José Manuel Barroso, President of the European Commission and European Council President Herman Van Rompuy are in Pretoria next week for Summit talks with President Jacob Zuma. The EU Ambassador Roeland van de Geer today hosted a media conference to highlight some of the key issues.

He noted the importance of the relationship, as the EU accounts for 25% of SA’s exports – bigger than all the BRICS partners combined.

The Ambassador suggested that Europe wants to encourage SA to export more – he gave the example of protectionist calls from local chicken farmers, and suggested that that if local producers were more efficient they would be exporting to Europe. And meat and frozen potato chip exports should be encouraged too. “We feel very strongly that SA should look at the competitiveness of its industry. This is very fundamental,” he said.

A spat over EU restrictions on imports of SA lemons has soured relations in recent months. A disease called black spot is worrying the Europeans, but the Ambassador said the issue is in the hands of their scientists and a solution is in sight which would intensify inspections of SA lemon exports to as many as 5 inspections on consignments. Apparently this problem can be invisible when the lemons leave SA, but becomes visible during shipment. The Ambassador said it’s in everybody’s interests to resolve this as soon as possible.

The Summit itself will involve discussions on investment, unemployment, Zimbabwe, Syria, piracy off the East Coast of Africa and the peaceful use of nuclear technology. On the eve of the Summit there will be a business forum involving around 100 business leaders on each side. Trade and Industry Minister Rob Davies will join EU politicians in addressing the forum.

The Europeans will launch a 100 m euro support programme in support of SA’s infrastructure, which will be topped up with loans from various development agencies.

The elephant in the room will be the still unfinished negotiations on a new regional trade accord between the EU and SADC – known as the Economic Partnership Agreement or EPA. The Ambassador remains keen to see this concluded this year, and said he hopes the Summit gives negotiators “the impetus” needed to wrap things up – although he cautioned that this is not just for SA to decide, but will be done in consultation with regional partners.

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Nedbank’s Economic unit comments that ZA manufacturing production growth slowed to 2.2 % y-o-y in May from the unexpected 7.1 % rise in April. The April rise was the result of seasonal factors, so the slowdown in May was not unexpected. The market had expected a deceleration to 2.9 % y-o-y. On a seasonally adjusted basis, manufacturing production declined 1.7 % m-o-m in May. Meanwhile, mining data was also released. Total mining output was down by 0.7 % y-o-y in May after rising by a revised 0.7 % in April. Production was up by a seasonally adjusted 4.5 % m-o-m after increasing by a revised 2.8 % in April. What do we learn from all these numbers? ZA Confidential sought the views of some of our experts….

Mile Schussler from economists.co.za:

Manufacturing is up a lot more than people think. The adjustment to manufacturing for the year to May is up from 1,4% growth to 1,7% growth. It is looking increasingly likely that 2nd quarter GDP data will be much much stronger than thought before. The fact that March data was so negative will fall away in June and Manufacturing will increase with over 1,5% or about 6% seasonally adjusted and annualised. This will make the minus 8% seem very weak and even this gets adjusted in the new data. Mining, while down on a year ago (when mines were catching up after the impala strike action), was a little disappointing but is up month on month two months in a row and will make the June quarter strong too. Expect a major upward revision of GDP data.

Craig Pheiffer from Absa Investments:

With concerns around the slowing consumption (demand) side of the economy, the contraction in mining and manufacturing production (the supply side) over the course of May does not augur well for domestic growth prospects in 2013. Mining production did come in better than expected for the month of May and the previous month’s year-on-year growth number was revised from a negative to a positive but the fact remains that mining production is still shrinking. As we face further wage negotiations and possible strike action in the industry in the months ahead, the situation could get worse before it gets better. Mining production makes a much smaller contribution to GDP these days but it still plays a significant role in generating export revenues. Manufacturing production came in slightly below expectations but the 2.2% y/y growth rate for May is in line with the recent Purchasing Managers’ Index (PMI) reading of 50.4 index points recorded for the same month. The PMI reading improved in June to 51.6 points and this leads to the hope that the volume of manufacturing production expanded a bit more over the course of June. Manufacturing was a drag on domestic economic growth in Q1 2013 (GDP of 0.9% q/q) but after two months of positive data the sector could make a positive contribution to GDP in Q2 where a q/q seasonally adjusted and annualised rate of 3.3% is forecast. The softness in recent economic data could lead one to believe that further monetary policy easing is necessary, but it’s unlikely that the SARB will budge while inflation is high (admittedly still cost-push, mostly with little core inflationary pressure). An unchanged monetary policy is therefore expected to prevail for some time into 2014.

