ILO, C-GIDD, Canback Consulting

The marginalized population (Average Annual income below R26,000), making up more than 50% of SA society, spend about 35% of what they earn on food and beverages. Over 50% of their income is spent on basic goods. The graph above highlights the great disparity between rich and poor in buying behavior, driven by income levels and affordability.

In further analyzing the impact of the budget, using Stats SA data for consumption expenditure, further breakdown through our analysis into the socio-economic classes we concluded that in percentage terms the average impact across all levels is about 5.6%. This is a further 40% increase to the impact of inflation (4%) data released for February 2018. The impact across socio-economic levels is highlighted in the table below:

SA Canback Graphic2

                                                                           Source: Canback Consulting

The increases, at the lower end is less than the upper end mainly attributable to a larger consumption of basic foods with a portion of that being zero VAT rated and lower % of expenditure branded goods, including alcohol, tobacco and sugary drinks.

Although it seems the impacts are similar in percentage terms, we should keep in mind that a R55 increase to a consumer for every R1,000 spent for those spending more then 50% of their income on basic needs is far greater than a R 61 increase to a consumer on every R1,000 spent at the higher end where only 12% is attributable to food and beverages

Reducing the impact by removing the Vat impact makes for interesting reading. This is illustrated in the table below:  

SA Canback graphic3

                                                                                Source: Canback Consulting

This will reduce the impact by about 10% of the total impact, or excluding an inflation increase it will reduce the impact on the consumer by one third (33%). This highlights its significance in the budget impact. Coupled with the recent price increase on fuel, with prices over time being passed on to consumers we can expect 2018 to be a tough year for the consumer, that would impact an already stuttering economy trying to get going again.

Lower to medium end consumers will struggle to absorb the latest budget and further increases may have dire consequences for them. South Africa can not afford any more slip ups and expect to pass on this cost to the consumers through budget increases.

For this to materialize policy changes is necessary. This includes a commitment to improving education at all levels and ensuring accessibility to grow the workforce, a firm commitment from government that it will not fund inefficiencies by acting as lender and guarantor of last resort to State owned Entities (SOEs), reducing the public sector wage bill with salaries for government employees at 35% of expenditure, , improving governance and fiscal discipline within the public sector and at SOEs, instituting reforms across SAs most important sectors to drive investment and transformation; and creating a business conducive environment within the private sector to ensure ease of doing business mainly for small to medium enterprises (SMEs).

The governments inability to address these items in future will further impact confidence and the economy and drive up tax rates for consumers.  

Published in Economy

South Africa’s economy fell into a recession for the first time since 2009 after it contracted for a second straight quarter in the first three months of the year as all bar two industries shrank.

Gross domestic product receded an annualized 0.7 percent in the first quarter from a contraction of 0.3 percent in the previous three months, Statistics South Africa said in a report released on Tuesday in the capital, Pretoria. The median of 19 economists’ estimates in a Bloomberg survey was for 1 percent expansion. There was only one forecast for a contraction.

While rains are helping Africa’s most-industrialized economy recover from a 2015 drought that was the worst since records started more than a century earlier, political uncertainty has hampered implementing reforms aimed at boosting growth. President Jacob Zuma changed his cabinet and fired Pravin Gordhan as finance minister in March, a move that saw the nation lose its investment-grade status with two ratings companies for the first time in 17 years.

“There is a risk that these contractions are not over and we could see another negative coming out in the second quarter of this year,” Annabel Bishop, the chief economist at Investec Ltd., said by phone from Johannesburg.

Industry Performance

All industries except agriculture and mining contracted in the quarter, the statistics office said. The finance, real estate and business services industry shrank 1.2 percent, the first decline since at least the first quarter of 2013.

The rand lost 1.4 percent to 12.8920 per dollar by 12:22 p.m. Yields on rand-denominated government bonds due December 2026 rose 6 basis points to 8.49 percent, the first increase in five days. The six-member banks index extended declines after the release, dropping 1.7 percent in Johannesburg.

S&P Global Ratings and Fitch Ratings Ltd. affirmed South Africa’s debt at the highest non-investment grade last week, with both companies saying policy uncertainty, political turmoil and slow economic growth pose a risk to fiscal consolidation. Moody’s Investors Service, which rates the nation at two levels above junk, has the nation on review for a downgrade.

“The rating agencies, even if they have already done their assessments, will no doubt be downgrading their GDP outlook off the basis of these numbers,” Gina Schoeman, an economist at Citigroup Inc. in Johannesburg, said by phone.

South Africa’s growth slowed to 0.3 percent last year, the lowest rate since 2009, after low commodity prices, the effects of the prior year’s drought and weak demand for locally made goods weighed on output. Unemployment rose to a 14-year high in the first quarter. The business confidence index remains near the lowest level in more than two decades.

“The first quarter ended with the cabinet reshuffle and the second quarter started with the credit-rating downgrades, so in terms of consumer and business sentiment I can’t see an improvement,” Christie Viljoen, an economist at KPMG LLP in Cape Town, said by phone. “I’m not excited about a big turnaround in the GDP numbers for the second quarter, there’s just no reason to believe that at this stage.”

The central bank on May 25 reduced its forecast for growth this year to 1 percent from 1.2 percent, and trimmed the outlook for 2018 to 1.5 percent from 1.7 percent because of the anticipated impact of the downgrades.

Published in Economy
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