The seven year ditch: climbing out of junk

While it is well documented that junk status has a number of dire consequences for both South Africa, and its people, more important is to consider how long the country can expect to be stuck with a junk rating say Lullu Krugel and Christie Viljoen, economists at KPMG.

On Monday, ratings agency S&P Global lowered South Africa’s sovereign debt to below investment grade, with Fitch and Moody’s likely to follow.

Hours after S&P announced that it would be downgrading South Africa to junk status, Moody’s confirmed that it would also be placing the country on review for downgrade, though the group has now delayed its report for at least 30 days as it assesses the country.

Economists have warned that the downgrade to junk is likely to trigger a recession as its effects spread to the wider economy.

“The downgrade greatly complicates the prospects for South Africa being able to stage an economic recovery. Without a growth recovery, employment growth and revenue collection will stagnate and may even decline,” said CEO of the South African Institute of Race Relations, Frans Cronje.

Research by KPMG into the sovereign ratings assigned by the three largest rating agencies – S&P, Fitch Ratings and Moody’s Investors Service – over the past three decades indicates that 15 countries have seen their investment-grade ratings revoked but were then able – over time – to regain this status.

These countries include Colombia, Croatia, Hungary, Iceland, India (twice), Indonesia, Ireland, Korea Republic, Latvia, Romania, Slovakia, Slovenia, Thailand, Turkey and Uruguay.

Of these countries, Krugel and Viljoen noted that the rating downgrades were broadly grouped into four categories:

Economic deterioration (Colombia, Hungary, India, Latvia and Romania);
Unsustainable macroeconomic imbalances (India, Slovakia and Slovenia);
A domestic currency, financial or banking crisis (Croatia, Iceland, Ireland, Thailand, Turkey and Uruguay); and
A currency, financial or banking crisis resulting directly from neighbouring or regional influences (Indonesia and the Korea Republic).
“These countries’ diverse experiences show that it takes, on average, seven years to again graduate to the investment-grade club.”

The economists said that countries like Croatia, Iceland, Ireland, Korea Republic, Latvia and Slovenia were able to do so in three years or less. At the opposite end of the spectrum, and depending on which rating agency was involved, there were instances where it took Colombia, India, Indonesia, Turkey and Uruguay more than a decade.

Strategies used to return to investment-grade

In addition to an analysis of why countries had historically been downgraded to junk, Krugel and Viljoen also released a report detailing how these countries typically managed to return to an investment-grade rating.

“Strategies and narratives on countries that recovered their investment-grade ratings are broadly grouped into six categories,” noted the duo.

These include:

Fiscal consolidation and/or austerity (Hungary, Ireland, Latvia, Romania and Slovenia);
Significant economic and political reforms (Colombia, India, Indonesia, Turkey and Uruguay);
Declining external and fiscal vulnerabilities (India and Thailand);
Debt restructuring and economic policy reform (Korea Republic);
Privatisation of the sovereign’s holdings in private/semi-state companies (Croatia); and
Active intervention by a newly elected government (Iceland and Slovakia).

South Africa
South Africa is most closely associated with the countries experiencing economic deterioration and, possibly, those having unsustainable macroeconomic imbalances, said Krugel and Viljoen.

“On the issue of how South Africa will be able to return to its former investment-grade rating, the key element in a recovery process is that admission that a problem exists and that work is needed to rectify this,” Krugel and Viljoen said.

However the economists noted that following the downgrade announcement by S&P, the National Treasury appeared far from concerned with the development

“The commitment to fiscal consolidation was reiterated, coupled with a rebuttal that South Africa is committed to a predictable and consistent policy framework and that open debate on policy matters should not be a cause for concern.”

Zuma breaks the rand – again

The rand was weaker on Tuesday afternoon as it emerged that President Jacob Zuma had told senior leaders of the South African Communist Party (SACP) that he planned to fire Finance Minister Pravin Gordhan.

When the market learnt on Monday that Zuma had recalled Gordhan and his deputy, Mcebisi Jonas, from an investor trip to the UK and US, the rand nosedived from 20-month highs it scaled last week.

The president is reported to have told senior leaders of the South African Communist Party that he plans to dismiss the finance minister.