Mohammed Nalla from Nedbank Capital:

Mining production, while beating estimates, has still contracted over the month to -0.7% y/y , while Manufacturing production came in significantly lower than consensus at 2.2% y/y from last month’s 7.1%. Non-gold output rose 1.9% y/y while the gold mining sector continued to build on losses, shrinking by a massive 14.6% y/y as labour unrest and rising cost pressures compound a falling bullion price. Turning to manufacturing, a softer PMI number in May acted as a leading indicator to the lower manufacturing print today. Despite an uptick in June’s PMI released earlier this month, it remains marginally in expansion and does not paint a picture of robust health, but rather of an economy beset with structural impediments which are seeing South African industry fail to capitalise on a much weaker rand exchange rate. Persistent labour unrest is compromising the output of goods while unsustainable wage demands place additional pressures on business, eroding the sustainability of many enterprises. Constructive engagement by the private sector, government and labour is required as a prerequisite of getting the economy on track, with each player needing to look toward the greater good in order to inform a sustainable growth strategy going forward. This is likely to be elusive over the short term as political considerations rise to the fore amid an election year next year.

Coenraad Bezuidenhout of the Manufacturing Circle:

Manufacturing production and sales figures for May showed that manufacturing recovery was still fragile. In rand term, sales registered year-on-year growth of 8.5%, despite production volumes growing at only 2.2%. This is made possible by the weaker rand, which is helping to ameliorate destructive margin squeeze in low demand, high cost conditions. High domestic costs, combined with the relative affordability of capital does mean that should protracted labour unrest occur in upstream sectors such as mining and agriculture and have knock-on effects for industrial peace in manufacturing, mechanisation and imports would become an immediate threat to retaining jobs in the sector. It may also see reversals in its currently fragile growth. More robust growth in manufacturing production and sales stats would be desirable. It could result if a concerted effort was made to improve the security of our energy and water supplies, and to bring these and other publicly administered costs into line with the prices levied in key competitor markets, such as in those of our BRICS partners, and in Eastern Europe. Over the longer term, it would be crucial to maintain the access that we enjoy to established export markets, to remove red-tape and infrastructure barriers to trade with other African economies, and to drastically improve our access to markets in Asia and South America.

Gerhard Lampen from Sanlam iTrade:

The SA economy is really showing signs of fatigue. This confirms economist forecasts of GDP growth slowing to less than 2.5%, with downside risk. Research showed that the SARB is much better at forecasting GDP than economists. The SARB forecast 2.3% growth a month ago. With the looming strike season, risks are surely on the downside. With CPI expecting to breach the upper band of 6% there will be no change to interest rates. Governor Marcus will keep rates steady until end 2014. Equities remain the best asset class to be invested in.

Conclusion:

There is little to cheer and much to ponder in the latest numbers, coming the day after the IMF cut its GDP estimate for this year for the ZA economy to just 2%. And further unrest in mining could be very troublesome indeed……

Tweet of the Day:

EricWest™ (@EricJWest): I got caught taking a pee in the local swimming pool today. The lifeguard shouted at me so loud, I nearly fell in.

After the news earlier this week that Eskom’s new Medupi power station will not be coming on stream at the end of this year, as had been planned, the parastatal today put out its financial results for the year to March, and ZA Confidential was in attendance.

It announced a net profit of R5.2 billion – a big fall from last year.

The Eskom chairman Zola Tsotsi suggested that poor performance was due to the need to keep the lights on – running assets at high levels.

