South Africa


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By Andre Roux

June witnessed a 5.3 index point decline in the seasonally adjusted Investec PMI to 43.8 from 49.1 in May, indicative of continued pressure on the manufacturing sector.

The seasonally adjusted business activity index dropped to 38.7 (lower than readings posted in 2003 when the sector was in a recession) pointing towards a sizeable contraction in factory output. The decline in new sales orders accelerated during the month. Pressure on input prices persisted, with the PMI price index printing at 90.8 (marking it the fourth consecutive print above the 90 point reading). The employment sub category printed below the critical 50 point level for the second consecutive month.

The combination of slowing demand and continued price pressures on input costs provide significant headwinds to the sector over the medium term.

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Source: Investec Asset Management, July 1, 2008.

 

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By Kevin Lings

In May 2008, SA growth in broad money supply (M3) was recorded at 20.9% y/y, down fractionally from 21.1% y/y in April. The market was expecting growth of 20.4% y/y. In May, claims on the private sector rose by a still relatively robust R15.9bn. Overall, while M3 growth remains high, there is some evidence to suggest a slowdown in the months ahead.

The growth in private sector credit rose marginally to 19.7% y/y in May, up from 19.6% y/y in April. Markets were expecting a modest slowdown to 19.4% y/y. This is the second consecutive month that the annual rate of growth in private sector has been below 20% y/y since December 2005, albeit only fractionally below 20%. In particular, there is evidence of a slowdown in mortgage credit, now growing at 20.6% y/y, well down from a peak of 30.9% y/y in October 2006 (see chart attached). Similarly, credit card growth is also easing (see chart attached).

In real terms (adjusting for inflation), the growth in private sector credit (excluding investments) has obviously slowed noticeably, mostly due to the rise in inflation. Real credit is now growing at only 8.4% y/y, well down from the recent peak of 20.8% y/y in February 2007. During that time inflation rose from 5.7% to 11.7% – 6 percentage points.

On a trend basis, the annual growth in credit demand is clearly showing signs of slowing, albeit very slowly. There is evidence that the previous increases in interest rates, the introduction of the NCA, and the slowdown in disposable income growth are having a moderating impact on overall demand for credit as well as consumer and housing activity. This is expected to continue throughout the remainder of this year and well into 2009.

Unfortunately, from an interest rate perspective, I suspect the Reserve Bank would want to see a much more convincing slowdown in credit demand. Overall these numbers, together with the disappointing inflation data released last week, are generally more supportive of a further rate hike in August.

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Source: Kevin Lings, Stanlib, June 30, 2008.

 

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By Kevin Lings

For a number of months we have been highlighting the enormous and increasing pressure on the consumer. This follows a four-year period of astounding growth in consumer income and spending, as well as an unprecedented increase in consumer debt. The release of the Q1 2008 SARB Quarterly Bulletin yesterday provides some additional evidence and confirmation of this pressure. The following is a list of the current key factors impacting negatively on the consumer, including the factors identified from the latest Quarterly Bulletin:

• SA interest rates have increased by 500bps since June 2006 and are at their highest level since July 2003. Unfortunately a further rate hike of 50bps cannot be ruled out in August 2008.

• SA household debt reached an all-time high of 78.2% of disposable income in Q1 2008. Consumers have more than doubled their debt in the last four years

• The interest cost of servicing debt has increased from only 6.3% of disposable income in Q1 2004 to over 11.5% of disposable income in Q1 2008. This is likely to increase further.

• SA consumer savings levels continue to deteriorate. In Q1 2008 net household savings, as a ratio of disposable income, were recorded at -0.7% and at -0.6% for 2007 as a whole. The 2007 level is the lowest net annual consumer savings rate ever recorded in South Africa. Unfortunately, this suggests that the average consumer has almost no savings as cushion during hard times.

• Personal disposable income is now growing at only 2.7% q/q in real terms. This represents a massive slowdown relative to the peak growth rate of 9% real in Q4 2006. Given that consumer inflation is now rising faster than most wage increases, disposable income is likely to continue to slump, dragging the growth in consumer spending lower.

• During the period 2004 to 2007 SA employment rose by an impressive 1.8 million. However, given the current slowdown in economic activity, employment is unlikely to experience much growth at all over the next year. Hopefully, the general skills shortage will help to contain job losses.

• Key non-discretionary spending items are up dramatically in price, in particular fuel, food and electricity. Electricity tariffs have been increased by 27.5% for the year 2008/2009, with increases of between 20% and 25% a year expected for the next three years. Consumer food inflation is currently at 15.9% y/y, while the petrol price has increased by 38% over the past year with a further very large increase expected in July. The current average under-recovery on the petrol price is around 70c/l. This implies that discretionary consumer spending on items such as cars, furniture, appliances, clothing, jewellery, etc will be under enormous pressure for at least the next year.

