Only one in four matrics likely to find a job quickly

Fewer than a quarter of matrics find jobs relatively quickly, according to economist Mike Schüssler of economists.co.za.

Those members of the matric class of 2017 who will not be studying further, but will be looking for a job, will not be easily absorbed by the job market, he told Fin24 on Tuesday.

“It will be tough for them to get work. Over 50% of our matriculants under the age of 34 have not found permanent employment and it’s not getting better,” he said.

“This is part of the process young job seekers go though. It takes long to get a first job – even for those with a degree it takes a while. You do not get a degree and suddenly you are running the firm.”

The overall unemployment rate in SA nears 28% in the narrow sense (excluding people out of work, but still actively searching) and 37% in broader terms (including those who have given up looking for a job). For young people this figure is much higher. Schüssler estimates it to be well over 50%.

“To get your first job is probably one of the hardest things in life and often takes a while. If you have not had a job, you are regarded as not having ‘proven’ yourself yet,” explained Schüssler.

“Unemployment in SA is high already, but for the youth it is higher and for those looking for a first job it is very tough.”

According to Statistics SA, only 12.8% of people in SA between 15 and 24 have a job (in terms of the narrow definition). For those between 25 and 34 years of age, only 49.6% actually have a job; and for those between 35 to 44 years of age, 63% have a job.

“My message to matrics is that a job is a job. The big thing is to start off doing a first job. Yes, we will have minimum wages, but maybe we have to be careful regarding how it is implemented,” suggested Schüssler.

“Maybe people getting a job for the first time could be excused from having to get the minimum wage for the first two years of employment.”

Another suggestion by Schüssler is for young matriculants who do not find a job quickly to try and do volunteer work.

“Maybe ask if you can just get money for transport. At least you will still be in the process of learning. The next employer wants to know that you can stick to a job and perform the tasks you are given. That is very important,” said Schüssler.

Never lose hope

“Don’t give up hope. Everybody is suffering and employers often prefer young people who are a little bit older – about 25 years – as they might be regarded as being more mature and used to the discipline of sticking to a job.”

He pointed out that this is a global trend as older people tend to be regarded as having proven themselves – whether they have done so or not.

“Young people must try to offer a service – even start waitering, just start somewhere. The best advice is not to give up. And if you get a job, work hard. Employers want people who are productive and efficient,” said Schüssler.

“Young people must say to themselves: get a job, then negotiate and work your way up. It is not an automatic thing. Yes, SA’s unemployment is high, but all over the world young people struggle to find jobs.”

By Carin Smith for Fin24

People to blame for record road deaths

More than 203 people have already died on Gauteng roads and the number is set to triple once the New Year and annual holiday return traffic figures are tallied, according to MEC for Community Safety Sizakele Nkosi-Malobane.

Nkosi-Malobane noted more pedestrians and motorists had died already than in the entire December holiday season of 2016.

“Most of the road fatalities in the province is because of driver and pedestrian behaviour. Contributing factors are speed as well as drinking and driving, and to some extent texting and driving.”

Nkosi-Malobane said most people dying on Gauteng roads were between the ages of 18 and 35, and were not respecting the rules of the road.

“For example, two 18-year-olds were caught yesterday. One was driving at 127km/h in an 80km/h zone, the other at 138km/h, also in an 80km/h zone,” said Nkosi-Malobane.

“They will die before they reach 20. And unfortunately people won’t be blaming the driver, they will be blaming abatakhathi (witchcraft) and law enforcement. More than 10% of the 59 pedestrians who died were under five years of age. On a national level, minister of transport Joe Maswanganyi said yesterday there had been a “remarkable” rise in traffic volumes.

“Road safety, first and foremost, is an individual road user’s responsibility. Once this notion is lost on any road user: motorists, passengers and pedestrians alike, the battle against road carnage is undermined.”

The Automobile Association of South Africa (AA) stated at the beginning of December 14 071 people died on roads in 2016 – the highest annual road death toll since 2007 – while over the festive period last year 1 714 people died.

