Category: Uncategorized

Does the WTO deal Matter to ZA?

At one stage it looked as if the latest session of World Trade Organisation (WTO) negotiations in Indonesia was doomed to failure, but word arrived at the weekend that a deal had been struck. Despite some flaws, there is now a new trade deal, moving away from protectionism and towards liberalisation. This comes after more than a decade of failure. Detailed assessments will no doubt arrive in time, but we sought some initial reactions from some of our experts.

Former Trade and Industry Minister Alec Erwin:
It is pretty clear that this is a holding job, and a very necessary one at that! They have basically dealt with the issues that affect the developing and least-developing countries that are not of fundamental importance to the developed or the BRICSA-type countries. I am not sure what the precise content of the trade facilitation text is but that could be important for all. I also cannot see the planned work program ahead. The big elephants in the room – industrial tariffs and further agricultural liberalization have been left once again. So in short they have moved along the development path but have not been able to address the rapidly changing balance of power in the world economy, which requires a pretty fundamental look at the key issues of industrial tariffs, agriculture and services. The Doha Framework, whilst a good one, is rapidly becoming outdated with this new balance of power. However the fact that they were able to reach a range of agreements is a very positive step that they need to build on in order not to entirely loose the momentum of the WTO – which is the real protection against the maxim of ‘might is right’. The new kids on the block in this regard are groups like the G11 around industrial tariffs (SA being a part of this). The ‘might is right’ regime will hurt the least-developing and most African economies the most!

Professor Raymond Parsons from BUSA:
The draft global trade deal now struck by the WTO is good news for the world economy, as well as for SA. Whatever the trade obstacles that still remain in the spheres of agriculture, industrial tariffs and services, it is in the interests of small emerging economies like SA that an international negotiating forum committed to multilateral agreements exists to ensure enforcement of their trade rights. An effective rules-based multilateral system remains essential to underpin the world trading system and to help level the playing field. The latest WTO accord may also extend the already protracted negotiations on the Doha Round, which SA and other like- minded economies have been seeking to influence over the past few years. It at least provides time for the WTO and its members to see whether they can reach fresh accommodations which will strengthen the WTO’s ability to respond to the changing economic and business environment of the last few years. The WTO has now been given a new lease of life and it up to its member-countries to make the best use of it.

Peter Draper from the SAIIA (writing from Indonesia):
I think the deal is justifiably described as the best thing that’s happened to the WTO in decades. In fact it’s the first substantive deal the organization has delivered. That is also positive in terms of its implications for wrapping up the Doha round in some form, which is the next big hurdle the organization confronts and will be the focus of renewed and revitalized effort over the next year or so. Even though it is a relatively limited deal, the trade facilitation component in particular will have substantial, positive implications for traders around the world since it will lead to more automated customs processes and a renewed emphasis on authorized economic operator systems – implying less intrusive inspections regimes down the line. I think this is good for SA, not so much because we need this kind of fillip but more because our neighbours will have to pay it serious attention. That may of course lead to implementation problems, but the deal caters for external assistance. I don’t think the other elements of the deal are much to write home about since they don’t really have substantive implications for us. With the exception of the food purchase programme which the Indians held out so long on. I’m told that SA has a similar scheme and therefore can take comfort that it will be legal for at least another four years. (I wasn’t aware of this so I can’t comment on the accuracy.) But for the Doha Round it also gives developing countries some purchase to secure actual elimination of export subsidies and disciplines on US food aid, since the EU and US respectively want these food purchase schemes to be disciplined. That provides some hope of an overall package incorporating agriculture and industrial tariffs, although I think the latter will remain particularly difficult.

Martyn Davies from Frontier Advisory:
The WTO is battling to remain relevant. I would say that this deal is by no means the big achievement that it is made out to be – rather an “easy win” that did not take much compromise at all from its wide membership base. The future of trade liberalism lies in regionalism, not global multilateralism.

Former SACCI CEO James Lennox:
The deal seems to be an agreement to further talks over a number of years to address issues such as food supply. Trade facilitation advances will probably be offset with additional “national security” requirements, resulting in less than hoped for benefits. Any growth opportunity for agricultural products from developing countries will potentially be reduced by high tariffs imposed on increased volumes. Bi-lateral and regional trade agreements between major trading blocs will continue to throttle growth opportunities for LDC’s and small developing countries – making the WTO even more important at a time of its declining influence. Multinational companies and any distorting effect they have on national and international trade also needs to be considered when considering trade agreements.

Ian Cruickshanks from the SAIRR:
It is interesting to see how long it has taken to reach the first trade agreement since the founding of the WTO in 1995. However, we have seen the Doha Round of talks with 12 years of trying to level the playing field between poor and rich countries, so a move to limit agricultural subsidies and hold stockpiles off the markets should provide some greater certainty for the marketing of products from the least-developed countries. However, I think that many of the major players in the WTO have been motivated by fear of alternative regional agreements. Considering their own snail-pace advances, definitely this is a boost to world trade. However the possible 1 trillion dollar benefit may be over-optimistic. These changes will take months and possibly some years to be fully effective, but it is a move to assist emerging markets like SA whose economies are skewed toward base commodity exports. Markets should be supported by this agreement, but may not necessarily be expected to improve.