After hitting a fresh 20-month best level of R12.31 against the dollar in Monday’s opening trade‚ the rand plunged more than 3%, or 52c, to an intraday worst level of R12.8295/$ in the afternoon.

The rand also weakened against global majors and went from being the best-performing emerging-market currency to one of the worst-performing currencies.

Rand Merchant Bank (RMB) analyst John Cairns said further runs on the rand were possible but Monday’s rand losses were nothing compared with what happened in the worst-case Cabinet reshuffle scenario when former finance minister Nhlanhla Nene was replaced in 2015. At that time, the rand shed 150c immediately and 250c within a month.

Cairns said the best rand scenario for the day was for the rand to stabilise above R12.50/$ within a 30-cent range, the worst case scenario would be a Cabinet reshuffle.

At 11.30am the rand was at R12.9766 to the dollar from a previous close of R12.7616. It was at R14.0954 to the euro from R13.8647 and at R16.3203 to the pound from R16.0221.

The euro was at $1.0859 from $1.0864.

By Reitumetse Pitso for www.businessday.co.za

Hike or no hike?

South Africa Reserve Bank Governor Lesetja Kganyago discusses currency manipulation, the performance of the rand, and the future of the central bank’s rate increase cycle.

South Africa’s central bank can’t yet call the end of its interest rate-increase cycle, even as the risks to inflation have eased since the Monetary Policy Committee’s January meeting, Governor Lesetja Kganyago says.

“It’s too early for me to make the call as to whether we are still on the tightening cycle or not,” Kganyago said in an interview with Bloomberg Television’s Jonathan Ferro. “We can’t say that” the increase cycle is now over.

Kganyago said in November the MPC may be close to the end of the tightening cycle in which it raised the benchmark lending rate by 200 basis points over two years to 7 percent by last March. This was in bid to bring price growth back to within the government’s target band after being outside it for most of last year as a drought raised food prices and the rand reached record lows.

The MPC, which will announce its next policy move on March 30, targets inflation between 3 percent and 6 percent.

Price growth eased to 6.6 percent in January, the first slowdown in five months, and five-year breakeven rates, a measure of inflation expectations, fell to the lowest since April 2015 on Friday. Oil and food price still pose risks, Kganyago said.

The risks to inflation have “definitely been mitigated compared to the previous policy-setting meeting,” he said. “Clearly, the recovery of the currency helps, but the rise in oil prices doesn’t help. Clearly the good rains help and the price of grains will come down, that helps, but that farmers are restocking their herds and meat prices remain high, doesn’t help.”

The rand was little change at 12.7712 per dollar by 3:02 p.m. in Johannesburg on Friday. Yields on rand-denominated bonds due December 2026 fell two basis points to 8.52 percent.

Economic growth in Africa’s most industrialized nation slumped to 0.3 percent for 2016, lower than government and central bank estimates, and the slowest rate since a recession seven years earlier

The central bank forecasts the economy will expand 1.1 percent this year, and 1.6 percent in 2018. There is still significant downside to growth, Kganyago said.

By Arabile Gumede for Bloomberg

As brick-and-mortar retailers seek to turn their physical stores into an asset instead of a liability to compete against online retailers, they will need to make sure they are heeding the demands of today’s increasingly mobile phone dependent consumers.

For one, while studies have showed in-store shopping remains important to a majority of shoppers, an International Council of Shopping Centers survey released on Monday showed that more than three-fifths of consumers expect that by 2020 they will actually prefer to be left alone to do their own thing while in stores instead of engaging with a sales person. The only caveat: stores have to provide easy access to products and sizes available there.

ICSC didn’t respond to a request for more details on any historical and other findings of the survey.

The survey of more than 1,000 people in February conducted by Opinion Research Corp. for ICSC also found more than half of the consumers said they prefer to virtually see how home furnishings and accessories fit in a home before they make a purchase. Separately, more than half said they want to compile a shopping list on a store app and receive a floor map to locate products.

The survey also showed how much consumers have come to rely on click-and-collect services, and how mobile is a key part of the experience: Nearly three-quarters of shoppers said they’ve made a purchase using their mobile device and picked up the product in store. Not surprisingly, millennials were even more likely than the average, with 87% of them saying they had made mobile purchase to pick up in store.