He spoke of ”challenges” at Medupi, but didn’t provide much detail.

He announced that Paul O’Flaherty, who has resigned, will be leaving his post as Eskom’s finance director today – prompting speedy comment on twitter that the CFO is the fall guy for failures with Medupi.

Public Enterprises Minister Malusi Gigaba did address the Medupi delay – saying he is “extremely disturbed” by the delays beyond December 2013, which had been the most recent deadline.

He said he supports penalties being imposed on the contractors, and he said that there are questions on the security of supply, on the economy, and on Eskom’s ability to manage projects.

He said Eskom is doing better now than it did during the building of its most recent power plant in the 1980s, and he noted a lot of skills have been lost to Eskom in the meantime.

And he praised Eskom for keeping the lights on since April 2008, when there had been several months of widespread power cuts, which Eskom describes as “load shedding.”

CEO Brian Dames said that there had been sound business performance in a very tough year.

Because of the tight situation with demand levels close to supply capacity, less maintenance has been done recently than had been required, even though maintenance levels have been higher recently than in the previous year.

He noted that the most recently granted tariff increases of 16% have been lower than Eskom originally wanted, but the sluggish economy has meant a 2.8 percent reduction in electricity sale so far this year.

Eskom has had a ratings downgrade, due to its link to ZA’s sovereign rating, but Dames stressed the need to prevent a further downgrade and to maintain an investment grade rating.

All in all, it was a sober and realistic affair, not leaving me with any confidence that we will be able to avoid blackouts in the months to come, but recognising that Eskom has better leadership and political oversight than had been the case in the fairly recent past.

Buddy, can you spare a dime? PwC today put out a report on executive director pay, and hosted a panel discussion on this issue in Johannesburg. A central theme of the report is that there is some restraint – bosses just haven’t been receiving the scale of pay rises that might have been expected.

Increases in total guaranteed packages in the year to April for executive directors across the JSE were up 4% – down from an 8% increase in the previous year.

PwC’s Gerald Seegers says that “times have been tough, and incoming CEOs are accepting lower packages.”

Adcorp economist Loane Sharp said companies should not be restrained in how they pay their executives, but should able to remunerate on the basis of company performance.

And he suggested that workers should also accept the concept of productivity-linked pay.

He disagreed with Cosatu’s Patrick Craven that workers are perfectly justified in seeking high pay rises when they see high rises in executive pay.

There was an animated discussion, with some heated intervention from leading economist Mike Schussler, who to nobody’s surprise seemed to favour Loane Sharpe’s views over those of Patrick Craven.

Tweets of the Day:

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Engineering News reports that e-tolls on Gauteng freeways are just a signature away. Once President Jacob Zuma has signed on the dotted line, implementation can be triggered. ZA Confidential sought reaction from our Panel of Experts…

Wayne Duvenage from OUTA:

It’s one thing to sign off on regulations and new laws; it’s another to govern and enforce them. E-tolling is not sustainable. It is too costly, extremely inefficient and too onerous to apply. For these reasons, it has lost the trust and support of society at large. This will result in high levels of non-compliance, which will bring the system down in a short period of time. It is not too late to halt the system and switch to more efficient funding mechanisms that exist in government policies.

Mike Schussler from Economists.co.za:

Well, it is coming. But with consumers under pressure, it is bad timing, as the economic cycle is just on an even par. If extra money also goes to tolls after huge petrol increases and electricity increases, Gauteng retail sales are going to suffer in the next month or two.

Dawie Roodt from the Efficient Group:

The huge public outcry against the toll roads is probably a form of tax revolt. The tax burden has been increasing in recent years, yet capital expenditure was totally insufficient while social expenditure was emphasised. Now that our capital infrastructure needs more money, additional funds are required – which is nothing other than an increase in the tax burden.

Business Leader Michael Tatalias:

My concern would be that they pleaded to the Constitutional Court in August last year that they would start in two weeks if the injunction (to prevent e-tolls) was overturned. Why haven’t they started already? Are they technically able to? Why the delay? Or are they having second thoughts? They should see that the people are dead set against it.