Miyelani Mkhabela from the Antswisa Management Group
The World Trade Organisations (WTO) outcome is a great achievement by 159 member nations to have signalled until they reach trade consensus and overlook minor regional challenges and differences. The WTO is the only global organisation dealing with trade rules between nations. The Indonesia agreement will resuscitate or asphyxiate the value of the WTO and make effective of their length and complex trade agreements. The agreement will also fulfil the principles that trading countries shall not discriminate between its trading partners, it should also not discriminate between its own and foreign products and services, lowering trade barriers is also one of the primary ways to encouraging trade and the discouragement of unfair practices will advance and mainstream the participation of developing economies that includes South Africa as well.
South Africa is trading mainly in mineral resources, agricultural products and other resources will benefit from the agreement. Economically, the disagreements in agriculture will continuously be witnessed as countries seek global competitive advantage within the sector and developing nations proved to use agriculture as their area of focus mainly for economic development. Trading nations and national domestic trading stakeholders will welcome the progress made by the conference 2013. The global community needs the WTO and other trade agreements between nations are guided by it. Trade Processes and other systems will change the normal operations of the world trade countries, chambers and producers will have to change slightly and this will add value in weakening trade barriers. Producers from emerging economies struggle to trade their products and the non-consensus discouraged fair trade for the past 17 years since World Trade Organisation formation 1 January 1995 and the outcome is a new practical formation in principle of the WTO and we anticipate flexible trading between developed and developing nations and also a symbol green leafs of the global economy to grow.

Conclusion: As is always the case with these deals, it is a compromise, and has some gaps and flaws. But for once let us consider the glass to be more than half full. Bravo WTO!

Tweets of the Day:
TRobert Stacy McCain (@rsmccain): Obama has a web site that doesn’t work and drones that kill people. Amazon has a functioning web site and drones that deliver gifts.
Funny Tweets (@iQuoteComedy): I need a 6 month vacation, twice a year.
Lynne McCarthy (@LynneMcCarthy): I don’t take orders from anyone. Which is most probably why my restaurant went bust.
Jay (@jaymeisterrr): Still trying to comprehend how it’s already 2014 in Australia.

ZA Confidential is e-mailed to subscribers. For details on subscription rates, please contact: zaconfidential@gmail.com. Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address. Upgrade your conference or event by hiring ZA Confidential Editor John Fraser as a speaker or MC.

More thoughts on Nelson Mandela’s Economic Legacy

Since our earlier newsletter, we have received further thoughts on Nelson Mandela’s Economic legacy, so it seemed worthwhile to publish them in a separate newsletter. Here is what some more experts had to say….

Nedbank CEO Mike Brown:
Madiba led South Africa from a closed state back into the democratic world and this allowed our economy to become part of the globalization trends that started in the 1990s.The South African economy of today has been a major beneficiary of our democracy for which we thank the father of our rainbow nation.

Peter Attard Montalto from Nomura (from his daily mailing):
Mr Mandela’s job while he was President was to build a nation, unite its people and secure its foundations. In this he was successful. In matters economic he took a number of key decisions before entering power, such as the rejection of the previous ANC policy (from the Freedom Charter) of nationalisation of industry, and realised the need for a more pragmatic social-democratic, liberal form of economic policy as opposed to the more hardline socialism (or even communism) promoted by many in the ANC. However, while in power much of the key economic policy making was done under the leadership of then Deputy President Thabo Mbeki and, as such, criticisms about the lack of infrastructure investment at the time and other issues should not be placed at Mr Mandela’s door – he was busy building that nation. One of the areas where there is a question mark, however, is around the decision to create a cadre of rich black empowerment businessmen who were not industrialists or really (if we are honest) job creators. The choice here was complex, and based partly on the need to create at least the perceptions of rapid sharing of wealth even if Mr Mandela knew it would be impossible to create true equality more widely. However, loyalty to the party which pushed hard on this issue was also partly to blame. The result is still evident today and is being further compounded by the government, whereas in our view a more widespread form of empowerment through families of workers and local community would probably be more appropriate. Under his term in office, however, inequality did fall and key policy decisions were taken which reduced absolute poverty quite sharply. This legacy, however, is now at risk. Inequality and unemployment have risen since, education standards stagnated after an initial surge, underlying growth has been very weak at only around 3.5% vs its theoretical potential to be 5.5-6.0% under the right policy choices, and this in turn has held back development. More important, however, is that the quality of leadership, and in particular its adherence to and respect for constitutional democracy, has faded to be now well short of Mr Mandela’s legacy. This has been seen most recently in the ugly racial language used by the ANC in the current election campaign – language we believe reflects an ongoing seam of real belief in the ANC of black domination and not simply election stump rhetoric. We should never forget that Mr Mandela fought as much internally against black domination as he did externally against apartheid suppression.

Frans Cronje of the SAIRR:
It was largely Mandela’s influence that saw the ANC abandon the afro-socialism that the party had advocated through the latter years of the apartheid system. In embracing markets and allowing for relatively conservative macro-economic policy Mandela allowed the rebuilding of the South African economy. This is a poorly understood fact but one that in our opinion was more important even that his investments in reconciliation.

Miyelani Mkhabela –Strategist and Analyst – Antswisa Management Group
It is with economic sadness the sudden passing of the First Democratic President of the Republic of South Africa who has throughout dedicated and sacrificed his life for the emancipation our nation and he will be remembered for generations to come. Mandela symbolises good leadership traits that South Africa lacks currently and his vision, values, integrity, character, charisma and selfless principles economically positioned South Africa to be a global player. Mndela played a key role in the economic development of the nation and his term policy Reconstruction and Development programme (RDP) highlighted economic majors that need attention to be addressed in our society. Africa in general benefited from the visionary leader of his calibre and his sense of economic choices. South African economic, fiscal and monetary policies have a positive foundation, and his passing will not affect the economic system of the nation. The current national leadership, former Presidents, ministers and the South African citizens together has a responsibility to assure the international community for the economic and political stability. Economically I have surety that the country’s policies with regard to foreign trade agreements are not going to be affected by his passing and South Africans will continue to unite. Tourism will continue to boom and related industries will benefit as well.

Mandela’s Economic Legacy

A great South African, and probably the greatest ever South African, has left us for a new walk to immortality. I drove past Mandela Square this morning, and it occurred to me that this is now a memorial – to a man who many believe united our beloved country. But what of his economic legacy? Before he brought the ANC to government, there were fears he would be an anti-business leader, a communist sympathiser much closer in ideology to Fidel Castro than to Margaret Thatcher. We asked some of our experts for their views….