“These deaths can no longer only be viewed as statistics. As a nation we need to be asking some serious questions about our driving behaviour,” the AA said.

Human factors which lead to crashes and deaths

Jaywalking pedestrians – 38.8%
Hit and run crashes – 18.5%
High speed – 14.1% ɳ Overtaking in the face of oncoming traffic – 6.9%
Drunk driving or driving while on drugs – 3.6%
Driver fatigue – 2.2% – Automobile Association

By Amanda Watson for The Citizen 

For the first time in 20 years, the Presidency has started to compose regulations for a state of emergency.

Rapport, sister publication of News24, saw the draft regulations in terms of the State of Emergency Act 64 of 1997.

In terms of these draft regulations, any security official will have far-reaching powers to act within his or her own judgement, arrest people, search property or cut communication channels such as cellphones or the internet.

The Constitution allows the president to declare a state of emergency when war, invasion, revolt, natural disasters or other dangers threaten the nation’s safety.

Former president PW Botha declared such a state of emergency on July 25, 1985. Activists were held captive in unknown places for undetermined periods.

At least 575 people were killed within six months of this announcement.

Concern over ‘vague’ guidelines

The Act of 1997 replaced the notorious apartheid-era laws, but the regulations that set out what should happen during a state of emergency have never been promulgated.

According to an internal memorandum from the military, President Jacob Zuma appointed a team to compose the regulations, but it is dragging its feet.

Over the past few weeks, the security sector has been urged to urgently provide contributions to complete the project.

National director of Lawyers for Human Rights advocate Jacob van Garderen has read the draft regulations and is concerned about how vague they are.

“It reminds one of the 1980s when the apartheid government used the declaration of a state of emergency to suppress political dissent.”

He said the regulations are vague about how much power various role players such as the military and the police would have and how much force they would be allowed to use.

“It is almost a matter of one size fits all,” he said.

Broad wording

The army decided after a workshop to support the project and develop an operational plan.

Army spokesperson Simphiwe Dlamini said the army was just a role player and was not in charge of the sudden review.

The Presidency didn’t respond to Rapport’s questions.

According to the draft regulations, no person may write, publish or broadcast something that could be threatening to somebody else or his family.

Members of the security forces are allowed to use as much force to restore law and order as deemed necessary under the circumstances, as long as it is proportional.

Van Garderen said the wording is very broad.

‘I can see it end up in court’

“Any meeting, even if it is not public, could be prohibited.

“The context of the regulations concerns me. Civic organisations opposed the amount of force used by police during the xenophobic violence a few years ago and at Marikana.

“If these draft regulations go through, I can see it end up in court.”

According to commissioner of the Human Rights Commission advocate André Gaum, any legislation, and therefore the accompanying regulations, is subject to the human rights provisions of the Constitution.

According to the Constitution, a state of emergency may not last longer than three months, while the president’s proclamation can be overturned and some constitutional rights – such as the right to dignity and life – can never be overturned, even in a state of emergency.

By Erika Gibson for Rapport 

Printing money: starting a business in a dying industry

Why would you start a business in a dying industry? Just ask Alexander Knieps.

In this electronic world, many say print is dead. But Alexander Knieps, the founder of online printing company, Printulu, echoing the words of famous author Mark Twain, says reports of this death are greatly exaggerated.

“If you look at how this industry is developing, I don’t think we are moving into a paperless industry, at least not in the next 50 years. Afterwards, I don’t know. It is all about what channel is out there and whether it is affordable,” says Knieps.

We meet Knieps at an industrial park in Modderfontein, east of Johannesburg. This is where business cards, posters, postcards, and flyers are printed for thousands of companies, media houses and coffee shops across South Africa. In a matter of minutes, a pile of paper flows from the printer.

On this spring day, the sun shines brightly and the sky is clear. The tranquillity is shaken by the loud rattle of paper being printed.

“In our age of technology, when you are studying, nobody thinks, ‘ooh, let me go into paper’. I think it is a very rare thing,” says Knieps.