More retailers are trying to turn that to a traffic-driving weapon.

“We introduced buy online and pick up in store and buy online and ship to store” without any shipping fee, Crate & Barrel COO Michael Relich said in an interview earlier this year. “We are trying to use that to drive store traffic. When they come in, we give them bounce-back coupons. They use our stores as a showroom first. We actually see a lot of transactions start in one channel and finish in another. Brick and mortar is good for us.”

While retailers such as Crate & Barrel are capitalizing on the shifting consumer behavior, a late 2016 survey by PricewaterhouseCoopers (PwC) for JDA, a supply chain software provider, showed that most retailers are still behind when it comes to designing a digital strategy that would give them a leg up in winning consumers’ wallet share.

Against the backdrop that some retailers are debating the economics of whether to use their mobile sites or roll out their own apps to target shoppers, the ICSC survey suggested there’s demand for retail apps: 71% of consumers said they have one or more retailer apps on their phones and 74% of them access them at least once a week. Some 86% of millennials accessed a retailer’s app weekly, outpacing 74% of Generation X and 61% of Baby Boomers.

In another sign there’s room for growth for voice-activated personal assistants like Apple’s Siri or Amazon’s Alexa, 37% of consumers said they’ve used a digital assistant to build shopping lists or to place orders for in-store pickups. The survey also offered an encouraging sign for mobile payment: 35% of survey respondents said they’ve used that feature.

With personalization a key buzzword for retailers seeking to stand out and offer a product or service only available in their stores, the survey indicated it’s time for them to take a closer look at prices: more than two-fifths of consumers said they are open to the idea of retailers “personalizing” prices based on their shopping patterns and demographics.

By Andria Cheng for www.etail.emarketer.com

The country’s gross domestic product contracted 0.3% in the fourth quarter of 2016, according to Statistics South Africa (Stats SA).

Stats SA released the data in Pretoria on Tuesday. Overall GDP grew by 0.3% in 2016. This is lower than growth of 1.3% reported in 2015.

The main contributors to negative GDP growth were the mining and quarrying industry and the manufacturing industry.

Commodities showed a declining trend, according to Michael Manamela, chief director of national accounts. Mining and quarrying decreased by 11.5% due to a drop in the production of coal, gold and other metals including platinum.

Manufacturing decreased by 3.1%. This was brought on by a decline in manufacturing of food and beverages, petroleum, chemical products, rubber and plastic products as well as motor vehicles, parts and accessories of transport equipment.

Agriculture declined by 0.1% but although negative, it showed signs of improvement, said Manamela. “What is important is that the trajectory is upward and we should see an improvement in 2017.”

The primary and secondary sectors declined by 9% and 1.8%, respectively.

The tertiary sector grew by 1.3%. The largest contributors to GDP include trade, catering and accommodation industry and finance, real estate and business services.

Expenditure on GDP

Expenditure on GDP decreased by 0.1%, and overall expenditure lifted 0.5% in 2016. This is lower than the expenditure of 1.2% reported in 2015.

Household final consumption expenditure increased by 2.2% in the fourth quarter. It contributed 1.3 percentage points to total growth. The largest contributors to growth include food and non-alcoholic beverages which went up 2.4%, and clothing and footware which rose 10.4%.

Growth in semi-durable goods grew 6.8%, followed by services at 3.2% and non-durable goods at 0.3%. Durable good spend only increased by 0.2%.

Government final consumption expenditure increased 0.3%.

Growth in investment expenditure increased by 1.7%. The largest contributor to growth was construction works, which increased 3.6% and contributed 1.2 percentage points to growth.

Net exports contributed positively to growth in expenditure, said the report. Exports increased by 12.5%, due to higher exports of precious metals and mineral products. Imports increased by 6.1%.

Fin24 previously reported that economists were expecting low growth in the fourth quarter. South Africa’s GDP growth rate on a yearly basis until the end of September 2016 was at 0.7%, which was impacted by a 0.1% contraction in the first quarter of 2016 and low growth in the following quarters.

South Africa’s GDP growth rate on a yearly basis until the end of September 2016 was at 0.7%, which was impacted by a 0.1% contraction in the first quarter of 2016 and low growth in the following quarters.