• SA house prices have started to slump. The ABSA house price index shows that the growth in the average house price has declined from well over 30% y/y in 2004 to a mere 4.3% in May 2008. The STD Bank house price index shows house prices declining by 13.2% y/y in May 2008. The slump in house prices is likely to create a negative wealth effect, which will further hurt consumer confidence and spending.

The combination of the above factors is likely to lead not only to a very significant slowdown in consumer activity, but also a very noticeable and perhaps alarming increase in debt defaults over the next 18 months.

Source: Kevin Lings, Stanlib, June 20, 2008.

 

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By Kevin Lings

In Q1 2008 South Africa recorded another shock current account deficit, equivalent to 9.0% of GDP. This compares with a deficit of 7.5% of GDP in Q4 2007 and 8.1% of GDP in Q3 2007. In value terms, the current account deficit widened to a record R194.7 billion from R157.7 billion in Q4 2007 (these are annualised numbers). For 2007 as a whole, the current account deficit was recorded at R145bn (7.3% of GDP).

Despite the sustained high commodity prices, SA’s exports reflected a relatively modest gain in Q1 2008, rising from R573 billion (annualised) in Q4 2007 to R614 billion in Q1 2008 – an increase of 7.2% q/q. In volume terms exports actually shrank by 7.2% between Q4 2007 and Q1 2008 (largely due to the impact of power outages on the mining sector). In contrast, imports rose from R600 billion (annualised) to R676 billion over the same time, an increase of 12.7%, largely due to increased oil, and machinery and equipment imports as well as the importation of a third submarine for the SA Navy. (Imports were up 3.4% in volume terms.) This means the trade deficit widened from R26.7 billion in Q4 2007 to a massive R61.4 billion in Q1 2008.

Importantly, as mentioned many times previously, the services account also remains under pressure. As a percentage of GDP the services account was recorded at 6.1% of GDP in Q1 2008. This compares with 6.2% in Q4 2008, and 5.5% in Q3 2007. It is clear from the charts attached that the services account has been widening significantly over the past few years, mostly due to an increase in net dividend outflows. In fact, in Q1 2008, the net dividend outflows amounted to 3.5% of GDP, exceeding the trade deficit, which was around 2.8% of GDP, in the quarter.

Given the increasingly large foreign ownership of South Africa’s equity market over the past four year, net dividend outflows from listed shares have risen noticeably. In addition, foreigners have a sizeable direct ownership of a number of unlisted companies. This means that net dividend outflows from South Africa have risen rapidly from a mere R10 billion, on an annualised basis, in Q1 2000 to a staggering R76.6 billion in Q1 2008.

Fortunately, although SA recorded its largest current account deficit, as a percentage of GDP, since 1982, foreign direct inflows were boosted in Q1 2008 by ICBC buying a 20% stake in STD Bank. This inflow accounted for most of the R40.6 billion increase in inward FDI. In contrast, portfolio investment declined by a net R20.6 billion in the quarter, while ‘other investment’ inflows increased by R34.3 billion. The ‘other investment’ inflows represent mainly non-resident rand and foreign currency deposits as well as short-term foreign loans by these banks. This is due to the increased interest rate differential between SA and many other, mainly developed, countries. (This is known as the carry trade.)

Looking forward, the current account is likely to improve, albeit modestly, during the remainder of 2008 on the back of an improvement in mining production and a slowdown in the domestic economy, and hence some import demand. However, looking further out, there is little doubt that South Africa’s import demand will rise noticeably in the years ahead as the country embarks on an extensive, and possibly unprecedented, infrastructural development programme. Consequently the trade account is set to remain in deficit for the foreseeable future. At the same time the dividend outflows, while perhaps boosted in recent years by exceptional corporate earnings, are also likely to remain relatively large over the next few years given that foreigners own around 25% of the listed shares on the JSE. Hopefully, the development of SA’s infrastructure, especially the port and rail infrastructure, will lead to some increase in exports in the years to come. Irrespective of the potential increase in exports, SA is set to run a current account deficit for many years. Ironically, this is actually crucial for the development of the country given that most of the key capital equipment needed to enhance the productive capacity of the country will have to be imported.

All of this is likely to raise significant concerns about the potential for further weakness in the currency. In the past few years the increased capital flows to South Africa have really been part of a dramatic increase in developed-market capital flows to emerging markets. These flows not only reflected the global search for yield, but also the improving economic fundamentals within most emerging markets. These included higher sustained growth, ongoing fiscal discipline and fiscal credibility, undervalued exchange rates, managed inflation rates, low foreign debt, improved credit ratings and a generally more friendly business environment. These are certainly the factors that benefited South Africa from 2003 to 2007. Unfortunately, the situation changed somewhat during the first half of 2008, and not just for South Africa. This change is reflected in the net portfolio outflows in Q1 2008. Fortunately, the ICBC/STD Bank deal clearly helped the balance of payments significantly in Q1 2008, but it would be naïve to believe that these types of deals can occur every quarter. This means that in the short term the country has become extremely reliant on the so-called ‘carry trade’, which really reflects the favourable interest rate differential between SA and Europe/US. This is far from ideal and represents a significant risk, especially if South Africa starts to reduce interest rates.