Knieps, who is born and bred in Germany, founded Johannesburg-based Printulu last year. The name is a combination of the words print and Zulu (a South African language). He studied business at EBS Business School in Germany and got his master’s degree at ESADE Business School in Barcelona, Spain.

Starting the business has been far from plain sailing.

“The first couple of months, we were completely bootstrapped. You get your first clients, you show some nice traction, and then, in the beginning of the year, we raised some funds, which were a couple of million rands, which are enough to last for the next two years,” he says.

Investors are hard to find.

“South Africa is not the easiest place to raise money. There also isn’t much money in the market because of the current economic climate. [When] it comes to online printing, people just look at the industry itself; they don’t think how you could invest deeper. There aren’t many investors and it takes a while to close deals [compared to] anywhere else in the world,” he says.

Knieps says the future for paper printing is mass production.

“We are batching up all these smaller orders and print them in bulk and that is how you can disrupt the market. Hence, you see a shift from offline to online in the industry,” he says.

He calls on other entrepreneurs to get with the times.

“The industry is very inefficient in a way that there is a lot of competitive pressure. There are thousands of printers in Gauteng who are operating with an archaic business model. You have inefficiency on the one side and macroeconomic pressure on the other. That is why a lot of printers are closing down even though we are growing strongly at the moment. If you see those components, it actually makes people a lot more price sensitive and that actually helps the business to scale,” he says.

Print dead? Not in the world of Knieps.

By Melitta Ngalonkulu for Forbes Africa
Image: Forbes Africa

Starting your own business? Here’s some advice

Here’s the irony: it’s never been easier to start a business, which is why it’s never been harder to start a business.

In the “old days”, when a big company had 5 00 staff, it had 5 000 horsepower which is why back then, big companies and governments were the only entities that could get the big jobs done and move the world forward. But thanks to digitisation, the world has changed drastically in the last decade or two. Now, a small company of 10 bright people equipped with the enabling technology become an army that has the equivalent 5 000 horsepower.

This is why starting a business has never been more alluring. Small groups of people can disrupt massive industries just like Uber and Airbnb did to their respective industries. The really big problem for most established industries is that it’s hard to see where new competition is coming from. The entire taxi industry could never have predicted that two entrepreneurs and a few software engineers could change their lives forever.

Things are heating up

For the first time in the world, you can impact the world from your bedroom while chilling in your underpants. That said, big companies aren’t standing still and they are equally using the same technology to ring out efficiencies in their businesses. I believe we are at the point where we will see technology replace people in big companies at an unprecedented rate.

A small example of this is Nu Metro and Ster-Kinekor. Just two years ago, you actually bought your movie tickets from a human being at the ticket kiosk. The other night, I went to the movies and counted a total of three staff working. All tickets and refreshments were bought using a tablet at the front desk. The only people working were the ones pouring my Slush Puppy and dishing my popcorn for me.

With this in mind, being an entrepreneur is a great idea with just one caveat: the easier it gets to become an entrepreneur, the more other people are going to do it. Competition drives innovation which means it will get harder and harder for startups to succeed unless they are absolutely excellent. With this in mind, the following advice is critical to you starting a business:

  • You have to be absolutely passionate about the business you want to start, but your business also has to also solve a big problem for society (there must be an appropriate market for what you want to do).
  • Conscious capitalism is the way forward. Doing the right thing isn’t a nice to have anymore. It’s the only way to do business.
  • You have to have the energy of a 1 000 men when you start because every little detail becomes your responsibility.
  • That said, you have to become a master of technology so that you can scale your business. Technology enables small groups of people to act like an army. The days of linear improvement won’t do.
  • You have to become forever educated because the world is changing so fast and you need to know what’s going on in order to understand how approaching trends will affect your business. YouTube, daily reading and podcasts: informal education is key.
  • Finally, play the long game. Create a 30-year plan and work backward. Chase excellence and not money. Money is the result of doing something well. When you put this all together, you have a sustainable business.

By Mark Sham, founder and CEO of Suits & Sneakers and Impello incubation hub

Round one to Ramaphosa

Deputy President Cyril Ramaphosa is leading the nominations for the ANC presidency, after all nine provinces completed their provincial general councils.