Further, the Business Confidence Index declined to 38 in the fourth quarter of 2016 from 42 in the previous period, explained Giacomo Bonavera, head of foreign exchange trading at Capilis Asset Managers, who wrote in Finweek on Monday.

“An increase in activity in the finance, transport and communication, real estate and construction sectors was offset by a decline in the agriculture, mining and manufacturing industries,” he said.

National Treasury said in its budget in 2017 that it expected the country to grow by 1.3% in 2017, and by 2% in 2018. It also sees inflation falling to 6.4% in 2017 and 5.7% in 2018.

By Lameez Omarjee for Fin24

shop-sa/My Office goes digital

My Office magazine is moving into the digital age, leaving print media behind in favour of an online platform.

As of May 2017, My Office will no longer be a print magazine. Exciting times lie ahead as we keep abreast of technology.

Digital media is the new frontier as the number of Internet users crest 3,42-billion – 46% of the global population. In South Africa, spend on the consumption of digital media is expected to rise to 49,6% in 2019, ensuring digital revenues will account for the majority of market share as early as 2020.

shop-sa chairman Hans Servas has issued the following announcement:

Times are a changin’
The board of shop-sa and the publishers of My Office magazine, IT-Online, have decided that the time has come to take the bold step and move into the Digital Age.

It was agreed that the print version of the My Office magazine can no longer keep up with the fast-paced information and technology age.
Needless to say that cost of print, distribution issues and revenue, played a part in the decision.

The final edition of My Office will be published in April 2017, after almost a century of serving the stationery and office products industry.

The exiting news is that from May 2017, a digital version/combination of the already successful My Office newsletter and a revamped Web-site will be launched.

Members and the industry at large will be able to access news, product information, forthcoming events and much more, instantly and continuously.

Advertisers will have ample opportunity to market their brands and products via this exiting medium.

After all, 3,4-billion users globally can’t be wrong!

Here is to the next 100 years!

Hans Servas

Chairman

 

SA’s big banks in big trouble

South Africa’s major banks implicated for price fixing by the Competition Commission could face heavy financial penalties as the Competition Tribunal can impose administrative fines of up to 10% of their turnover for collusive conduct.

“In a world of substantial and ever-increasing fines, as well as the potential for private damages actions, it would be critical for the banks to show that they have stringent compliance policies in place.

“This would assist in providing accurate data and reports to the authorities to show that the conduct complained of was that of a deviant employee/s, and not common practice,” says Anthony Crane, competition law partner at law firm, Dentons SA.

The commission said last week that it has been investigating a case of price-fixing and market allocation in the trading of foreign currency pairs involving the rand since April 2015. It has now referred the case to the tribunal for prosecution against 17 banks, including three of South Africa’s big banks.

Last year six banks in the United Kingdom were ordered to pay $6-billion for manipulating foreign exchange markets in 2013. Coupled with the fact that our courts are now getting to grips with private damages claims as indicated in the recent SAA/Comair matter, this could end up being an extremely expensive exercise.”

In addition, the banking sector was criticised in the State of the Nation Address for its highly-concentrated nature and so the timing of the referral is unfortunate for the banks. However, they now have an opportunity to formally respond to the allegations before the tribunal.

The banks being prosecuted are Bank of America Merrill Lynch International Limited, BNP Paribas, JP Morgan Chase & Co, JP Morgan Chase Bank NA, Investec Ltd, Standard New York Securities Inc, HSBC Bank Plc, Standard Chartered Bank, Credit Suisse Group; Standard Bank of South Africa Ltd, Commerzbank AG; Australia and New Zealand Banking Group Limited, Nomura International Plc, Macquarie Bank Limited, ABSA Bank Limited (ABSA), Barclays Capital Inc, Barclays Bank plc.

Source: www.bizcommunity.com

Supermarkets are a key route to market for many suppliers of food and household consumable products. The growth of supermarket chains in southern Africa presents important opportunities for suppliers, as it potentially opens up much larger regional markets for them. Supermarkets can therefore be a strong catalyst to stimulate suppliers in food processing and light manufacturing industries in southern Africa.

