South Africa Economy Report from Wells Fargo
May 11, 2012
The following report was issued by Wells Fargo Bank in the USA in their monthly Global Chartbook. For a copy of the full report please contact us.
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The South African Reserve Bank (SARB) has maintained a rate of 5.50 percent for its official lending rate, the repo rate, since November 2010. As signs of slower global growth have emerged, the SARB has faced pressure to reduce the repo rate to spur economic growth. However, in recent public comments, SARB Governor Gill Marcus has pointed out that inflation is at the top end of the SARB's 3.0 percent to 6.0 percent target range. She has affirmed that with inflation so high, there is little room for any rate cuts.
The South African rand lost roughly 20 percent of its value in 2011 which had the mixed blessing of helping to spur exports while at the same time stoking inflation. On a year-to-date basis, the rand has recouped more than 3 percent of its lost value. While this has helped release some of the inflationary pressure, it has not been "helpful for the real economy," according to Gov. Marcus.
While the South African economy boasted a headline economic growth rate of 3.2 percent in the fourth quarter, it appears that growth may slow somewhat in the first quarter as the consumer-driven expansion seems to be losing steam heading into the first quarter of 2012. Retail sales fell in both of the first two months of the year, though the year-over-year growth rate remains north of 4 percent. Alternatively, manufacturing production increased in the first two months of the quarter.
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Is 2020 South Africa's "Tunisa Day"?
May 9, 2012
by Moeletsi Mbeki: Author, political commentator and entrepreneur.
I can predict when SA's "Tunisia Day" will arrive. Tunisia Day is when the masses rise against the powers that be, as happened recently in Tunisia. The year will be 2020, give or take a couple of years. The year 2020 is when China estimates that its current minerals-intensive industrialisation phase will be concluded.
For SA, this will mean the African National Congress (ANC) government will have to cut back on social grants, which it uses to placate the black poor and to get their votes. China's current industrialisation phase has forced up the prices of SA's minerals, which has enabled the government to finance social welfare programmes. The ANC is currently making SA a welfare state and tends to 'forget' that there is only a minority that pay all the taxes. They are often quick to say that if people (read whites) are not happy they should leave. The more people that leave, the more their tax base shrinks. Yes, they will fill the positions with BEE candidates (read blacks), but if they are not capable of doing the job then the company will eventually fold as well as their 'new' tax base. When there is no more money available for handouts they will then have a problem because they are breeding a culture of handouts instead of creating jobs so people can gain an idea of the value of money. If you keep getting things for free then you lose the sense of its value. The current trend of saying if the west won't help then China will is going to bite them. China will want payment ie land for their people and will result in an influx of Chinese (there is no such thing as a free lunch!)
The ANC inherited a flawed, complex society it barely understood; its tinkerings with it are turning it into an explosive cocktail. The ANC leaders are like a group of children playing with a hand grenade. One day one of them will figure out how to pull out the pin and everyone will be killed. ...and 20 years on they still blame apartheid but have not done much to rectify things changing names etc only costs money that could have been spent elsewhere.
A famous African liberation movement, the National Liberation Front of Algeria, after tinkering for 30 years, pulled the grenade pin by cancelling an election in 1991 that was won by the opposition Islamic Salvation Front. In the civil war that ensued, 200000 people were killed. The 'new' leaders are forgetting the 'struggle' heroes and the reasons for it their agenda is now power and money and it suits them for the masses to be ignorant same as Mugabe did in Zim. If you do not agree with the leaders then the followers intimidate you.
The former British prime minister, Margaret Thatcher, once commented that whoever thought that the ANC could rule SA was living in Cloud Cuckoo Land. Why was Thatcher right? In the 16 years of ANC rule, all the symptoms of a government out of its depth have grown worse.
•Life expectancy has declined from 65 years to 53 years since the ANC came to power; - a leader who did not believe that HIV causes AIDS (Mbeki) and another who believes having a shower after unprotected sex is the answer and has 5 wives and recently a child out of wedlock (Zuma). Great leaders for the masses to emulate!!- not!!