All of which implies that not only does the risk to the rand remain high, but the currency is also likely to remain relatively volatile. The situation also highlights how important it is that South Africa builds on the economic successes achieved in recent years, and that economic policy management remains sound for the foreseeable future.

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Source: Kevin Lings, Stanlib, June 19, 2008.

 

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By Cees Bruggemans

As we approach midyear, the global and local scenes are still upping the ante daily.

Locally, we have just increased interest rates for the tenth time by 0.5% in two years, prime rising to 15.5%, with more increases likely. Perhaps not many more, but enough to turn yesterday’s outperformance to dust.

The economy is sending out clear signals, in consumption and private fixed investment spending, and in the building trades, manufacturing, transport, retailing and financial and business services, of heading for recession.

Saving graces such as windfalls in agriculture, non-gold mining and infrastructure construction (between them 12% of GDP), will probably not help us much. The implosions in other parts of our economy are just too severe for that.

If that is our local trajectory, we still have at least two nagging questions: Will Eskom once again surprise us with future blackouts, further knocking GDP growth? And will there be an early rather than a late switch in macro policy emphasis, such as raising inflation targets (or even abandoning them) and returning to deficit budgeting (as Turkey did only two weeks ago)?

Neither of these may happen. But we may as well worry about these things rather than suddenly being surprised by them.

The country has apparently not yet succeeded in sufficiently changing its electricity balance. Unless power is unintentionally saved by much slower growth, winter peak loads may yet cause unscheduled load shedding, further reducing GDP growth.

Easing the macro policy stance would in the short term ease the growth sacrifice in progress. But it could also weaken rand prospects and further increase inflation (and interest rate) prospects in the medium term. Not necessarily a happy prospect, reminding one of the evolution in the 1970s.

Although important in potentially influencing our future financial and economic trajectories, these local forces may not be our most decisive drivers. These are most probably still based offshore, shaping the global environment, whose influences are steadily shaping our existence, like weather depressions this time of the year accumulating over the Atlantic and heading for Cape Town.

On this score, the world plainly can’t quite believe what appears to be still heading its way.

After being sandbagged by fearful Anglo-Saxon housing, banking and credit adjustments, which in their own right are capable of turning off the global lights if left unattended, quick central bank responses saved the day.

With these emergencies still only half addressed, an even bigger adjustment threatened. Oil and food prices, having already risen for five years and therefore thought to be approaching a cyclical peak, accelerated into 2008 with undiminished vigour. This process may not yet be at an end, judging by oil and agricultural commodity prices.

This possibility continues to boggle global minds. Surely, with oil prices this high and global GDP growth distinctly slowing, the oil demand/supply balance will improve to the point of causing an oil price relapse?

Well, yes it will happen eventually, but not necessarily quickly, or at least not without some serious mayhem.

A quick analysis reveals two components to global oil demand (rich world/poor world), three components of supply (OPEC, Non-OPEC and substitutes), inventories and the buffer between actual demand and supply capability.

The unvarnished truth is that rich OECD oil demand has not grown at all in recent years, and fell by 0.3 million barrels daily last year. But poor emerging demand continued to surge by 1.4 million barrels daily.

The rich world practices conservation and substitution, and grows very slowly into the bargain. The US economy is most exposed to rising oil prices, and has the most potential for reducing demand.

But a US equivalent part of Asia subsidises its oil demand, encouraging wasteful oil demand growth on top of rapid GDP growth. Though cracks are appearing in these arrangements, many governments remain intimidated by their internal political trade-offs.

The long and the short of it is that global oil demand is slowing, but only gradually.

Instead of oil supply vigorously expanding new investment in response to steeply higher prices, resource nationalism in many OPEC countries inhibits this. Worse, non-OPEC countries experience physical setbacks (old oilfields running down), manmade disasters (civil war, government incompetence) and natural ones (hurricanes).

Thus we find that global supply barely keeps pace with oil demand gains, with the only real additions coming from biofuels, and other substitutes still technically disappointing.

As a consequence, global commercial inventories aren’t really rising much, the global supply buffer remains an uncomfortably low 2mbd and the biofuel response is destabilising global agriculture.

This, by the way, is the configuration that got us from $30 to $140 oil, with the imbalance actually deteriorating slightly over the intervening years.

So what drives the oil price higher?

Global consumers and financial players are not comfortable with a small 2mbd supply buffer. When a minor oil producer gets knocked out (something that happens quite easily, be it as a result of a hurricane, civil war or whatever), the world could suddenly go short of oil.

The global market-place is trying to rectify this situation by pre-emptively bidding up the oil price in search of adequate buffer insurance, commonly thought to be 5mbd.

But no matter how the oil price rises, global supply is unable or unwilling to oblige by raising output fast enough. Thus the accommodation has to come from the demand side. Here some slow change is under way in some regions owing to slower growth, conservation and substitutes, but other regions adjust their oil demand much more gradually.