Ramaphosa now has 1 861 branch nominations, compared to Nkosazana Dlamini-Zuma’s 1 309.

It means he has a 552-branch nomination lead.

However, the figure excludes the 223 Mpumalanga branch nominations, where the word “unity” was written next to the name of the top six delegates.

The “unity” nominations were recorded as abstentions, even though the numbers were higher than those of Ramaphosa and Dlamini-Zuma.

Ramaphosa has the nod from five provinces: Gauteng, Northern Cape, Eastern Cape, Western Cape, and Limpopo.

Dlamini-Zuma has the most support from KwaZulu-Natal, North West, Free State and Mpumalanga.

The nomination process was completed when Dlamini-Zuma won 433 nominations from her home province. However, Ramaphosa made inroads, garnering 193 nominations.

Ramaphosa gathered the following nominations per province:

KwaZulu-Natal – 193

Mpumalanga – 117

Limpopo – 391

Gauteng – 374

North West – 44

Northern Cape – 154

Western Cape – 121

Free State – 44

Eastern Cape – 423

Dlamini-Zuma gathered the following nominations per province:

KwaZulu-Natal – 433

Mpumalanga – 123

Limpopo – 104

Gauteng – 64

North West – 291

Northern Cape – 11

Western Cape – 13

Free State – 209

Eastern Cape – 61

‘It’s not over until it is over’

However, Ramaphosa’s toughest challenge is that Dlamini-Zuma has the support of the biggest provinces, who are sending more delegates to the fiercely-contested conference.

The conference will get under way on December 16 in Johannesburg.

While each branch gets to nominate – some branches get more than one vote. The bigger the branch, the more delegates it can send to the conference.

A Dlamini-Zuma campaigner said the nomination process was not a true reflection of what was likely to be the outcome as they expect Mpumalanga’s 223 “unity” nominations to be in her favour.

“We are counting warm bodies that will be on the conference floor when the conference gets under way, and we have the numbers,” he said.

If the “unity” nominations go to Dlamini-Zuma, Ramaphosa’s lead is reduced to just 329.

If the ANC Women’s League and ANC Youth League, that have officially endorsed Dlamini-Zuma, give her their 60 nominations each, that decreases Ramaphosa’s lead by a further 120 as they are expected to get 60 nominations each.

However, Ramaphosa is expected to get sizeable nominations from the Veteran’s League and the national executive committee (NEC) that could push up his numbers.

A senior NEC member said the final tally will only be clearer when credentials are adopted on the first day of the conference, as some branches are still rerunning their branch general meetings to nominate leaders.

“So, it is not over until it is over,” he said.

By Mahlatse Mahlase for News24

US seeks class action against Naspers, MultiChoice

E-commerce and media giant Naspers and its pay-TV arm MultiChoice could now be facing a possible class action suit in the US after a law firm there announced it was starting an investigation on behalf of investors into Naspers.

In the latest fallout in the widening scandal involving allegations of corruption, collusion and undue corporate influence from Naspers’ MultiChoice unit to allegedly influence South Africa’s long-stalled digital migration switch from analogue to digital TV, US law firm Pomerantz has launched a search for investors who want to start a class action lawsuit against Naspers.

Pomerantz said its investigation on behalf of Naspers investors concerns whether Naspers and certain of its officers and/or directors have engaged in securities fraud or other unlawful business practices.

In its public statement issued on Tuesday it said: “On December 1, 2017, Naspers reported that its wholly-owned television unit MultiChoice had initiated an investigation into whether improper payments were made to ANN7, a South African news channel owned by the politically-connected Gupta family.

“According to local media, citing leaked emails, MultiChoice substantially increased its annual payment to ANN7 from R50m to R141m over the past two years.

“On this news, Naspers’ American Depositary Receipt price fell $3.05, or 5.58%, to close at $51.60 on December 1, 2017,” Pomerantz said in the statement.

Naspers acknowledged Pomerantz’s statement and told Fin24 on Tuesday that adjustments in global tech markets took place at around the same time Pomerantz highlights.