Conclusion:

There are strong doubts that the e-tolls will be easily enforceable if enough people fail to register. There have been reports that the toll levels may again be reduced prior to implementation. If so, the campaigners will have achieved a long delay and lower tolls. This might make the system more palatable, but high costs of petrol and other running costs have made motoring increasingly expensive. The tolls will just add to the misery.

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Hong Kong trade officials report that ZA is targeting the Hong Kong and China mainland markets for wine exports. We recently looked at this issue in the context of a possible trade war between the EU and China and the opportunities that might offer to our exporters. But should we not already be on the front foot in seeking to sell more wine to China? ZA Confidential sought the views of some of our experts….

Expert Comment:

Mike Ratcliffe from Warwick and Vilafonte Wine Estates:

I think China’s current solar panel and cellular electronics dispute with the EU could be opening doors for our wine, and perhaps cheese as well – the EU may see some of its products becoming not quite as popular. Our wines have done well in general around the world when there is a wine glut. We need to put a few more things into place such as a China-SA wine expo and perhaps a business-to-business chamber in the food industry. But already plenty of SA wines are doing well in China. We need to look at other industries with urgency now that gold and platinum are off the boil, and make use of the weaker rand. Wine is well placed, as are the tourism and food industries.

Dr Martyn Davies from Frontier Advisory:

China undoubtedly presents great opportunity for increased wine exports from SA. We’ve been rather slow to market ourselves consistently in China and have lost the early-mover advantage to our competitors, but I am nevertheless optimistic about the prospects for SA wine in China.

Jeremy Sampson of Interbrand Sampson:

Any effort to enter potential wine markets is to be welcomed. But is this too little, very late? And is it focussed on bulk wine – i.e. cheap and cheerful – or the branded, and, more profitable, end of the market? The Chinese wine market is all about red wine. Marketing campaigns come and go, but does SA have a physical presence in China, are partnerships in place, and so on – making it a sustainable exercise? As I recall, China’s main beer brand by volume is Snow, owned and managed for the last couple of decades by SAB. They understand that to succeed in new, especially emerging, markets you need partnerships. And it takes time.

Duane Newman from Cove Advisory:

The rand value of exports of wine and other alcohol products is on the increase. This will be due to increased marketing, and also the weakness of the rand. According to the South African Trade Statistics the exports of wine and related products increased by 54% from R446m in April 2012 to R688m in April 2013. This is an amazing rise, and I am sure some of this will be due to the increase of exports to the East, especially China. I do expect the exports of SA wine to increase even more with the focused marketing efforts of Wines of South Africa. With the drive to ban alcohol advertising in South Africa I am sure alcohol companies will have available budget to market to newer regions.

Independent Economist Ian Cruickshanks:

SA’s existing modest wine exports confirm the industry’s inability to form a co-ordinated marketing effort – rather than the current fragmented – mostly individual producers’ – foreign sales push. However, the expected record harvest, weak rand and rocketing Asian demand provide an opportunity which should benefit the domestic industry. A potential repeat of recent labour unrest and illegal arson in the vineyards renders reliable projections difficult, but the new basic wage agreement should contribute some industry stability. China’s estimated economic growth rate provides a huge marketing opportunity for SA wines for an industry initiative, which will also hopefully attract support from the Department of Trade and Industry.

Conclusion:

There are a lot of Chinese people, and the growing affluence of the Chinese does represent a massive opportunity for exporters of all sorts of South African goods and services. China welcomed us into the BRICS group of emerging nations. How better for them to toast our ever-closer friendship than with a few glasses of fine Cape wine?

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The hotel group Tsogo Sun won some positive publicity this week with the news that it is to offer free Wi-Fi to guests. But will this be a draw card? Would you stay in a particular hotel or hotel group, or visit a particular coffee shop or cafe chain to benefit from a free Wi-Fi connection?