The net result is a persistent process of global price discovery, steadily pushing oil prices higher in search of a resolution to the demand/supply balance that will provide long-term stability.

Does that sound familiar? Creating maximum short-term instability so that we may have long-term peace of mind? If that sounds like war, it is entirely unintended.

This is the structure of the evolving global economy and market adjustment mechanisms talking. It is realism at its worst reshaping our world.

How bad can it get?

Gazprom went live with a $250 view last week for 2009, topping Goldman Sach’s $200 view of last April. I met some farmers recently who are planning for another 50% increase in the next twelve months. That would top $200.

Even if partly softened by the existing fuel levy, another 40% gain in refined oil product prices to R14/litre would directly add 2% and indirectly probably a further 2% to the coming CPIX inflation peak of 12%, to which any Eskom tariff increases over and above 14% must still be added.

At a guess, $200 oil next year would imply an early 2009 CPIX inflation peak of over 15%, oil and Eskom driven.

But this is before including any further agricultural surprises. Unfortunately, the Northern planting season is already disappointing in parts (US Midwest, Iraq, Western Australia). Maize prices are setting new global highs of over $7 a bushel daily.

Our current agricultural windfall is partly shielding us, but will that still be the case next year? At worst, we could be seeing yet another 2%-3% added to the CPIX peak, or at least an extension of the peak deeper into next year.

Does that suggest 15%-17% CPIX peaking territory, but lingering with us for much longer in 2009?

This is as yet not a formal forecast. But do realise where $200 oil, super Eskom tariffs and agricultural nasties will lead.

This is compared to a current CPIX of 10.4% and a core CPIX (excluding energy and food) of 6.1%.

We then have yet to model the business pricing and wage round responses to such a play-out, with any acceleration therein further extending the CPIX peak.

Meanwhile, going by the June MPC decision, the SARB is already getting cold feet about raising interest rates further and incurring too much unwanted growth sacrifice.

If our CPIX inflation trajectory has as much as 50% and possibly 70% further to go, and is spread over a longer time frame than ever imagined, what are we supposed to pencil in for SARB interest rate decisions?

Will we willy-nilly incur a deep recession and asset market implosions just to keep on matching CPIX gains with interest rate increases? Or will prime 20%-22% be a few bridges too far?

I believe SARB capitulation along Turkish lines would be somewhere in prime 16%-18% territory, if only because still rising oil and agricultural commodity prices had acquired an evidently self-destructive streak.

In other words, a breaking point globally would eventually approach, in which growth would fall away sufficiently for oil price discovery to end and the long-awaited price implosion would get under way.

Hopefully at some point the SARB would envisage such an end-game, incorporate this in its two-year forecasts, act upon it by ceasing to raise rates, and indeed to start focusing on the return journey, with recession problems looming large.

The next 12-18 months may prove momentous. Hopefully oil prices will have receded enough by mid-2010 to make global visitors still willing to come and enjoy the World Cup with us in person rather than opting to remain behind their distant tellies.

That’s another risk we face. Not that the stadia aren’t ready (they will be), or that Eskom will switch off the lights (they won’t, at least not in cities hosting qualifying games) or that the tournament be cancelled (it won’t).

But too high an oil price could mean there would be more local tickets for resale after all.

An unpredictable few years still lie ahead.

Source: Cees Bruggemans, FNB, June 18, 2008.

 

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By Shaun le Roux

Equity markets around the world are struggling. Most markets are down in 2008 and are not significantly above their lows earlier this year. The Shanghai Composite in China is more than 50% down on its October 2007 high.

Equity markets have had to grapple with a toxic combination of slower profit growth on the back of weaker economies and rising inflation. The US has been forced to slash interest rates and this has had the effect of stoking the inflation fire via high and rising commodity prices. Loose US monetary policy is imported into the developing nations where growth in demand for commodities is strongest which partly explains the high levels of food and energy inflation. Furthermore, investment demand for commodities is strong - they act as an effective hedge against inflation and a weaker US dollar.

Equity markets never like inflation and they positively loathe stagflation. It is worth remembering that the almost 18 year bull market on the Dow Jones between 1982 and 2000 coincided with benign inflationary forces and low interest rates.

South Africa is suffering from a souped-up version of the same themes. Our inflationary pressures are especially acute of late. The latest projection by the Reserve Bank sees CPIX peaking at 12% in the third quarter of 2008 and only returning to the target range by the third quarter of 2010. Interest rates have been raised ten times and a cumulative 5% in two years, with more rate hikes expected in months ahead. The result has been a severe crimping of domestic demand and economic growth forecasts continue to be revised downwards.

Domestic equities have received a battering, particularly the financials, retailers and other cyclical consumer stocks. A large number of shares including some of our better known domestics are more than 40% off their highs of last year. In fact, according to Bloomberg last week only 76 out of the 370 shares they track on the JSE have gained in price this year. 287 shares are down in 2008, most sharply so. This implies that about 80% of the shares listed on the JSE have lost money for investors this year. Earnings forecasts for the next few years for domestic industrial and financial shares have been on the receiving end of an aggressive haircut. But, not only are higher interest rates impacting on levels of consumer spending and profitability but they also result in lower share price values as the rate at which future cash flows are discounted rises.