Dennis Dykes from Nedbank:
Nelson Mandela leaves a number of important legacies, but his main economic legacy was to settle business and investor nerves in the post-apartheid period by adopting a pragmatic rather than an ideological economic policy approach. He kept an open mind and it is often said that he was persuaded to follow a more market-based approach after discussions with global business and political leaders at the World Economic Forum in Davos in 1992. However, this did not mean that his compassion and concern for the poor and social justice was in any way diminished, with his government starting the strong drive towards addressing backlogs in areas such as housing, sanitation, education and health. Of course his status as a global icon also helped to market South Africa as a tourist and investment destination. His capacity to build national unity through actions such as those at the 1995 rugby world cup also helped build confidence in the new nation. In 1996, a health scare sent the rand tumbling, again underlining his central role. His economic legacy is significant and we need to reflect on how we can recapture some of that national unity of purpose that he espoused to grow the economy and address continuing inequalities in our society.

Neren Rau from SACCI:
It was definitely yet another demonstration of extraordinary leadership that Madiba succeeded in balancing the difference ideologies and political pressures within the Alliance to deliver a balanced approach to the economy.

Dawie Roodt from the Efficient Group:
The ANC morphed from a socialist-orientated liberation organisation into a neo-liberalist political party during the early 1990’s. This was fortunate for SA, a huge political change AND a significant change in economic policies may have been too much for this new democracy – Nelson Mandela was most likely the driving force behind this change of heart. In recent years, however, the true colours of the ANC with its socialist tendencies are reappearing again. Mandela was a pragmatist that was prepared to suppress his own ideological beliefs for the good of the country.

Frans Cronje from the SAIRR:
It was largely Mandela’s influence that saw the ANC abandon the afro-socialism that the party had advocated through the latter years of the apartheid system. In embracing markets and allowing for relatively conservative macro-economic policy Mandela allowed the rebuilding of the South African economy. This is a poorly understood fact but one that it our opinion was more important even that his investments in reconciliation.

Writer David Bullard:
Madiba had little influence on economic policies other than to put finance into the safe hands of Trevor Manuel. Now the commies rule.

Nedbank CEO Mike Brown
Madiba led South Africa from a closed state back into the democratic world and this allowed our economy to become part of the globalization trends that started in the 1990s.The South African economy of today has been a major beneficiary of our democracy for which we thank the father of our rainbow nation.

Raymond Parsons from BUSA:
It is difficult to find new words to describe the massive contribution which Nelson Mandela made to stability and progress in SA in the early years of democracy in SA after 1994. Whatever his initial ideological points of departure he soon put a strong stamp of pragmatism on economic policy and reached out to stakeholders like the business community to help undo the legacy of apartheid. An early visit to the World Economic Forum in Davos gave him new insights into an global economy from which he had been excluded for so long. His crucial support of the creation of Nedlac in 1995 was, through social dialogue, to provide the socio-economic dimensions of the reconciliation and nation-building to which he was so deeply committed. His pragmatism in economic matters at the time went a long way towards creating the consensual stability needed to underpin investor and business confidence in the formative years of SA’s new democracy. Already in 1996 he said in Parliament that SA needed a longer-term shared vision if it was to fully unlock its real economic potential and create a better life for all, a vision which his one-term Presidency unfortunately did not make possible. SA is still struggling to find this shared vision under the aegis of the latest National Development Plan and to rediscover the values that will make it possible.

Mike Schussler from economists.co.za
Yes I believe that the Mandela administration lead us to a more free economy and we have seen growth improvements over the fifteen years to 2008. Mbeki was essential in this; as was Trevor Manual, Derek Keys, Tito Mboweni and others. But of course the start was Nelson Mandela accepting that a generally mixed economy with a free market leading the way would be best. He also calmed everything down and business stayed and built the economy as did many thousands of entrepreneurs – some of whom had worked for the state before and then found that they had talents beyond paper work. I think if one looks at the adjustment at the time it was clear that labour productivity increased and capital costs declined, making the cost of doing business here much less until about 2007 when it started increasing again. The State Debt was reduced and the civil service became less until 2004 when it started increasing again. Reconciliation was as important to the economy after many years of mistrust and hate. Economies only grow when we have certainty, and his administration brought certainty.

Craig Pheiffer from Absa Investments:
The birth of democracy opened up the world to South Africa and brought with it both the good and the bad of being a member of the international economy. In the honeymoon years we did a lot that was right in maintaining the independence of the central bank, growing the pool of taxpayers, improving the efficiency of the tax system, balancing the national budget books, growing our foreign reserves and reducing our sovereign debt levels. Thanks to our glorious transformation we could also witness World Cup Cricket, Rugby and Soccer on our very own shores. Our markets attracted foreign investors and our domestic asset managers could invest larger and larger sums of money offshore. The downside to being part of the global economy has been the vagaries of foreign capital – easily being withdrawn when our domestic growth has stuttered or when emerging markets have collectively wobbled. But things have gone a little awry in recent years as the countercyclical fiscal policy has widened our Budget Deficit and increased our sovereign debt. Our currency has depreciated sharply and our current account deficit has widened as we struggle to keep growth at 2%, never mind 3% or the much higher levels of growth required to create sustainable employment. These have generally been tricky times for policy makers around the globe but we need to honour Madiba’s legacy by investing in our future through education and eliminating all of those labour market obstacles that are restraining our rate of growth from moving to a higher plane.

Conclusion: Mandela set this country on the right path. But if Malema ever gains real influence, Madiba’s economic legacy, as well as his legacy of tolerance and inclusiveness, would be in terrible danger.

ZA Confidential is e-mailed to subscribers. For details on subscription rates, please contact: zaconfidential@gmail.com. Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address. Upgrade your conference or event by hiring ZA Confidential Editor John Fraser as a speaker or MC.