•In 2007, SA became a net food importer for the first time in its history; Yet they want to carry on with their struggle song 'kill the boer(farmer)' and stopping farm killings does not seem to be a priority. They do not seem to realise where food actually comes from.
•The elimination of agricultural subsidies by the government led to the loss of 600000 farm workers' jobs and the eviction from the commercial farming sector of about 2,4-million people between 1997 and 2007; and yet they want to create jobs and cause even more job losses very short-sighted thinking.
•The ANC stopped controlling the borders, leading to a flood of poor people into SA, which has led to conflicts between SA's poor and foreign African migrants. Not much thought was given to this their attitude was to help fellow Africans by allowing them 'refuge' in SA. Not thinking that illegals cannot legally get jobs but they need to eat to live. I believe that most of our crime is by non-South Africans from north of the borders. They need to do something to survive! Remove the illegal problem and you solve most of the crime problem.
...but is it in their interest to solve crime? There are whole industries built on crime each burglary, car hijacking etc results in more sales of product and contribute to GDP. What would sales be if crime was down? I do not believe that anyone has worked out how much electricity is consumed a day because of electric fencing and security lights at night. Reduce the need for this (crime) and Eksdom (Eskom) would probably have a power surplus. or if they charged our African neighbours the correct rates at least make a decent profit to build more power stations.
What should the ANC have done, or be doing?
The answer is quite straightforward. When they took control of the government in 1994, ANC leaders should have: identified what SA's strengths were; identified what SA's weaknesses were; and decided how to use the strengths to minimise and/or rectify the weaknesses. Standard business principle but they too busy enriching themselves. People who were in prison or were non-entities 20 years ago are now billionaires how? BEE??
A wise government would have persuaded the skilled white and Indian population to devote some of their time -- even an hour a week -- to train the black and coloured population to raise their skill levels. This done by lots of NGO's but should have been more constructively done by the ruling party.
What the ANC did instead when it came to power was to identify what its leaders and supporters wanted. It then used SA's strengths to satisfy the short-term consumption demands of its supporters. In essence, this is what is called black economic empowerment (BEE). ...and put people in positions they could not cope with making them look stupid where if they had the necessary grounding could have been good in the position at the right time. You cannot 'create' a company CEO in a couple of years. It takes years of work starting at the bottom of the ladder not in the middle. Only some things can be learnt in books experience is the most important factor and this is not found in text books or university corridors.
BEE promotes a number of extremely negative socioeconomic trends in our country. It promotes a class of politicians dependent on big business and therefore promotes big business's interests in the upper echelons of government. Second, BEE promotes an anti-entrepreneurial culture among the black middle class by legitimising an environment of entitlement. Third, affirmative action, a subset of BEE, promotes incompetence (what I said above) and corruption in the public sector by using ruling party allegiance and connections as the criteria for entry and promotion in the public service, instead of having tough public service entry examinations. Nepotism is rife jobs for friends and families who are nowhere near qualified and then hire consultants to actually get the work done at additional cost of course!
Let's see where BEE, as we know it today, actually comes from. I first came across the concept of BEE from a company, which no longer exists, called Sankor. Sankor was the industrial division of Sanlam and it invented the concept of BEE.
The first purpose of BEE was to create a buffer group among the black political class that would become an ally of big business in SA. This buffer group would use its newfound power as controllers of the government to protect the assets of big business.
The buffer group would also protect the modus operandi of big business and thereby maintain the status quo in which South African business operates. That was the design of the big conglomerates.
Sanlam was soon followed by Anglo American. Sanlam established BEE vehicle Nail; Anglo established Real Africa, Johnnic and so forth. The conglomerates took their marginal assets, and gave them to politically influential black people, with the purpose, in my view, not to transform the economy but to create a black political class that is in alliance with the conglomerates and therefore wants to maintain the status quo of our economy and the way in which it operates.