Naspers re-iterated that it takes the recent media allegations about MultiChoice SA seriously. It however pointed out that MultiChoice SA has many minority shareholders and the responsibility for dealing with the matter lies with the independent MultiChoice SA board.

“The MultiChoice South Africa board has therefore instructed its audit and risk committees to assess whether or not there have been any corporate governance failures at MultiChoice in regard to the ANN7 matter and report back to the board,” Naspers said in an emailed response to questions.

The ecommerce and multimedia giant said it has confidence in the MultiChoice SA board to deal with the matter, following their governance procedures. It said it will verify that the MultiChoice SA board has addressed the matter adequately.

“The MultiChoice Audit & Risk committee has confirmed the action it is taking in response to the allegations in the media. As stated above, once they complete their work following their governance procedures, they will report to the MultiChoice board, and after that has happened the Naspers board will consider whether it is satisfied with the action that the MultiChoice board has taken.”

Source: Thinus Ferreira and Fin24

Rand rallies as Ramaphosa leads

The rand rallied on Tuesday, strengthening to below R13.50 to the US dollar as the race for the ANC president enters the final stages.

Deputy President Cyril Ramaphosa is now firmly in the lead after winning backing from most ANC branches to succeed President Jacob Zuma as ruling party leader.

READ: Ramaphosa has edge, but leadership victory not guaranteed
RMB currency strategist Ilke van Zyl said in a morning note that the positive turn in local politics could buoy the rand further.

The local unit has clawed back more than a rand since it breached R14.50/$ just over two weeks ago on plans by President Jacob Zuma to push through free higher education.

By 09:10 the rand was trading 0.4% firmer at R13.46/$ from an overnight close of R13.52/$. The unit was still trading in the high R13.70s on Monday.

“Local politics are the main reason for the significant rally in the rand this morning as the race for ANC president enters the final stages. Kwazulu-Natal endorsed Dlamini-Zuma with 433 (69%) votes vs. 193 (31%) votes for Ramaphosa. But this was more than neutralised by Limpopo that crowned Ramaphosa with 391 votes (79%) vs. Dlamini-Zuma’s 104 (21%).

“Ramaphosa is now firmly in the lead and has the backing of five provinces with a total of 1 862 votes. Dlamini-Zuma has four provinces behind her and a total of 1,309 votes. Simplistically, this is a 59/41 percent split in favour of Ramaphosa,” she said.

Van Zyl however said it is important to remember that not all of the branches were allowed to vote and an accreditation of delegates will take place on the first day (the 16th) of the conference.

“Either way, this gap is very unlikely to be closed.”

South Africa’s GDP growth numbers are also due for release on Tuesday, with economists expecting an easing to 1.7% in quarterly growth from 2.5% recorded in the second quarter.

Van Zyl reckons markets are already pricing in low growth and the release should have minimal impact on the currency.

Source: Fin24 

How does government spend our taxes?

Stats SA has released a complete overview of total government spending for 2015/16, providing insight into where your tax contributions have gone.

The report found that total government spending amounted to R1.52 trillion in 2015/16 – an average of R27,600 per person if we consider South Africa’s population of 55 million people.

Compensation of employees contributed 40.6% of the R1.37 trillion, the largest expenditure item in economic terms. The second largest item was purchases of goods and services, contributing 21.9%.

According to the latest Financial statistics of consolidated general government report, general services accounted for a quarter of government spending in 2015/16. Within this, debt payments accounted for 9% (of the total) and executive, legislative and financial services accounted for 12%.

The latter includes the funding of general government services provided by institutions such as SARS, the National Treasury, the Auditor-General of South Africa (AGSA), the Financial and Fiscal Commission (FFC), parliament, and the various legislatures.

Not surprisingly, big priorities for government also include education and social protection (which includes the payment of social grants). Together these two items contributed 32% of total spending.

Government also spent more money on servicing its debt than it did on items such as housing, police, tertiary education and hospital services. Almost R129 billion was spent on public debt payments in 2015/16. In 2011/12, it was 7.2%, rising in 2012/13 (7.4%), 2013/14 (7.8%) and 2014/15 (8.4%). In 2015/16 it rose only slightly to 8.5%.