Will the Last Eskom Executive to Leave the Building Please Keep on the Lights?

I hadn’t been expecting any fireworks from today’s presentation of Eskom’s Interim Results to September, but I was wrong. Good thing I invited myself along (they had failed to). There was one unexpected, but nonetheless electrifying, announcement – that CEO Brian Dames has resigned. Dames, or Danes as my iPhone’s twitter app chose to re-name him, has been a massive improvement on the arrogant thugs who preceded him, and has done an impossible job pretty well. No real explanation why the big boss is being load shedded – just that it was for personal reasons. But Dames’ decision to power down followed uncomfortably soon after Eskom CFO Paul O’Flaherty’s unexpected departure. It leaves a big gap at the top of such an important player. Unless Eskom can bring on more capacity speedily and reliably, we are heading for dark days, indeed. The chat after the presentation was all about why Brian is being dis-charged – he is leaving at the end of March – with no one seeming to think this will be a good thing.
Here are a few of the other issues I noted during the presentation, and before the news of the CEO outage….

– Eskom chairman Zola Tsotsi says the recent emergency, when Eskom ordered big users to cut consumption to keep the system going – was the first since 2008, but the situation has improved over the past 2 weeks.
– Eskom still asks customers to curb demand for electricity. In their weird world enough of a good thing seems to be too much.
– Dames says ZA has a power system that is still constrained, but the system is stable – customers have responded extremely well.
– The 1st power from new Medupi coal-fired power station is due at the end of next year.
– Electricity demand in the next few years is lower than earlier expected. Thanks to a stagnant economy and an army of unemployed (my views, not those of Eskom).
– Eskom made a profit of 12.2 billion rand for the 6 months to September.

Dames signed off by suggesting we should cook on our holiday braai, so we use coal and wood and not his scarce product. If you go on holiday, don’t leave the lights on. Switch them off.

Conclusion: Power cuts are not the only crisis facing Eskom, which now faces a leadership crisis. They need someone exceptional to fill Dames’ shoes, but who would want that awful job?

Tweets of the Day:
Ellen DeGeneres (@TheEllenShow){ What nationality is Santa Claus? North Polish.
Matt Lucas (@RealMattLucas): Great news. I hear Cher is reforming.

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Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address. Upgrade your conference or event by hiring ZA Confidential Editor John Fraser as a speaker or MC.

Corruption Eruption

Depressing reading in today’s Business Report, which says the latest Corruption Watch perceptions index shows that ZA has slipped down the ranking to 72nd out of 177 – from 69th last year. On the face of it, this is bad, but we asked a few of our experts for their views….

Mike Schussler from economists.co.za:
At this moment in time almost all the indicators for South Africa are slipping. Corruption, transparency, doing business and global competiveness indices have all slipped in the last few years. I am concerned that all these indices are not getting the country to act as we still fight about silly things such as socialism and capitalism when the world has clearly moved on to capitalism. The corruption index slippage however is not unexpected as many powerful people have their hands in the till. Think presidents and ministers and mayors and even businessmen. Our criminals are getting away with murder and our police chiefs are at best incompetent or part of the underworld. It is actually surprising that we did not slip more places, say to outside the top 100. Sad, really sad, that crime and corruption can become ever-more the norm.

Ian Cruickshanks from the SAIRR:
I think that the Corruption Watch Index shows that the SA level is stabilizing, but at a very unsatisfactory level. This confirms the public view of a low level of accountability, particularly amongst politicians – with abuse of position. And we have business leaders apparently fearful of speaking out because of possible negative impacts on their business. Recent press reports on the possible abuse of public funds at Nkandla, and the Gupta family riding roughshod over domestic regulations, have led to a growing negative view by South Africans and foreign investors. I think this could be having a severe impact on foreign investment.

Azar Jammine from econometrix:
Even in 72nd place South Africa is still in the best half of corruption perceptions in the world. So it is not a total disaster by any stretch of imagination. What is of concern is the trend which has deteriorated significantly over the last few years. What is particularly concerning is that Africa as a whole is considered the most corrupt region of the world. South Africa is one of the least corrupt nations in Africa – but other African nations have become less corrupt while SA has been becoming more corrupt. Most places where you or I do business operate in a non-corrupt way, but clearly the perception is the more you have to do with public sector bodies, the more corruption is becoming endemic. This happened to coincide with the ascendency of Jacob Zuma to the leadership of the ANC. It has also been a period during which SA’s economic performance, related to other emerging nations, has deteriorated.

Neren Rau from SACCI:
It is not as much a surprise as a disappointment. Our members were becoming optimistic that, while we may be losing individual battles, SA was making some progress in the war against crime and corruption. The decline in the ranking unfortunately shows that any positive perceptions were more attributable to business being overwhelmed by other challenges as opposed to any gain in respect of the war against crime and corruption. A partnership between business and government is key to dealing with this challenge with, as a prerequisite, each partner willing to accept its own shortcomings in this regard on entering into the partnership. SACCI has had some success in partnering with the police services on specific challenges faced by our members.

Conclusion: Whether or not the scourge of corruption is growing, the perception is that it is getting worse in South Africa. And, sadly, we are not getting much of an example from our political leaders.

Tweets of the Day:
Gert V8 ™ (@gertmods): Bought a book on the history of flour the other day. Just sifting through it now.
Funny Tweets (@iQuoteComedy): What if soy milk is just regular milk introducing itself in Spanish?

ZA Confidential is e-mailed to subscribers. For details on subscription rates, please contact zaconfidential@gmail.com. Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address. Upgrade your conference or event by hiring ZA Confidential Editor John Fraser as a speaker or MC.

Nkandla: Don’t Shoot the Messenger

There have been suggestions that the Mail & Guardian was wrong to publish what it claims are extracts from the Public Protector’s report into Nkandla. It was a draft report and may change. However, the counter-argument is that if our President has indeed been siphoning off public cash for this private complex, and has been lying about this, then there is a compelling argument that this was a worthwhile exercise. We asked a few of our experts for their views….