Expert Comment:

Tsogo Sun CEO Graham Wood had this to say:

Wifi is becoming an increasingly important choice in local and international travellers consideration of which hotel to stay in. High speed connectivity is of absolute paramount importance, which is why we at Tsogo Sun have invested in the latest technology to ensure a consistent and reliable high speed WIFI service. In time Wifi will become a commodity such as soap or shampoo in a room!!!!

Jeremy Sampson from Interbrand Sampson:

Tsogo Sun’s offer of free Wi-Fi is to be welcomed. For some time, where Wi-Fi is charged for, it has been seen as onerous, even a bit of a con. In many parts of the world, as costs come down, it is now offered for free. The UK for the most part is a glaring exception. Will it change my booking habit? If I am on the road travelling it certainly becomes a factor. The other question is: how will the competition respond?

Duane Newman from Cova Advisory:

I have stayed at various Tsogo Sun hotels and the recent offering of free Wi-Fi is a move in the right direction. I believe all hotels need to offer this. It initially was a differentiator; now it is expected by customers. If you don’t offer it, I believe it irritates customers and could result in you losing customers. I recently installed it in my wife’s coffee shop to offer convenience to clients, especially business people who use the shop as a temporary office. We did take a while to offer the service as it does increase the fixed cost base of the coffee shop, but it was a worthwhile investment – in upgrading the IT infrastructure, and the increased monthly fee. While there are conditions to using the free Wi-Fi and it is secure through the use of codes which are only valid for an hour, it does ensure the coffee shop does not lose customers. I am not convinced it results in new customers.

Mike Ratcliffe from Warwick and Vilafonte Wine Estates:

In this interconnected age, access to the Internet is a key criteria for travellers as they all require connectivity. While Internet provision does not come free, it is as important as good food and a comfortable bed. The above is especially true in Africa given its low Internet connectivity rates and the high price of broadband and mobile Internet. The Tsogo Sun move is consistent with international trends. The key question is whether they will be able to harvest the valuable data that this opportunity presents.

Duncan McLeod from TechCentral:

Yes. I work on the road a lot and I definitely go to places like Mugg & Bean where I can find an AlwaysOn Wi-Fi connection. So, yes, Wi-Fi availability plays a big role in my movements. I’m less sure I’d pick a local hotel based on Wi-Fi, though it’s always nice to have it. If it’s not available, I default to using my 3G wireless hotspot device.

Chris Gilmour from Absa Investments:

Absolutely! In a country where internet access is poor, unreliable and outrageously expensive, many people are attracted to free Wi-Fi in a variety of areas in order to supplement their meagre and expensive allowances from internet access providers. So, for example, any hotel that doesn’t offer free Wi-Fi to its guests is operating at a distinct disadvantage. It has become the international norm, even if it is only offered in the public areas rather than throughout the entire property, or if it is capped either in time or by usage. Coffee shops such as Thyme on Nicol, for example, offer 2hrs or 200Mb of data per day to their patrons. Virgin Active offers something similar in its health clubs. Airport lounges also offer free Wi-Fi. These types of offering are especially useful to people who are grabbing a quick bite, chilling after a workout or catching up en-route to a new destination. Mango Airlines apparently offers free Wi-Fi in its aircraft and that should be a big draw card, relieving the monotony of flying

Malcolm MacDonald from Tersos:

Our South African Wi-Fi providers have taught me up to now not to rely on Wi-Fi, so I have invested in cellular data bundles. I am a member of two Wi-Fi services that give free roaming access at many Wi-Fi hotspots. The problem is that the bandwidth available behind those Wi-Fi connections is often so slow, that using my mobile phone is faster – especially since the advent of LTE. I have used a few restaurants’ internet access, and it was adequate to update my Flipboard articles while having lunch, but I had to go to the front desk to get a logon key. The standard amount of free internet bandwidth that hotels offer is neither fast enough nor large enough to stream a movie or TV show – only enough to check some emails. I cannot understand why a hotel charging R1500+ per night cannot do better than 50MB free internet access.