Source: Business Tech

How the world sees South Africa

South Africa dodged a bullet when credit ratings agency Moody’s Investor Services put the country on review for a downgrade rather than reducing its status, as rival agency S&P and Fitch did, notes London-headquartered global newspaper, the Financial Times.

This four-month reprieve creates an opportunity for the South African government to send a signal to the international community that it will undertake a political and economic overhaul. International investors are asking why Moody’s rates South Africa more favourably than Argentina and Ukraine, which both have reform programmes. Yields on South African bonds reflect the assumption that a Moody’s downgrade is on the way.

The South African government and investors may think none of this matters, with bonds and the currency recovering after former finance minister Pravin Gordhan was fired. But look beyond the short term opportunities to buy, as respected economist Dr Azar Jammine of Econometrix has, and it is evident that the S&P and Fitch teams have given up on South Africa for now.

The outcome of the credit ratings reviews by S&P and Moody’s revealed a mixed result. S&P did indeed downgrade the credit rating on South Africa’s local currency debt to junk status, but Moody’s has deferred its decision to do so until after next year’s Budget. As a result, the worst-case scenario of South Africa falling out of key world government bond indices in such a way as to precipitate a huge outflow of capital from sales of domestic bonds, has been averted for the present. The earliest date at which such an outcome can now materialise is March next year.

Essentially, S&P has given up on South Africa being able to restore its fiscal strength and promote higher economic growth over the next few years, whereas Moody’s seems to have given the government an urgent opportunity to undertake the structural reforms needed to promote higher economic growth and alleviate the fiscal deterioration. The latter rating agency also seems to give greater credence to the importance of having deep financial markets, a stable and sound banking system, a solid spread of maturities for government debt, as well as deriving the benefits of having a freely floating exchange rate and democratically-oriented institutions. S&P in contrast has taken the view that irrespective of the ANC’s presidential electoral outcome, there are likely to be huge impediments to undertaking reforms that might improve the economic growth and fiscal outlooks.
The uncertainty surrounding the possibility of further credit ratings downgrades and South Africa falling out of world government bond indices, therefore remains in place. In such a situation, the Rand is likely to remain under pressure, but not to collapse. The one ray of hope that we see is that real economic growth might surprise on the upside and as a consequence could serve to prevent the worst-case scenario materialising in 2018.
Both views on credit ratings downgrades have been partially vindicated

Clients will be aware of the uncertainty with which we have been looking ahead for several months at the S&P and Moody’s credit ratings and reviews which were due to be released on November 24th. Over this period we were arguing that there was a very high probability of the credit rating on S&P and Moody’s local currency debt ratings being downgraded to junk. However, we were uncertain as to whether or not these ratings agencies would give the country the benefit of the doubt and wait to see what panned out in the ANC’s electoral conference in December and the subsequent policy adjustments that this might bring forth, before taking the final action in downgrading. We had argued that ratings agencies that had already placed the outlook on South Africa’s credit rating to negative, had 12 months in which to either go ahead with a downgrade or restore a stable outlook.

This meant that S&P had until April to make up its mind and Moody’s until June. In the event, S&P seems to have decided that there is no point in holding off a ratings downgrade to junk despite not yet knowing for certain what the outcome of the ANC’s electoral conference might bring, whilst Moody’s has decided instead to place the country’s rating on review. It has been fairly transparent in suggesting that it wishes to see what the electoral outcome might be and subsequently to wait to see what measures are announced in the February 2018 Budget before deciding whether to join S&P in downgrading South Africa’s local currency debt.

As we have frequently argued, a junk status rating for local currency debt by both the S&P and Moody’s would precipitate South African government bonds having to fall out of key world government bond indices. Such an event would lead to tracker funds which base their asset allocation on the breakdown of the various world government bond indices being driven to sell out of South African government bonds.