Journalism Professor and former Editor of the M&G Anton Harber:
The saga of the Nkandla report has shown that attempts to suppress such information will only fire up those who are determined to get it out. Censorship was defeated in the process, as was a deceitful attempt to protect the president from public accountability. Would it be more fair under regular circumstances for such reports to be finalised before being released? It probably would be, but in this instance what took precedence was getting the information out in the face of attempts to suppress it. As long as the reports make it clear that the findings are not final, then publishing it serves the fundamental constitutional values of holding the powerful to account and enforcing open government.

Mario Pretorius of Telemasters:
The thoroughness of Ms Tuli Madonsela means that the Final Report on Nkandla may differ around the edges, but the core will remain: current President Jacob Zuma is called a liar and a thief. No efluxion of time will alter the finding, unless she is silenced to Tula Madonsela. Give that girl a Bells. As for the ruling party, nay kleptocratic kakistocracy, I hope with every fibre in my being that these charges will stick and bring down this sordid mess of dream poachers. Give that man a jail cell.

Jeremy Sampson of Interbrand Sampson:
I would suggest the job of the government and of the President, who are all public servants, is to lead by example for the good of all South Africans. If it was not for the media, the South Africans voters would not know of the outrageous pilfering of State funds – that’s yours and mine, not theirs – the lying, the self-enrichment of a totally corrupt government. We are told daily of the criminality and lack of accountability. The forefathers of the ANC must be turning in their graves. Mr Mandela, if he is aware of what is going on, would be very saddened. It’s about time those few good men left in government stood up; otherwise they will be tarred with the same brush.

Journalist and Broadcaster Benedicta Dube:
At what point will the government under President Jacob Zuma respect the role of a free press and at what point will those who advise the president realise that the more you hide information, the more journalists will want to satisfy their own curiosity? Gagging the press on Nkandla will not dilute the stench that it represents. I wish those in charge could realise that South Africa has bigger problems than Nkandlagate, but unfortunately it happens to define exactly what is wrong with this country’s leadership.

Leon Louw from the Free Market Foundation:
The notion that there are security excuses for media muzzling is too manifestly absurd to be dignified by countervailing comment. All there is to see is readily visible in detail by way of three easy options: flying low over Nkandla as I have done, zooming in with Google Earth as I have done, and looking from a nearby hilltop (with binoculars, telephoto lens or telescope if you are visually challenged) which I haven’t bothered to do.

Conclusion: When we see the excellent job done by the M&G, we understand government’s intention to introduce new Secrecy legislation. Very worrying!

Tweet of the Day: Puns (@omgthatspunny): Velcro – what a rip off!

ZA Confidential is e-mailed to subscribers. For details on subscription rates, please contact zaconfidential. Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address. Upgrade your conference or event by hiring ZA Confidential Editor John Fraser as a speaker or MC.

Is Eskom the World’s Worst Company?

Obviously the bunch at Sanral had gone undercover. I assume that is why environmental groups Earthlife Africa, groundWork and Greenpeace Africa have nominated Eskom as the worst corporation in the world, in an awards event to be held at the World Economic Forum in Davos in January. Now Eskom may not be loved, but is it really THAT bad? We asked a few of our experts….

Mike Schussler from economists.co.za:

I am not sure if Eskom is the worst company in the world but their effect on SA economic growth is currently negative. It’s unfair to say they are the worst but it is true that their actions at present are having negative effects on inflation, growth, energy supply and are creating negative views on SA. But the problem is that Eskom does make money, but perhaps not enough to help SA build new power stations on time – and therefore help SA Corp make money and thereby create growth.

Mario Pretorius from Telemasters:

Eskom is the living monument to the policies of the government. Revered as the world’s lowest-cost producer two decades ago, it is now a shambles of short-term profiteering and reflects the disastrous self-serving economic policies of the ANC. These policies of fast-tracking, affirmative action, preferential black suppliers, BEE management, black woman owners’ tender preferences, forced retirement of expertise, preference of social goals, political pussy footing around debtors and a vicious and toxic disregard for basic economic laws makes for an almost fatal crippling of this economic giant. It is not only sad, it is threatening the very survival of the ZA economy. The sudden rush to trillion Rand nuclear power, the meltdown of its ability to manage projects and its inability to deliver electricity reliably, albeit at astronomically inflated prices, shows the dearth of common sense and absence of understanding of the essentials of a proper economy. Eskom deserves this – and in a few years, it will probably achieve the Lifetime Award, if it still exists.

Frans Cronje from the SAIRR:

In many respects, yes. Such rankings are for the most part silly things that contribute very little to our understanding of how the world works. Over the past 20 years, 6 million households have been connected to electricity for the first time in South Africa. Eskom’s expansion plans were initially undermined by the government. It does remain a wasteful monopoly – but that is because this is the policy of the government. It would be more accurate to make the government the beneficiaries of this reward.

Dawie Roodt from the Efficient Group:

Any company that encourages its customers to use less of its products must be totally crazy. So Eskom is a “worthy” candidate for this title. But do not blame Eskom only. The reason why it behaves so irrationally is because its political masters are so fixated on their socialist illusions that Eskom is prevented from acting rationally. Cut Eskom into smaller pieces, privatise it and create a competitive environment and Eskom may well win the award as the best company in the world!

Conclusion: Not sure I would give Eskom the award, but then, apart from Sanral, I am not sure who would beat them into first place……..

Tweet of the Day: Puns s(@omgthatspunny): I used to be a banker, but then I lost interest.

Awesome Todd (@Awesome_Todd): The worst part about being a giraffe is probably having other animals constantly asking you to get their kite out of a tree.