But even the most efficient suppliers with competitively priced, high-quality products are unlikely to succeed if they can’t get their products to consumers. Here, large supermarkets play a key role. Onerous requirements and exertion of buyer power by large supermarket chains can result in small- and medium-sized suppliers and entrepreneurs failing to enter and participate in the economy.

We examined the obstacles to accessing shelf space in supermarkets in Botswana, South Africa, Zambia and Zimbabwe. The research revealed a range of costs that suppliers incur even before a single unit of their product is sold off supermarket shelves in each country.

Supplier development initiatives have been put in place by supermarkets and governments. But these have had limited success because they are restricted in scale and scope, are largely ad hoc, and don’t have a regional development perspective in mind.

There is a need for more co-ordinated, sustainable and regionally focused interventions to increase the participation of suppliers in supermarket supply chains. These should aim to reduce barriers to entry by, for example, curbing supermarket buyer power and building capabilities of suppliers.

Supermarket buyer power
The formal South African supermarket industry is concentrated, with only a handful of large chains holding more than 70% of the national market share. South African supermarket chains also have a strong and growing presence in each of the other countries assessed, although recent years have seen the emergence of other African and global chains too.

Large supermarket chains therefore have considerable buyer power, and are often able to control pricing and trading terms with suppliers. This can include a range of fees such as listing or support fees paid by suppliers to get their products listed in supermarket books.

These fees can be prohibitive for small suppliers. Estimates of listing fees in South Africa range from US$350 to $3,500 per year for a single product line of a basic food item on the shelf. They can go as high as $17,000 to $20,000 for prime till positions for products like sweets and lollipops for a limited time period.

In Zimbabwe, listing fees can be up to $2,500 per product line, with $50 to $100 for the introduction of additional new product lines by the same supplier.

Suppliers are also often required to offer supermarkets settlement discounts for paying them within the number of days stipulated in the trading terms. This varies depending on the supplier.

Long payment periods put considerable pressure on suppliers’ cash flow and working capital which is problematic particularly for small suppliers. Local suppliers in Zambia raised this as a key reason for non-participation in supermarket value chains although it was a concern in all the countries studied.

Over and above the advertising costs faced by suppliers themselves in creating brand awareness for their products, supermarkets require them to make a host of additional payments. These can include:

  • Discounts off the purchase price for indirect advertising;
  • Contributing towards promotions. Our research showed that it can cost anything from $2,500 to $7,000 to promote a single product line as a contribution to the costs of the supermarket advertising through TV, newspapers and flyers; and
  • Paying to participate in different promotions held by supermarkets such as Easter and Christmas promotions.
    A range of other fees also apply, varying by supplier and according to industry. These include general discounts, fixed or variable rebates based on sales volumes, transport discounts and swell or wastage allowances.

Cumulatively, the various fees can add up to at least 10-15% off the price of the product sold to supermarkets, placing considerable strain on supplier margins.

Other obstacles to accessing shelf space
General access to good shelf space often comes at further costs. It is critical for successful sales that products are displayed where shoppers can easily see them. Eye-level shelf space is often taken up by dominant suppliers.

Similarly, access to refrigeration space is important for suppliers of cold products such as soft drinks, ice creams and frozen food. There have been competition cases globally and in South Africa that have recognised the harm to competition of dominant suppliers imposing exclusivity requirements on fridge space.

Over and above legal requirements such as compliance with national standards, food safety, labelling and packaging requirements, suppliers also have to adhere to private standards imposed by supermarkets. These can include barcoding and specific packaging requirements as well as sustainability criteria and religious requirements (such as halal and kosher certifications).

These can also include higher accreditation standards which often involve on-going audits at the supplier’s cost.

Helping emerging suppliers
Codes of conduct between suppliers and supermarkets can be a useful way to control the exertion of buyer power.

In the UK, for example, the Groceries Supply Code of Practice was set up specifically to oversee the relationship between supermarkets and their suppliers following an inquiry by the former Office of Fair Trading.

Similarly, in Ireland and Spain, there are plans to institute voluntary or mandatory codes of conduct in the grocery sector to govern commercial relations between suppliers and supermarkets in the food chain.

We recommend that such codes also be set up in southern Africa. Given the multinational nature of supermarkets in the region, these codes can be harmonised across the region.