The speed and extent of the slowdown in consumer demand caught many businesses in South Africa napping. They were in the process of rolling out capacity to meet further anticipated growth in demand. The combination of weak demand, higher finance costs and input cost pressures has given rise to the abrupt wobble in corporate profits. While earnings have been light in many cases, a noteworthy element of some recent results announcements has been disappointing dividends.

Here, I refer you to Nampak’s recent results. Nampak has been a perennial disappointer but retained a strong following amongst investors attracted to its stable and high dividend yield. In its recent interim results, Nampak cut its dividend signaling a further cut in its full year dividend. This will be the first cut since I-Net share data for Nampak commenced in 1982! Besides being symptomatic of poor trading conditions the cut in dividend is a indicator of financial stress emanating from a very low dividend cover, high levels of gearing, rising finance costs and a growing working capital burden.

Of course, the boom in commodities has very effectively insulated the resource-heavy JSE from the global equity bear market and we have often discussed the bi-polar nature of the JSE All Share. However, this particular commodity cycle is quite long in the tooth and even the Resource shares will peak out at some point in the future, if they aren’t in the process of doing so currently. Under those circumstances the JSE will likely find itself suffering some of the woes afflicting other global equity markets.

Yet, to our minds, the very clear silver lining that is emerging in this sandstorm of despair is the value that is emerging within pockets of the equity market. Stock markets are very efficient discounting mechanisms but they always have a tendency to overshoot both to the up and down-sides. It is always the case that it is difficult to commit capital to the stock market when all the news is so gloomy. But, without exception the best and lowest risk returns are to be had when “there is blood on the streets” as Rothschild put it. Many of the stocks we cover are at very attractive valuation levels. We don’t anticipate a rebound in the near future but we remain of the view that the next few months will present a very attractive entry point for those that are fortunate enough to have capital available.

Source: Shaun le Roux, Alphen Asset Management, June 18, 2008.

 

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By Cees Bruggemans

As a foreigner of longstanding in this country, I have some interest in the phenomenon that got a burning man on the front page of the New York Times and Financial Times last month, in addition to numerous local papers.

What’s going on?

It has been a much-asked question, especially overseas. By the time I felt like I used to feel, attempting to explain the inexplicable and the unexplainable (not unlike the apartheid regime of old), something started to bother me.

Xenophobia refers to a hate or fear of foreigners. But what if this was the wrong word or concept entirely in our present context? What if someone had jumped to a misguided conclusion?

After all, black South Africans fearing or hating fellow black Africans? It’s preposterous, a far-fetched notion indeed, when there is apparently so much else to hate, when going for instance, by the barbarism displayed whenever crime gets a chance to strip away all veneer of civilized behaviour. Like in any war where rules get suspended and the jungle takes over.

The ingredients that go missing, yet are very central to genuine xenophobia internationally, are religion, race, social standing, ideology and nationalism. These features are absent in our black-on-black violence.

Dislike of foreigners may be standard procedure in many countries, potentially as diverse as complex homogeneous Japan and complex fragmented South Africa. But of itself this mustn’t be confused with xenophobia. Instead it merely reflects poor manners and suggests the absence of an open mind.

Genuine unquestioning tolerance is mostly found in world-class cosmopolitan cities, like the Amsterdam of old (though not today).

In contrast, real xenophobia is a much more intense, extreme manifestation than mere everyday dislike. It is a deep intolerance marked by specific triggers. Aside perhaps of tribalism, such triggers remain mostly absent in our setting.

What seems central to our condition is poverty. But what does that really suggest?

Try on the following for size:

In recent times, African migrants have found their way to this country in growing numbers, mostly because of dysfunctional conditions at home, including civil war and its poverty aftermath. They were pushed by events.

The more entrepreneurial elements decided to move on. Many probably lost their lives in the attempt. But the most resourceful, or downward lucky, succeeded in getting into Europe, and some even into the US, Canada and other Anglo-Saxon settler countries, where many encountered ‘real’ xenophobia in at least some places. But that is another story.

Some had heard of the fabulous wealth and opportunities down south, and hazarded the journey. With or without papers, they found a way into South Africa. Being poor, many focused on the teeming townships and informal squatter settlements on the outer margins of urban areas, where they could naturally blend in.

What stood out in these settings was a live-and-let-live tolerance, sharing common hardship. Indeed, it is quite remarkable what kind of polyglot reality mushroomed into existence on the edges of Johannesburg, Pretoria, Cape Town, Durban, Kimberley, Bloemfontein, Port Elizabeth, Wellington, Paarl, George, Nelspruit and a hundred smaller cities.