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New Research Suggests Food Inflation is Twice the Official rate

Many of us feel instinctively that the official CPI inflation rate does not reflect our own experience. I seem to be spending much more on food now than 12 months ago – despite the 5.5% inflation rate. ETM Analytics is working on its own inflation indicator, and ZA Confidential asked Russell Lamberti what it is and what it shows….

ZAC. When did you start this, and what is the aim of the exercise?
RL. We conceived of the idea in early 2013 and started measuring the basket price in March 2013. The aim is to assess how closely an ‘everyday’ shopping basket cost tracks official CPI and retail inflation statistics. South Africans constantly complain that official CPI data doesn’t reflect their personal reality. We’ve investigated Stats SA’s methodologies and find that there are techniques in measuring the CPI that probably bias the measure downward over time. We’ve decided to measure a simple, representative shopping basket over time to see if the price inflation pressures on it validate or challenge the official picture.

ZAC. What is in the index?
RL. There are about 20 grocery items in the basket (things like bread, chicken, soap, toothpaste, coffee, rice, maize meal, milk and so on). There is a mix of basic necessities and less necessary goods like chocolate and coffee. We’ve chosen to always buy the same brands, and we’ve chosen the most popular brands. Popular brands are less prone to price volatility and are highly purchased, making the basket that much more representative.

ZAC. How reflective is your index of the average South African shopper? Is there a type you can identify who would match the index quite closely?
RL. We track a very standard shopping basket at PnP, Checkers, Spar and Woolies stores in Fourways. The stores typically price their products on a national basis, although store managers in some instances do have some discretion here. Fourways is a good choice because a) it is close to our offices:) and b) it is a confluence of the middle income suburbs of Fourways, the high-income Dainfern, and the low income Diepsloot. All these income groups shop in Fourways. So we think the basket is a good representation of simple ‘retail’ inflation that most shoppers experience. We’ve kept our basket simple and included items which, on the whole, rich and poor households all buy.

ZAC. What has been the movement so far?
RL. The index is up 9.2% from March to November 2013. So that is 8 months’ worth of data. If you had to annualise that, it would be an annual shopper’s inflation rate of 14.1%, which is more than double the current official rate of CPI inflation and also other official measures of retail inflation. There is potentially some seasonal caveats to this, so we reserve full judgement on the y/y figure until March 2014 when we have a complete full year picture. Nonetheless, the basket inflation is quite startling so far and I think far more in line with people’s intuitive sense of price escalation in their everyday expenses at the shop.

ZAC. Any big movers?
RL. Chicken has been a big mover. This is due to ‘ordinary’ inflation but also the result of tariffs on chicken imports. Coffee, olive oil and salt are also up strongly, but there has actually been a broad-based increase in prices in the basket. 12 of the 20 items increased by more than 6% in just 8 months, or over 9% annualised. Of these 12 items, 6 are up by over 15% annualised. 5 items of the 20 are the same or lower in price than they were 8 months ago.

ZAC. Why do you think your index seems to be rising much faster than the official CPI index?
RL. Not an easy question. Official CPI is a much broader basket, covering school fees, rent costs, transport costs, energy costs and so on. It’s possible that there is less cost escalation in these items than in grocery items – we still need to investigate this further. Additionally, Stats SA weights its basket heavily toward highest 20% of income earners who tend to spend a lower proportion of their incomes on groceries, but this is clearly not a broadly representative approach of most South Africans. Finally, we need to remember that the CPI inflation rate presently is a y/y measure, while the ETM basket only has 8 months’ worth of data – we’ll have a more accurate comparison in March 2014. But certainly if we see the ETM basket inflating in price much more than the official CPI for a prolonged period of time it would raise some red flags on the CPI methodology. The strength of the ETM basket methodology is its simplicity – it measures the cost of buying the same 20 broadly representative items at four nationally representative major retailers in a busy and demographically diverse retail precinct.

ZAC. Are there lessons to be drawn from your findings?
RL. The most important lesson at this stage is that people’s intuitive concern about their daily shops rising in price much stronger than inflation seems to be correct. Over time we will be able to draw out more and more lessons. If indeed Stats SA does systematically underestimate the extent of inflation, this has profound implications for monetary policy and wage bargaining. The ETM basket does not purport to be the definitive answer to these questions, only to provide another interesting and objective measure of price inflation that can inform this debate. We have however done other, proprietary work for our clients which shows that broad-based inflation in South Africa is considerably higher than the official CPI data reports.

ZAC. Do you think policy makers should/will pay attention to what you are doing?
RL. Yes, over time I believe they will. We know that the ETM basket price index will take time to gain traction and credibility. We’d certainly like to run it for at least two years before we start placing greater confidence in it, so by March 2015 we think it will tell an interesting story and be a very useful cog in the inflation debate. ETM is well-respected by our clients and policy makers alike, and so this is certainly an area of research that I think policy makers will pay more and more attention to in the coming months and years.

ZAC. Is there a long-term strategy for this exercise?
RL. In a sense yes, but we’re also just letting the data emerge month by month for now. Let’s get to March 2015 and have two solid years of data under our belt and then we can assess things from there. Certainly as a broader concept of understanding the true loss of purchasing power of the currency, which is really what inflation data should be capturing, ETM is committed to feeding information to our clients that gives the most accurate picture possible. As they say, a huge part of investment success is exploiting the gap between perception and reality. To the extent that inflation reality is strongly divergent from inflation perceptions, there is an opportunity to be exploited for investors.

Conclusion: Bravo ETM. A useful, interesting and informative initiative. One to watch!

Tweet of the Day:
Puns (@omgthatspunny): Class trip to the Coca-Cola factory. I hope there’s no pop quiz.

ZA Confidential is e-mailed to subscribers. For details on subscription rates, please contact zaconfidential@gmail.com Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address. Upgrade your conference or event by hiring ZA Confidential Editor John Fraser as a speaker or moderator.

Terrible GDP Numbers

The economy is growing, but so slowly that it is not going to make much difference. The annualised third quarter growth figure has come in at 0.7%. We are worried, but what about our experts…..?