Supermarkets can also play an active role in building the capabilities of suppliers. Almost all supermarkets in South Africa have some form of voluntary supplier development program in place.

In some instances, large supermarkets have been mandated to set up supplier development programs. For example, as part of the merger between Walmart and Massmart, the merged entity was required to set up a supplier development fund. Around $16.7 million was allocated to be spent over five years to develop suppliers.

Some aspects of the program involving farmers were unsuccessful. But there have been positive outcomes for some black entrepreneurs in food processing. One beneficiary, Lethabo Milling, a new entrant producing maize meal, received around $110,000 towards refurbishing his plant.

And the company was able to secure a loan from a commercial bank on the back of a guaranteed route to market through supplying Massmart stores in South Africa. Lethabo Milling also received additional support through training, waived listing fees and fast-track payments.

Successfully developing supplier capabilities in the region requires a much larger, long-term and commercially oriented approach by supermarkets in partnership with governments. This can be done through the creation of supplier development funds similar to the Massmart/Walmart programme. Funding can also come from fines levied by the competition authorities in abuse of dominance or cartel matters in each country.

By Reena Das Nair  for www.theconversation.com

Deputy President Cyril Ramaphosa signed the R20 per hour minimum wage agreement between labour, business and government on Tuesday.

That is according to Dennis George, general secretary of the Federation of Unions of South Africa (Fedusa) on Wednesday.

Ramaphosa’s spokesperson Ronnie Mamoepa declined to confirm the signing late last night.

“Deputy President Cyril Ramaphosa will provide details on the status of discussions of (National Economic Development and Labour Council) Nedlac committee of principals on labour relations and wage inequality tomorrow (Wednesday),” he told Fin24.

The signing was supposed to have taken place at Tuesday’s InvestSA lunch that President Jacob Zuma hosted in Cape Town ahead of his State of the Nation address (Sona) on Thursday.

However, the Presidency announced on Tuesday that it was postponing the signing due to Cosatu’s request to delay the agreement until its central executive committee (CEC) could review the new proposal.

However, George said Cosatu was not able to stop the signing. “Our friends from Cosatu think they can stop the process,” he said. “Cosatu said they were in agreement and that all they want to do is speak to their CEC. They must tell us when they are ready to sign.”

“This agreement kicks in from May 2018,” he said. “After this, we need to draft legislation and that must go through a public consultation process.

“There were concerns around the R20 per hour salary as employers could try reduce hours,” he said. “But we will put in a law that workers cannot be worse off.”

He said Zuma will spell out the details of the agreement in his Sona.

Signing the agreement on Tuesday were (left to right) National Council of Trade Unions President Joseph Maqhekeni, Fedusa president Godfrey Selematsela, Deputy President Cyril Ramaphosa and Labour Minister Mildred Oliphant.

The deal follows Ramaphosa’s proposal of a R3 500 national minimum wage. He has been heading up the negotiations with Nedlac.

He explained that the panel considered the low level of growth in the South African economy, but also looked at South Africa’s peers, such as Brazil, Turkey and Mexico and how a minimum wage has affected them.

Ramaphosa argued that a minimum wage will be a radical shift to address wage inequality. About 47% of South Africans earn below R3 500, while 51% live on less than R1 600 per month, he said at the time.

However, there has been widespread criticism of a minimum wage of R3 500, with political parties and labour unions referring to it as “slave wages” and “poverty wages”. They are demanding a “living wage” for workers.

The Congress of South African Trade Unions (Cosatu) said on Tuesday the African National Congress failed to implement its policy to radically transform the economy. “It is ridiculous,” said spokesperson Sizwe Pamla.

“We made it very clear that the minimum wage is not just about having a wage,” he told Fin24. “It’s about having one that makes a difference to South African lives.”

The National Union of Metalworkers of South Africa (Numsa) said paying workers R20 per hour is an insult.

Numsa general secretary Irvin Jim also climbed into Ramaphosa, claiming that he has proven to be “hostile” to workers.

“Ramaphosa, the billionaire and ultra-capitalist, values his precious buffalo more than the lives of human beings.”

By Matthew le Cordeur for Fin24

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