The resultant outflow of funds could amount to over R100bn, or even R150bn, leading to a rapid depreciation of the Rand’s exchange rate, with inflationary consequences and potential upward pressure on interest rates. This could damage economic growth still further, thus exacerbating the ability to raise sufficient government revenue to reduce the budget deficit and constrain the increase in the public debt.

S&P has given up hope of an early restoration of fiscal strength, Moody’s hasn’t

On Thursday last week Fitch credit ratings agency had left its credit ratings at one notch below investment grade (ie the best junk rate rating) in respect of both foreign currency debt and local currency debt. Encouragingly, however, it maintained the stable outlook assigned to South Africa’s credit ratings. In the case of S&P, it maintained the one notch differential between the rating of foreign and local currency debt even while reducing the rating on local currency debt to junk status.

This meant revising down its rating on South Africa’s foreign currency debt to two notches below investment grade, thus allocating the worst rating of all to this form of South Africa’s credit rating. On the other hand, so long as Moody’s persists with keeping South Africa on review rather than going ahead with a further downgrade, its rating on both local and foreign currency debt remains at the lowest rung of investment grade just above junk status. The difference between S&P and Moody’s in deciding whether or not to go ahead with downgrading South Africa’s debt to junk status lies in the fact that S&P appears to have given up even bothering to wait until the outcome of the ANC’s electoral conference before going ahead with its decision.

Essentially, S&P has decided that no matter what the outcome of the presidential election, South Africa is going to struggle to restore the strength of its fiscal position. In the case of all three ratings agencies, three main problems manifest in South Africa’s fiscal situation. Firstly, because of the low rate of economic growth and the downward revisions of growth forecasts over the past year, including by all three ratings agencies, the projected growth in government revenue is just too low to accommodate a reduction in the budget deficit in the face of difficulty in reducing government expenditure due to social pressures. Secondly, there is deep concern about the possible liability for government emanating from poor corporate governance and low or negative returns at state-owned enterprises (SOEs). This might exert further upward pressure on South Africa’s debt metrics should guarantees granted to the SOEs by government be called up.

Thirdly, worries continue that economic growth remains unacceptably low and that under such circumstances fiscal consolidation requires dramatic action to curtail expenditure, a required development which is unlikely to be forthcoming. The difference between S&P and Moody’s is that the former believes that no matter what the electoral outcome in December, whoever succeeds president Zuma as leader of the ANC will be unable to effect structural changes to ameliorate the country’s fiscal situation for a long while.

In contrast, Moody’s suggests that if it sees sufficient action to address structural weaknesses in the economy being taken by a new leadership in the aftermath of such an electoral outcome, it might yet hold off a downgrade to junk. In this regard, the forthcoming February 2018 Budget is obviously perceived by the agency as being the litmus test of required action to improve the fiscal situation. Clearly, the agency is still providing a ray of hope that an appropriate new leader of the ANC will bring about changes in the structure of the economy and manifest the intention to effect such changes in next year’s Budget in such a way as to give a renewed sense of hope that some action is being taken to prevent the public debt from getting out of hand.

Several negative structural features identified by S&P

Similar structural weaknesses in the South African economy are identified by all three credit ratings agencies. The aspect of unacceptably low economic growth goes without saying. S&P picks up on this by arguing correctly that capital investment remains unacceptably low and this is likely to constrain an improvement in economic growth in the longer term. It argues further that even though there have been encouraging signs of an improvement in the country’s trade balance, this has less to do with increased competitiveness from an export point of view and more to do with an unwillingness to increase capital investment, leading to a lower rate of growth in imports of capital equipment.

In other words, the improvement in the balance of trade and a reduction in the current account deficit are a function of economic weakness rather than strength. Part of the reason also why S&P seems to have given up on South Africa’s being able to address its structural weaknesses, lies with the labour market situation. Clearly S&P does not foresee any major amelioration in the standoff between the stance of employers and that of workers in the economy, no matter who leads the country. One reads into the agency’s stance a perception of the ideological divide between market-friendly and interventionist policies persisting.