Dawie Roodt from the Efficient Group:

Average growth for the first three quarters now stands at 1.9% – probably the reason the SARB lowered its forecast for the year to 1.9%. That also means that if growth comes in at below 1.9% for the final quarter, then growth for the year will be below 1.9%. And as things stand, weak demand, strikes on the mines and the "normal" structural problems in the economy, mean growth in the 4th quarter is quietly likely going to be sub 1.9%. Under these circumstances, monetary policy is rather ineffective to support the economy any further. What we need is better labour relations, an efficient state, and clear macroeconomic policies – but for that we need solid political leadership…

Ian Cruickshanks from SAIRR:

This latest number of 0.7 percent quarter on quarter is very disappointing, when compared to Q2’s revised 3.2 percent. Manufacturing, which is 15 percent of the economy, was down . Strikes, particularly in the motoring industry, had an overall impact on manufacturing and on the economy as a whole. This could be expected to continue into Q4. I now fear we may not get to 1.9% GDP growth for the year as a whole. The stock market may be booming but it is difficult to consider allocating fresh funds to the market with the economy in this state.

Mohammed Nalla from Nedbank:

SA’s GDP printed at 1.8% y/y and 0.7% q/q, below consensus estimates of 2% and 1% respectively. We remained bearish on this data given the torrid Q3 which saw labour unrest impact the vehicle sector, as well as a failure of the mining sector to rebound from an already low base. Retail sales and manufacturing also posted negative surprises during the quarter and as such, it is not surprising to see this filter through to headline GDP.

George Glynos from ETM:

A key factor weighing on domestic output in the third quarter was a prolonged period of strike activity in vehicle production industry, while a weaker consumptive sector is expected to have made a less pronounced contribution to growth relative to previous quarters. The domestic economy is in the midst of a cyclical downswing as the initial support to growth stemming from SARB policy loosening wanes while the subsequent inflationary pressures erode purchasing power. Not only cyclical, but also structural issues continue to weigh on domestic production growth and unless reforms which generate a less hostile business and production environment are implemented, economic growth will struggle to gain meaningful traction. 2014 looks set to be a tough year. Why do I care? A softer than expected GDP number will raise further concern at the SARB as it suggests that the underlying economic weakness is even more pronounced than expected. While this may entice market players to increase calls for a deeper reduction in interest rates, with the ZAR still vulnerable and inflation still sticky the SARB is unlikely to take any policy action.

Peter Attard Montalto from Nomura:

Strike action was a partial bug bear affecting the end of the quarter in particular in the car industry (though that will really probably be felt in Q4 because of the peak of the strike in October). Overall the wage round has progressed with tight bursts of layoffs that have not been overly long lasting in sectors outside the headlines. As such the strike impact has been mainly felt in the very weak manufacturing number and not more widely. Broadly SA has followed much similar patterns to other emerging markets with a weak Q3 as global demand has ebbed and sentiment has taken a knock from the goings on around tapering and the shut down in the US. More broadly we can see the constraints the local economy is under not only the usual structural issues, but also on households’ indebtedness and the slower pace of credit growth. Manufacturing was really the dog of the quarter, though actually its performance wasn’t that different from Q1. The clearly significant volatility in seasonally adjusted output is down to strikes, but even accounting for this we are seeing underlying weakness thanks to slow domestic investment rates and slower export demand. Companies have also been running very low inventory levels (as a % of GDP), which we expect to have been repeated in Q3 when the expenditure breakdown is provided by the SARB soon. That may also be feeding into the volatility of output. We will most likely have to downgrade our 2013 growth forecast to 1.9% from 2.0% previously.

Conclusion: South Africa needs to boost job creation, but it ain’t going to do it at these levels of economic growth. The beloved country must be weeping…

Tweets of the Day:

Funny Tweets (@iQuoteComedy): Diet ideas: Eat whatever you want, and if anyone tries to lecture you about your weight, eat them too.

rob delaney (@robdelaney): Peter Jackson just found a postcard JRR Tolkien wrote his nephew in 1938. He’s turning it into 22 nine-hour films.

ZA Confidential is e-mailed to subscribers. For details on subscription rates, please contact zaconfidential@gmail.com. Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address. Upgrade your conference or event by hiring ZA Confidential Editor John Fraser as a speaker or moderator.

Why Does Eskom Clobber its Best Customers?

Having done an impressive job of ensuring reliable power supply throughout the Winter, Eskom screwed up last week, declaring an emergency and instructing its best customers – the mines, smelters and so on – to cut back on their power consumption. Once again, we have a clear indication that our lack of generating capacity is a severe brake on the growth of this country, and the fruits of past under-investment are rotten, maggot-infested and cancerous for the SA economy. Should these big, job and wealth creating industries be in the front line when power generation capacity is inadequate? We asked some of our experts…..

Mario Pretorius from Telemasters:
Spreading pain in never easy, and to quote my friend Leon Hart: ‘"Genius has its limitations, but stupidity is boundless". So Eskom and NERSA have driven the cost of alternative energy down, limited the amount of purchases thereof and in general done coal BEE where coal is priced up to 40% dearer. They have shrugged off the damage done to the local roads by coal transporters – and Eskom has revamped its HQ by the billions of rand. Here is the order in which every load-shed must happen:
1. Eskom HQ and regional offices.
2. Government departments, starting with the DME.
3. Provincial departments.
4. National parliament, provincial and municipal offices.
5. All 249 SOE’s.
6. Any residential area with more than 10% in arrears.
7. Shopping malls, in decreasing size.
8. Power to neighbouring countries
9. Residential users – for no more than 60 minutes at a time
10. Any Gupta-owned enterprise. (Maybe this should come first and we’ll be safe for a while.)
In a real emergency, the E Toll gantries, Nkandla municipality, traffic departments, and all political party offices should be switched off. Permanently.