But what is wrong with protecting SA's conglomerates?
Well, there are many things wrong with how conglomerates operate and how they have structured our economy.
•The economy has a strong built-in dependence on cheap labour; With tight labour legislation they are preventing people from getting jobs. For some industries minimum wages are too high resulting in less people being employed. Because it is almost impossible to get rid of an incompetent employee without it costing lots of money in severance people rather do not employ run on minimum with no incentive to grow the business or alternatively automate. Result more unemployment and employment of illegals at more affordable wages.
•It has a strong built-in dependence on the exploitation of primary resources;
•It is strongly unfavourable to the development of skills in our general population; Gone are the days of the artisan no more structured learning to be artisans over a period of time. Try to fast track everything resulting in little on the job experience to be able to do the job. That is why Eksdom has sub stations blowing up and catching fire lack of skill and maintenance. A friend told me about 5 years that this would start happening after Tshwane (Pretoria) started qualifying electrical engineers who were not up to standard.
•It has a strong bias towards importing technology and economic solutions; and at a higher cost
•It promotes inequality between citizens by creating a large, marginalised underclass. Who depend on handouts that cannot be maintained into perpetuity.
Conglomerates are a vehicle, not for creating development in SA but for exploiting natural resources without creating in-depth, inclusive social and economic development, which is what SA needs. That is what is wrong with protecting conglomerates.
The second problem with the formula of BEE is that it does not create entrepreneurs. People do not develop necessary skills when being fast-tracked into a position and being given a free ride.You are taking political leaders and politically connected people and giving them assets which, in the first instance, they don't know how to manage. So you are not adding value. You are faced with the threat of undermining value by taking assets from people who were managing them and giving them to people who cannot manage them(what I said earlier above). BEE thus creates a class of idle rich ANC politicos.
My quarrel with BEE is that what the conglomerates are doing is developing a new culture in SA -- not a culture of entrepreneurship, but an entitlement culture, whereby black people who want to go into business think that they should acquire assets free, and that somebody is there to make them rich, rather than that they should build enterprises from the ground. Agree!
But we cannot build black companies if what black entrepreneurs look forward to is the distribution of already existing assets from the conglomerates in return for becoming lobbyists for the conglomerates. All companies start from the bottom when they are 'given' these businesses they are usually run into the ground because of inexperience. And when they are given loans to buy business the loans invariable are not repaid and the businesses go bankrupt.
The third worrying trend is that the ANC-controlled state has now internalised the BEE model. We are now seeing the state trying to implement the same model that the conglomerates developed.
What is the state distributing? It is distributing jobs to party faithful and social welfare to the poor(what I said in different words). This is a recipe for incompetence and corruption, both of which are endemic in SA. This is what explains the service delivery upheavals that are becoming a normal part of our environment.
So what is the correct road SA should be travelling?
We all accept that a socialist model, along the lines of the Soviet Union, is not workable for SA today. The creation of a state-owned economy is not a formula that is an option for SA or for many parts of the world. Therefore, if we want to develop SA instead of shuffling pre-existing wealth, we have to create new entrepreneurs, and we need to support existing entrepreneurs to diversify into new economic sectors.
Make people work for their 'handouts' even if it means they must sweep the streets or clean a park just do something instead of getting all for nothing. Guaranteed there will then be less queing for handouts because they would then be working and in most instances they do not want to work they want everything for nothing.
And in my opinion the ANC created this culture before the first election in 1994 when they promised the masses housing, electricity etc they just neglected to tell them that they would have to pay for them. That is why the masses constantly do not want to pay for water, electricity, rates on their properties they think the government must pay this after all they were told by the ANC that they will be given these things they just do not want to understand that the money to pay for this comes from somewhere and if you don't pay you will eventually not have these services.
And then when the tax base has left they can grow their mielies in front of their shack and stretch out their open palms to the UN for food handouts an live a day to day existence that seems to be what they want sit on their ar$e and do nothing.