Zimbabweans, Mozambicans, Congolese, Malawians, Nigerians and people from the Great Lake district, but also West Africa and the Horn (Somalis and Ethiopians). A rich mixture of an entire Continent descended onto our urban fringes, mostly unknown in numbers, except everyone seems to be employing them informally and they monopolise every urban street corner of note.

The natural traders among them, foremost the distant Somalis, like the Boere “smouse” of old, zeroed in on the poorly serviced townships and settlements - retail opportunity made in heaven, or so many must have thought.

There was no competition of any kind, for the locals didn’t have the necessary experience, skill or capital, and white business was conspicuous by its absence.

For someone without papers and only a little capital or simply only an idea to his name, it promised to be the start-off place to greater things.

So far we have a standard self-made entrepreneurial setting in the midst of poor urban squalor.

What’s next?

What’s next is standard New York City, Los Angeles or Chicago, easily recognisable to those watching too much television. In other words, something out of NYPD or Kojak (remember Telly ‘Lollipop’ Savalas?).

When a small businessman starts up in a lawless jungle, predictable things happen. The luckless gather, like vultures descending on those few sources of easy pickings.

Rackets they used to call them. Pay protection money or we will ruin your store. Once a week, the punk does the rounds, collects the ‘rent’, and ‘promises’ some kind of vague ‘protection’. To most economists this sounds like a tax, except it ain’t collected by Trevor.

Just remember that in American cities the victims also used to be mostly foreigners. Italians, Irish, Polish, Russian, Armenians, Afghans, Jiddish, Latinos, Cambodians, Thais, Chinese, Indians, Cubans and what have you. But they weren’t singled out because of xenophobia. They were singled out simply because they were easy pickings, irrespective of their backgrounds.

Who decided to collect protection money or squeeze from ‘our’ Somalis from an early stage?

Look among the down-and-out, young, no schooling, no prospects, no hope and no money, but with a keen eye for easy pickings. In the townships they are generically known as Tsotsis, however true or appropriate that term may be.

Vultures preying on the weak.

They wouldn’t dare try on the strong, such as in the cities proper, but that is merely a misunderstanding. That niche on the crime beat has been taken by stronger elements, including (especially ironical) foreign elements, either with mafia or military training or other useful links.

So what happens in the big cities on an ambitious canvas (armed robberies, car hijackings, organised serial burglaries) was ultimately also imitated on a much smaller scale in the poorer marginal reaches of our urban existence.

For one needs to appreciate that this is not happening in the Transkei or in any other rural hinterland. It is a sickness of the urban setting, with hopeless elements preying on the helpless with a little money or a few goods to be lifted.

It is called crime and has absolutely nothing to do with xenophobia.

The victim just happens to be an entrepreneurial foreigner, small-scale and successful. At first criminal elements in their immediate surroundings started to milk them for protection money, swaggering in unannounced, just like in your favourite American gangster movies.

And then at some point somebody got greedy or had some other difficult-to-discern motive and decided to simply plunder these little stores.

Interestingly, once under way, the Tsotsi elements apparently proceeded to invite ordinary people to join in the plunder of broken-down shops, a sociological phenomenon yet to be fully explained. For were any predetermined organisation and objectives involved?

Whatever the precise motivation, such invitations were apparently too much of a temptation for many poor township dwellers, with free groceries coming suddenly within easy reach. The traditional madness of crowds apparently took over. Television and cell-phone socialising spread the basic idea like wildfire.

That was ultimately shortsighted. Milking gives long-term returns. Gutting shops for groceries gives only a one-off return, after which there is nothing left.

Not every foreigner was assaulted. Mostly only those that had something useful to lose were attacked, especially when defenceless. Books can be written about those untouched by the violence but still fearful of somehow falling foul of the raging mob, and having it rage all around them. After all, we have about two to five million black foreigners in our midst, and only some 30 000 were displaced.

Go figure what really happened.

The real irony is that it was over in a matter of weeks. Partly because a few hundred Tsotsis (and not a few otherwise upright citizens) were rounded up and locked away. More importantly because so many communities came to realise they needed these informal traders to make life more bearable, as their produce cost less than the far more costly products obtained outside the township. They wanted them back. Pronto!

Without too much formal organisation of note, and without apologies of any kind, informal street committees in communities started to welcome returning ‘foreigners’, wishing them to restart their plundered, gutted businesses.

That of course isn’t simple when your only business capital has been stolen and your mental state has been rather drastically rearranged by the rage observed and felt only so very recently. But given their innate abilities, the hardcore returnees will no doubt restart small, earn a little money, save most of it, and slowly recreate their businesses.

And the townships?

They will know better after this bad experience. The traders offer important services, irrespective of their origins. They need to be nurtured, not plundered.

What does that mean? It suggests the need for protection. Not the milking kind, but what we know as policing. But if the official variety cannot be relied upon, it may need to be privatised. That, too, sounds oh so familiar.

In other words, vigilantes, protectors or bounty hunters going after Tsotsis, may get to be in demand, if only very unofficially and not necessarily contracted by the vulnerable traders either, but by the communities they serve. Topsy-turvy world indeed.