Lavan Gopaul from 28e:

A Wi-Fi offering has become commonplace in recent times. We take it for granted that any establishment will offer connectivity and expect a generous download allocation. Google has recently provided free Wi-Fi and generous download capacity to a few blocks in Manhattan as a test case. This is a pre-cursor to a major US roll-out of a similar offering. Today’s Tsogo Sun Wi-Fi showboating is already becoming a minimum standard worldwide.

Conclusion:

In this age where phones, tablets and computers are all hungry for data usage, it is a welcome development to receive free Wi-Fi. I am writing this from the gym where – you guessed it – my Wi-Fi consumption is more consistent than my work outs.

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We are now into H2 of 2013, and we have recently been bombarded with an array of economic data. Are we in trouble; are we OK? ZA Confidential sought the views of some of our experts….

Expert Comment:

Ettienne Le Roux from RMB:

Most recent statistics suggest the pace of growth in real GDP accelerated slightly compared to the poor first quarter annualised rate of 0.9%. Still, for the year as a whole, growth should come in lower at around 2%, against last year’s 2.5%, and 3.5% in 2011.Consumers remain under pressure, companies are hesitant to invest, and growth in emerging markets – key trading partners of South Africa – is slowing. All the while, room for further fiscal and monetary policy relief domestically is limited. Interest rates are already at record low levels and public finances are stretched. The picture for this year is not rosy at all……

Craig Pheiffer from Absa Investments:

The South African economy is not an island and our current low rate of growth can partially be attributed to the slow rate of growth in the global economy. Slowing growth in China and recessionary conditions in Europe, two of the largest importers of our goods, have hurt exports and domestic manufacturing production. Slower global growth has also translated into a lower demand for commodities and commodity prices have fallen. That’s further hurt export revenues but it’s also made for less profitable mining production, mining closures and retrenchments. Lower domestic consumer confidence and business confidence in an uncertain global and domestic economic environment has meant that consumers have postponed purchases of big ticket items while business has postponed expansion and hiring plans – adding to the general slowdown. The highly indebted nature of households has exacerbated the situation in that even in a historically low interest rate environment, consumers are running out of capacity to borrow more (and hence demand more goods and services). The result is that the production side of the economy is weak (mining and manufacturing) and the consumption side (household demand) is weak. With the country running a substantial current account deficit as well as an on-going budget deficit, there is little room for government to stimulate demand through looser fiscal policy (a chief concern of the ratings agencies). It is unlikely that lower domestic interest rates will have a significant impact on demand either. Growth forecasts for SA are being revised lower across the board and it seems we will only get some respite once the global economy picks up pace again. We need to have our house in order then to benefit from that uptick, when it eventually comes.

Gerhard Lampen from Sanlam iTrade:

Our economic indicators point to a sluggish economy. The PMI is still above 50, but only just. Slowing vehicle sales point to slower retail sales, always an early indicator. Our trade deficit and Balance of Payments are still in dangerous territory. On the other side of the coin, we had a lower inflation number, but only because of a petrol price decrease. With the increases in June and July it is pretty certain we will overshoot the 6% upper band. This will be temporary, though. There is nothing the SARB can do. It cannot cut, as CPI is at the upper band of the CPI bands. The currency and wage demands pose a threat to inflation. It cannot increase rates because the economy is losing traction. Rates will be on hold until both CPI and GDP recover, probably in 2015.

Hein Kruger from Kruger International:

I am most worried about something that everybody is trying to forget about – and that is the household debt to disposable income ratio of 75,4% at a time when imported inflation on the back of a deteriorating rand is fast eating into the shrinking living cost budget of the average consumer, with Bernanke’s looming rising interest rate threatening to knock a large part of middle class South Africans out of the ring – with Banks inheriting excess properties and cars instead of outstanding payments. The government will also lose a large part of its 80% income base when this starts to happen. This is what happened in the USA in October 2007, and in Europe in 2009.

Conclusion:

There seems to be sense of realism that the economy is not buoyant, but is not in deep trouble either. Q2 2013 must show some signs of dynamism, or this will not be a year to remember, with any fondness anyway.

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