Mbeki is the author of Architects of Poverty: Why African Capitalism Needs Changing. This article forms part of a series on transformation supplied by the Centre for Development and Enterprise.
Is Social Security a "Ponzi scheme"?
September 9, 2011
At the Republican nominee debates the other evening, Gov Rick Perry said that Social Security was a "Ponzi scheme" and a "monstrous lie". Radio talk shows and TV news reporters have made a big issue of this and NPR yesterday had an interview in which this notion was flatly denied and the concept scoffed at. So I wonder if there is any truth in what the Gov says.
Ponzi schemes bring to mind Bernie Madoff, so I thought to look at what he did and compare.
Madoff convinced people to give him money for which he promised a return. He then proceeded to pay that return out of new investments, presumably because he was not generating the returns he had promised. Of course as he kept paying out returns in excess of what he was making, his deficits were getting bigger and bigger, so he was having to fund those deficits with even more investors, until ultimately it got too big, the stream of new investors slowed and his scheme fell apart.
Social Security takes money from people via FICA taxes and promises them a pension, or in other words, a return many years later when they retire. The only difference at this stage of the comparism is that Social Security is a more daring proposal to the contributor because instead of giving you a return in the short term, the government forces you to wait 40 years to get your return. Forecasts published in the media say that Social Security will be running at a huge deficit in the not too distant future. Anecdotely, there are many reports of how people have drawn far more out of social security than they ever contributed, which would explain the future deficit. This deficit is being funded by new contributions, or investments, being made by younger entrants to the work force. Eventually the deficit will get so big that there will not be enough new contributions and the structure will collapse, leaving all the new contributors with no return and a loss on their investments (i.e. no pension).
This was the fate of the investors in Madoff's Ponzi scheme, so the paralells are definately there. Madoff employed a vast organization, as does Social Security, so no distinction there.
Social Security, however, is obviously not a "scheme". It is a well meaning, social program that seeks to provide for people in their retirement. Because it is a "tax", there is no single mastermind out there conning people, so it does not have the apparent evil agenda Madoff had.
Anyone who cares to think it through for just a moment has to realize that Social Security has the same effect as Madoff's Ponzi scheme, take from the new contributors to pay the old. That it means well is a big difference, but small comfort for the new contributors who are beginning to question whether they will ever see their "return".
US Credit will restored in time
July 27, 2011
Let's recognise some good from the debt ceiling ISSUE
The discussion going on now in the USA is the same discussions that Greece and Italy have been having - the only difference is that Greece and Italy have no option but to cut deficits they really are broke!
We in the US, on the other hand, have created our own deadline by using the Debt Limit Increase vote, something that would normally have been a formality. Sure, it would have been better to have agreed to a plan to reduce the deficit without having to take the USA's fiscal credibility down this precarious path, but given record spending, a lack of leadership from the White House, and a refusal to accept the hard economic facts by the leadership (a deficit of around $1,5 Trillion - in just this year!), any voluntary solution to the problem was probably not on the cards.
I find it hard to believe that the credit rating agencies are not taking into account the beneficial aspects of the US successfully reducing spending and deficits ("austerity measures" as they call them in Europe) as a result of this crisis. They know, as we do, that the US will not "default" because it is not worthy of the credit to pay its debts; it will default because of a technical "brake" put in place for good reason. The US has national debt at approximately 70% of GDP, not bad by European standards. Is this not much the same as having not having a budget approved - what happened under President Clinton when there was government shut down? That's not called a :default", but in the same way as is predicted now, bills don't get paid until a budget is approved. Minnesota has just gone through this.
Cutting spending is not fun, but cutting expenses never is. Most of commercial America had to do this two years ago when the economy crashed, so why should government do it also? The lesson is, like taking off a Band Aid, rip it off quickly and you'll feel better sooner.
In time we'll look back at this time, if the deficit really is reduced, and credit will be given to the US for taking pro-active steps to avoid real default like what is happening in Europe now.