That reminds me strongly of another version of American films. Modern American society was ultimately quite a social laboratory, and most of our modern existence can also be traced back in some form or other to the freewheeling border regions of the American Wild West.

Xenophobia? That’s a much too sophisticated label for what happened here. Rather try ordinary crime instead. Foreigners just happened to be in the wrong place at the wrong time. And they just happened to be black and vulnerable.

The real problem has been a breakdown in civil behaviour in the midst of poverty. And that’s a familiar problem throughout this country.

Source: Cees Bruggemans, FNB, June 17, 2008.

 

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By Kevin Lings

Fitch Ratings has revised the outlook for South Africa’s long-term foreign currency rating of ‘BBB+’ from Positive to Stable.

According to Fitch, “the revision of the outlook reflects a reassessment of South Africa’s medium-term potential growth prospects as supply side constraints have become more visible in 2008 and more challenging international economic and financial conditions. Rising inflation, a wide current account deficit and political uncertainties are creating a testing environment for policy makers.”

The following is a summary of Fitch’s comments:

GDP growth momentum slowed significantly in Q1 2008 to 2.1% on a seasonally adjusted annualised basis, due to severe disruptions to energy supply. But more generally, growth is slowing due to the impact of rising interest rates on consumer demand, and a less benign global environment. Although South Africa’s public investment programme will continue to underpin demand growth, tighter monetary conditions are already taking their toll on consumer spending. Electricity supply constraints and other infrastructure bottlenecks will limit growth potential until at least the end of the decade.

Inflationary pressures worsened over the past year due to global food and fuel prices and a weaker rand. The South African Reserve Bank has increased interest rates by 300 basis points over the past year, taking the total increase to 500 basis points since June 2006. Given ongoing global inflationary pressures, the impending rise in electricity tariffs and higher wage expectations, the SARB does not expect to bring inflation back within the target range until Q3 2010. This means that interest rates will need to remain higher for longer than previously expected in order to anchor inflation expectations, with adverse implications for growth.

The current account deficit was also boosted by rapid demand and credit growth over 2006 and 2007 but remains high even though consumer spending has slowed, reflecting its increasingly investment-driven nature. However, adverse global investor sentiment coupled with the domestic energy shock and increased political uncertainty, has made its financing more problematic. Cumulative net equity portfolio inflows (the prominent source of financing in the last two years) have been negative so far this year, resulting in a depreciation of the currency. Financing of the current account deficit remains a risk to the macroeconomic outlook. Fitch expects a much higher reliance on borrowing by the private sector and public corporations to finance the current account deficit, resulting in a worsening of gross external debt ratios. Nevertheless, starting from a comfortable position, gross debt ratios are forecast to remain moderate over the medium-term and provide support to the rating.

Public finances remain an important strength for the rating. The worsening growth outlook and cost pressures will negatively impact the 2008 budget, which Fitch expects to result in smaller surpluses or small deficits over the medium term, rather than the projected surpluses. Nevertheless, public debt continues to decline to below the ‘BBB’ median and could fall as low as 21% of GDP in 2010 from 27% in 2007. However, the energy crisis has fiscal implications. In support of Eskom’s massive capital spending programme, the government has committed ZAR60bn (2.7% of 2008 GDP) over five years to allow Eskom to borrow based on the strength of its balance sheet. This is included in the government’s budget projections. As a result of upward revisions to Eskom’s capital expenditure, the public sector borrowing requirement will increase to a still modest yearly average of 1.4% of GDP over the medium term from 1% in the previous budget.

Private credit growth is moderating with a more marked effect on household credit items, such as instalment sales and leasing credit. House prices have also started to fall. Bank NPLs are rising and banks’ earnings growth is expected to slow. However, the banking system is expected to be able to manage the impact of the economic downturn.

Fitch expects South Africa to continue to experience political uncertainty due to the ongoing transition to the new ANC leadership, as well as the impending corruption trial of the ANC president and likely future president of the country, Mr Jacob Zuma. Although Fitch does not expect a fundamental shift in policy, these factors are likely to affect investor sentiment until at least after the general elections in April 2009 and the trial is resolved.

Overall, Fitch believes South Africa’s sound fundamentals in terms of fiscal surpluses, strong public debt dynamics, higher reserves, moderate external debt and the flexible exchange rate and inflation targeting framework leave the country well placed to manage the impact of adverse shocks and support its current rating of ‘BBB+’.

While this is not a formal downgrade, the move from a ‘positive outlook’ to a ‘stable outlook’ is obviously negative in that it suggests it will be some time before Fitch awards South Africa an ‘A’ rating. Fitch upgraded to BBB+ on 25 August 2005 and during 2006/2007 it was hoped that the rating would be moved up to an ‘A’ rating.