Finally, S&P highlights the difference between South Africa and other emerging markets in tackling inequality. It argues that whereas other similar countries have made some inroads into reducing inequality, this is not the case with South Africa where such inequality has been exacerbated. We have frequently suggested that the causes of this lie in the very poor outcomes of the domestic educational system which leaves such a high proportion of the workforce unable to command a job, or alternatively not to be able to perform a job that adds sufficient value to accommodate remuneration of a level that will allow for reduced inequality. Furthermore, the concentrated structure of the private sector, with so much power residing in the hands of big rather than small business, also constrains the ability of the economy to reduce inequality.

Fortunately, some positive structural attributes re-emphasised by Moody’s

On the other hand, as was the case with Fitch’s credit rating review on Thursday, Moody’s did at least re-emphasise some of the positive features of the South African economy which still justify an investment grade rating.

These include the depth of its financial markets, the strength of its banks, the well-diversified maturity spread of its government debt, as well as the fact that the country operates on a flexible exchange rate regime which can insulate the economy from the worst ravages of exchange rate depreciation.

Moody’s also draws attention to the ongoing strength of many of the country’s institutions such as the judiciary and other vibrant democratic non-governmental organisations. The presence of such institutions provides it with confidence that the country can indeed tackle its fiscal challenges under the right circumstances. In the case of S&P, even though the organisation acknowledges the persistence of institutional strength, it nonetheless points out various areas of deterioration in this attribute.

The most important of these is the manner in which S&P expresses its alarm at the deterioration of the ability of the South African Revenue Services to collect taxes. Nonetheless, one derives some encouragement from the fact that the credit ratings agencies are still prepared to acknowledge some residual strengths in the economy. The most important of these would appear to be the ongoing independence of the Reserve Bank in the implementation of monetary policy, something which is not prevalent in many other emerging markets.

Uncertainty to continue prevailing, but with a strong message to forthcoming president of the ANC

The mixed nature of the credit ratings reviews by S&P and Moody’s unfortunately leaves continued uncertainty in the outlook for the country’s credit ratings and through this for financial markets in the next few months.

This is not disastrous and has at least allayed the worst-case scenario for the present, but can unfortunately not eliminate the possibility of such a scenario still materialising through the course of 2018. As a result, it is unlikely that the Rand can make significant gains in coming months. Instead, the currency might experience a continuation of bouts of significant weakness as some bondholders increasingly anticipate the country’s bonds having to fallout of world government bond indices.

Essentially, it suggests that the Rand will trade somewhere between R14 and R15 over the next few months, without eliminating the possibility of a much more substantial depreciation in the event that Moody’s does go ahead with downgrading the country’s local currency credit rating in March. Under such circumstances, there is little chance of domestic interest rate relief, but at least it does mean that the Reserve Bank will be reticent to increase interest rates.

What if economic growth does turn out to be stronger than previously anticipated?

There is a final point worth making on a more positive note. In recent weeks and months we have increasingly pointed to the possibility that real economic activity might after all turn out to have been stronger than anticipated.

We have argued that, contrary to the fact that economic growth forecasts have progressively been downgraded in recent years in each important budgetary presentation, it is not inconceivable that for a change we might find a situation in which the government, as well as analysts, begin to revise economic growth forecasts upwards. In their latest credit ratings reviews, all three ratings agencies downgraded their forecasts for South Africa’s economic growth by a good few decimal points for both 2017 and 2018.

We are now increasingly posing the question as to whether or not the 0.6% to 0.7% prevailing forecast for economic growth in 2017 and the 1.0% to 1.2% growth forecasts for 2018, might not turn out to be unduly pessimistic. In the event of this suspicion turning out to have been correct, it is just conceivable that the ratings agencies will recognise that the deterioration in the country’s fiscal situation might not turn out to be as aggressive as currently anticipated. In the case of Moody’s, at the margin, this might assist in the agency staving off downgrading the country’s credit rating to junk in March.

Under such circumstances, the worst-case scenario of South Africa falling out of key world government bond indices might yet be avoided. However, common wisdom suggests that the probability of such a positive outcome is less than 50%.

By Jackie Cameron, Dr Azar Jammine for Biz News 

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