Washington politics at its worst, and its best!
July 23, 2011
Got to love the debt ceiling talks in Washington right now - I reckon it'll get higher ratings that Big Brother!
The President of going off pop about the Republicans not able to agree to anything, and with such passion and vitriol. Quite something for national television. His whole point, as I heard it, was how fair and comprising he and his fellow Democrats were being by, if I heard correctly, agreeing to $1,6 Trillion in spending cuts, while those ungrateful Republicans were not satisfied with a mere $1,2 Trillion increase in Revenue. Of course if he had his way, the entire $2,8 Trillion deficit cut this would generate should be taken from the wealthy and big business via tax increases and the removal of legal tax deductions.
What he failed to tell the nation was that up until the day before, everyone seemed to be close to an agreement at $800 Billion in increased Revenues, but on Friday morning he had come into the negotiations with a new demand for a 50% increase in this target, somehow expecting everyone to swallow it and move on. This, in my books, is a material non-discIosure and is more like a partisan political speech than coming from the head of the Executive and our President. I have read this morning that a possible explanation for this change in the goalpost was that the increased Revenues put forward in the Group of 6 plan were substantially higher than what the President had agreed to at $800 Billion, so he had to move quickly to save face.
Whatever the reason, the issue remains unresolved, but that is a position that the anti-spending folks can live with. I guess that's what the debt ceiling is there for in the first place, to stop the government spending too much!
Deficit spending, debt and democracy
July 13, 2011
I am blown away with the ongoing deficit and debt discussions!
What is there to discuss, our credit limit is up! There is no more money to borrow!
So how come our government is still talking about spending money it does not have! And don't give me that tax on the wealthy stuff, as if that justifies this protracted grandstanding. If anyone is serious about getting the country's deficit in order, and avoiding further debt, they would not waste time on the miniscule revenue gains from increased tax rates on a fraction of the population. It was not long ago that the budget was balanced. We know the painful cuts that have to be made; Paul Ryan's plan has made a very reasonable effort at doing just that (without throwing Granny under the bus I might add).
Don't be misguided by the debt level and the debate around increasing the limit. Warren Buffet was quite critical of using this issue because of the damage it does to the country's reputation. However, the debt limit is the only stick Congress has to extract some sense of economic responsibility from an administration that has run amuck with taxpayer's money and investor's bonds. The real issue is that a country, like a business or a family, cannot simply carry on spending more that it takes in.
President Clinton put it very well when he said he was justing putting the math back in the budget. Simply put spend less than you earn and you will not run a deficit. Anyone who now claims anything except meaningful and substantial spending cuts as the solution to the deficit is either delusional or deceitful.
Campaign spending paybacks?
June 7, 2011
This thought popped into my head this morning: If Obama raised $650 million for his 2008 campaign and paid his contributors back with the multi - Billion dollar Stimulus bill, I dread to think what the payback will be if he raises $1 Billion for his re-election bid in 2012.
Just think about it, why would you contribute to a political campaign if you are a business or union (i.e. you are accountable for other peoples' money, be it investors' funds or union dues)? The most obvious reason is that you want, and expect, a return; if not you are in breach of your fiduciary duty. You're effectively taking a chance that your guy will get in and you'll get your money back, usually via some legislative advantage granted your organisation or a program that your business or union are key players in. In Obama's case, it is quite clear now (although we predicted it at the time) that the Stimulus plan was a useless plan of un-focussed spending that has singularly failed in improving employment or the economy. Instead of being a waste of money, I submit, it was in fact part of a plan to payback the corporate and union contributors to his campaign in various ways designed to obfuscate and confuse the public.
Just imagine what the payback for a $1 Billion campaign will be? There seems to be no effort at all to cut spending in this administration, and the thought of another 4 years of the same, with increased pressure from an extravagant election campaign, is more than this country can tolerate. Surely there should be limits on spending during such campaigns?
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