While it is clear that the general economic environment has deteriorated, we had expected the rating to be left unchanged and the positive outlook maintained. (I met with the Fitch rating agency delegation and National Treasury on 5 June). I suspect the latest current account deficit of 9% of GDP, coupled with the increased political uncertainty and difficulties surrounding Eskom, led to the revision to the rating outlook. This is effectively the first step backwards South Africa has experienced in the rating process since Fitch gave the country its first international credit rating on 22 September 1994.

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Source: Kevin Lings, Stanlib, June 18, 2008.

 

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By Jeremy Gardiner

“Never buy on credit what you can afford to pay for with cash.” Sage advice from previous generations, but unfortunately too often ignored in today’s relentless pursuit of instant gratification.

Equally ignored are words such as prudence and diversification. Unfortunately, the time to plan appropriately from a diversification perspective is when times are good, and diversification by definition involves cutting back a bit on what is hot and diversifying into what is not! Which is always less fun and therefore not nearly as popular.

Human instinct being what it is, most people find this approach impossible. They either stay overinvested in what is hot, ignoring what is not, and worse still, some borrow or leverage to buy more of what is hot than they can afford. Of course, this inflates returns while what is hot remains hot, but when that which was hot, becomes not hot, it can exaggerate downside returns as well.

At the moment, unfortunately, not much is hot, and with rampant fuel and food prices driving further rate hikes, much out there looks set to remain cool for a while. The consumer is likely to remain financially challenged until rate hikes peak and at least show some promise of relief, which looks unlikely for another year. Equally, financials will remain under pressure while consumers struggle to repay loans and while sub-prime works its way through the system. This will probably take another six months; however, the after-effects of the shock, i.e. how long it takes before banks loosen up on credit provision or until consumers feel sufficiently confident to borrow money and spend it, may take longer! In addition, with the Listed Property Index down 28% from its peak in November, ABSA’s residential property report telling us median house prices are down 13.5% year on year, and with 82% of properties selling at less than asking price, property also is struggling.

Commodities have enjoyed an extended period of “time in the sun”. Cash has not. However, due to higher interest rates, cash is now showing reasonable post-tax returns (although with inflation where it is, real returns are unimpressive). Nevertheless, there are great bargains out there for those with cash, who are prepared to take a longer-term view, although there is no rush. Like cash, commodities are also hot, and Asia (even with a likely slowdown in Western demand in the short term) will ensure that commodities remain hot for some time to come – for 10 years, possibly even 15 years.

Therefore, investors are inceasingly trying to position their portfolios excessively (and imprudently) towards cash and commodities. While both play an important part in a diversified portfolio, there are risks associated with both.

Firstly, sitting too heavily in cash could see you miss the rise in asset prices when it comes. Equities (aside from commodities) are reasonably priced, and when the world recovers (which it will) prices will rise.

Secondly, although commodity demand should remain fundamentally strong over the longer term, commodity shares (and prices) are not going to maintain a smooth, gradually rising trajectory. They will run ahead of themselves and at some stage they will pull back, possibly as much as 40% or even 50%, and when it happens it will happen fast. They will recover thereafter, but it will take some time.

Of course, one must remember that tough times are a global phenomenon. The world is struggling with high fuel prices, food prices and inflation. Globally, cash and commodities are hot, and most other sectors are not. But, the wheel turns and when it does, what is hot becomes not, and what is not once again becomes hot. While prudence and diversification are not the most adrenaline-fuelled concepts, it is at times like these that those who have diversified enjoy a far more peaceful sleep at night.

Source: Jeremy Gardiner, Investec Asset Management, June 6, 2008.

 

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The May edition of the Reuters South African Survey of Economists has just been published. (The Econometer is a measure of economic sentiment drawn from a monthly poll of forecasts by leading economists in South Africa and abroad and presented in the form of an index. The index reflects the forecasters’ sentiment for a quarter 12, 11 or 10 months forward.)

econometer-may08.jpg

SA economic confidence plunged to a new five and a half year low in May as conditions deteriorated and the near-term outlook worsened. The May Reuters Econometer plunged to 184,54, its lowest level since September 2002, from 207,50 in April. The current scenario of sharply slower economic growth (as confirmed by official data for Q1 2008 reflecting growth of just 2,1% q/q) and steeply rising inflation is projected to continue with quarterly growth rates now expected to remain well below 4% until the middle of next year.

Meanwhile inflation rates, after reaching their own five and a half year high in April, are now forecast to continue rising in the remaining quarters of 2008 before slowing into 2009 albeit remaining firmly abvoe the 3% - 6% target band by the end of next year. This is a substantial deterioration from previous estimates - recent forecasts (February 2008) saw the targeted CPIX inflation rate turning to within the upper end of the target band by Q2 2009.

Consequently, interest rates are seen rising further in the very short term, at least a 50 bp hike at the June MPC meeting now seems certain, and whereas the top of the rate cycle was previously forecast at arriving in the current quarter (Q2 2008) at a rate of 14,50%, this has now been pushed out to Q4 2008, with Prime seen climbing as high as 17,00%.

Please click the thumbnail below for the full report.

econometer-may-tmbn.jpg

Source: Sasfin, June 5, 2008.

 

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