Mike Schussler from economists.co.za
It is easier for Eskom to cut the big users to create savings in demand. But it is certainly not fair, as they could argue that they are at present keeping all our lights on. Rolling black-outs may however have more economic damage – as value-add is often in the areas such as Sandton or the CBD in Metros. Perhaps a rolling blackout that is never longer than 2 hours per area, that rolls across the country on a schedule, might be best. The country does owe the big power users some relief from all the times they have taken the hits. Anyway, Eskom could just allow any industrial customers with extra capacity to supply power and free up the system now. This state monopoly has to think outside of their very narrow box now to help save the country.

Duane Newman from Cova Advisory:
It does not seem fair that industrial users are the target of Eskom, as this impacts their financial viability in the medium term. I do understand it is easier for Eskom to negotiate with large business than municipalities. It is clear that Eskom has negotiated some favourable buy-back deals to make it financially worth it for business in the short term, but it is harming their medium to long term outlooks when Eskom supply becomes unreliable. I do understand that business is starting to have a sense of humour failure on this issue, and it is important that Eskom do come up with alternative plans. Many municipalities are marking up power to consumers and businesses, which is also not sustainable. With Eskom’s IDM programme running out of funding, it is likely that business and households will not be investing in energy-savings devices. It is time that Eskom, the Department of Energy and the Department of Trade & Industry push harder for business to develop Co-Generation projects to develop base-load capacity that can be used by large energy users – and any excess can be sold back to the grid. For this to happen, we need a lucrative incentive programme to stimulate this investment. I have been dealing with foreign investors who would like to invest in South Africa – and the deal breaker is not high levels of crime, poor education, excessive strike action, nor lack of incentives – but is the lack of electricity from Eskom and lack of gas from gas suppliers like Sasol.

Peter Attard Montalto from Nomura:
I think it’s a big challenge to decide who gets cut and who not.
Arguably the best way, economically – to ensure investment and job creation etc, would be to cut households and allow SMEs and big business to be able to still produce. However that’s practically impossible to separate SMEs from households and is also politically impossible to target households. That really only leaves bigger industry to take the strain as most practical alternative. We are talking about a handful of users here where there can be real time Eskom monitoring of usage to prevent shirking. The trouble with asking households to cut is that there is no household by household monitoring or ability technical to cut their usage by say 10% – they can only be asked, implored – and then there is a beggar thy neighbour problem that there is little incentive for any particular household to cut if they assume a neighbour will do it instead. These issues, and the push back by larger users is why when the system is very tight for a prolonged period the chances of deterioration into load shedding (ie from normal through level 1 to level 3 emergency) is actually quite likely. The saving grace last week was that the specific problem was quite easy to fix and short lived. In the new year we may not be as lucky.

Chris Gilmour from Absa Investments:
Not an easy one, and one that changes over time. Had this situation occurred 20 or so years ago, cutting residential consumers would have made very little difference, as their collective usage was much lower than it is today. However, with the accelerated rollout of electricity supply to a far greater residential base in the past couple of decades, coupled with virtually no growth in the installed capacity of Eskom, this has meant that collective residential usage as a percentage of total electric capacity is now significantly higher than it was then. So, residential customers should now bear the brunt of power cuts? Logically, probably, yes – but politically this would likely hit a very raw nerve indeed. We only need to cast our minds back to the dark days of early 2008, when Eskom was literally hours away from collapse. Random power cuts affected everyone and the impact on national morale was truly awful. Having said that, when rotational, scheduled power cuts were introduced, people accepted them and in fact began to get used to them. So, if a thoughtfully-invoked rotational schedule were to be enacted, it might just work with the minimum of consumer resistance. Trouble is, this is happening in the run-up to a general election, where the proportion of undecided voters is extremely large. If scheduled power cuts were to be introduced for a few months before April next year, it could play a meaningful role in determining how people vote. Another factor to bear in mind is that our municipal electrical distribution system (mainly residential sub-stations) is so clapped-out that regular power cuts would play havoc with it, as they did in 2008. This could wreak havoc with sub-stations and exacerbate an already parlous situation.

Prof Raymond Parsons, Special Policy Adviser, Business Unity South Africa
Busa does not believe it was appropriate to place the burden of the emergency measures on a few firms – and expect them to take the hit for everyone. It is the household sector, and not industry, that has the high peaks in the morning and the evening that place a big strain on the network. Other methods should be explored to smooth these peaks. Fortunately, Eskom has now lifted the state of emergency under pressure from the companies affected, but that is not the end of the story. We need to look down the road as to what other contingency measures may be needed to keep the lights on in a continuing tight supply situation. Busa considers that the longer-problems that arise from the latest Eskom experience are twofold. Firstly, the uncertain power supply is clearly unable to accommodate planned new investment, a serious bottleneck which has broader economic implications and, secondly, there has been a serious delay in dealing with the ISMO bill in Parliament, which is meant to develop independent power producers. It nonetheless remains a paradox that SA should be experiencing a power emergency at a time when the economy is at a low ebb of only 2% growth this year. We are obviously still facing a vulnerable situation in which to avoid further disruption before new capacity is assured late next year. Conclusion: Industry drives the economy, and I am uncomfortable with Eskom’s current strategy. Not least because it partly conceals the true scale of this country’s energy crisis.

Tweets of the Day:
Ellen DeGeneres (@TheEllenShow): Excited to make fun plans for this weekend. Last weekend, I spent 8 hours organizing my spice rack. Where does the thyme go?
Fake Dispatch (@Fake_Dispatch): Five Habits of Annoying People: 1. Not finishing what they started. 2.
Funny Tweets (@iQuoteComedy): later is the best time to do anything

ZA Confidential is e-mailed to subscribers. For details on subscription rates, please contact zaconfidential@gmail.com. Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address. Upgrade your conference or event by hiring ZA Confidential Editor John Fraser as a speaker or moderator.