07 Nov

S. Africa Pay Dilemma Means Bigger Budget Gap or Union Wrath

South Africa faces a stark choice: risk strikes by as many as 1.3 million government workers or meet their pay demands and jeopardize its credit rating.

After years of above-inflation increases, public-sector unions now want nothing less than “double-digit” raises from April 1, 2018, in addition to better housing benefits. The National Treasury has provided for average pay increases of no more than 7.3 percent in each of the next three fiscal years. The annual inflation rate is 5.1 percent.

“We cannot afford the government wage bill,” Mike Schussler, the chief economist at Economists.co.za, a research house, said by phone from Johannesburg. “We have got to either give people an increase below the rate of inflation, or we are going to have to employ fewer people.”

Finance Minister Malusi Gigaba tabled a bleak picture of the nation’s finances last month, with growth and revenue falling below projections while public debt may exceed 60 percent of gross domestic product by 2021. An inability to rein in spending growth and increasing debt threaten to trigger a downgrade of rand-denominated bonds by rating companies.

Efforts to put the continent’s most-industrialized economy back on track have been hamstrung because of conflict in the ruling party in the run-up to a leadership election next month, and as allegations of mismanagement of state resources dent tax collections and business confidence.

Last week, the National Education Health and Allied Workers Union, which has 295,000 members and speaks for the biggest number of public-sector employees, said it will reject offers of less than 10 percent and says pleas for austerity are undermined by reports of corruption at state companies. Government employees represented by the Public Service Association want increases of 10 percent to 12 percent.

Employee compensation is the biggest component of the budget, comprising about 35 percent of spending.

“Since 2011, government has been forced to restrict employee headcount growth to accommodate rising salaries — spending on compensation has continued to grow more quickly than nominal GDP,” the Treasury said in an Oct. 25 budget update. “A fair and reasonable compromise between government and state employees in the current round of wage talks is in the public interest.”

Read more: Bloomberg Markets

27 Oct

The Bond Market Hates the New Plan for South Africa’s Finances

South African Finance Minister Malusi Gigaba took on the bond market, and he is losing.

As investors digested Gigaba’s intention to close a yawning budget gap by flooding the domestic market with an additional 122 billion rand ($8.6 billion) of bonds over the next three years, benchmark yields soared as much as 56 basis points to 9.42 percent, the highest in 19 months. That’s already closing in on the government’s own bad-case scenario of an 80-point jump in yields – and things could get a lot worse.

The market and rating companies “will hate” an increase in the debt ceiling, rising bond issuance, the lack of spending cuts, and the widening deficit contained in the budget proposals, Investec Asset Management said in a note to clients.
Foreign investors, who hold 41 percent of the country’s 1.97 trillion rand of local-currency bonds, dumped 5.1 billion rand of the debt in the hours after Gigaba delivered his medium-term budget statement to lawmakers on Wednesday. That’s the biggest one-day outflow since September 2011, at the height of the European debt crisis — but it’s small compared to what could happen if the debt gets downgraded to junk, forcing South Africa’s exit from Citigroup Inc.’s World Government Bond Index.
That would spark outflows of as much as 200 billion rand as investors that track the index divest their holdings, according to a recent estimate by JPMorgan Chase & Co. If that happens at a time when rising rates in developed nations curb demand for emerging-market assets, yields on benchmark bonds may climb close to 11 percent and stay there, according to the worst-case scenario painted by South Africa’s National Treasury.
“A downgrade and exclusion from the WGBI seems as though it is a foregone conclusion in the market,” Reezwana Sumad, an analyst at Nedbank Group Ltd., said in a client note. In addition, “South Africa’s vulnerability to global and emerging-market risk sentiment cannot be ignored. Any turn in foreign sentiment would yield large outflows from the bond market, and consequently higher yields,” she said.
19 Oct

How this South African banker found success in the fitness industry

In April 2014 South African entrepreneur Tumi Phake clocked out for the last time from his job at Rand Merchant Bank (RMB), where he worked as a structured-lending specialist, to start his own business.

Despite his experience and having studied a BCom finance degree, it wasn’t the financial sector that Phake had his sights set on.

He is now the sole founder and CEO of Zenzele Fitness Group, a gym management business which operates fully-equipped health clubs for, and in partnership with, various large companies and universities.

Interestingly, RMB – part of the FirstRand group – was founded by three of South Africa’s most respected entrepreneurs, Paul Harris, Laurie Dippenaar and GT Ferreira. In 1977, they established Rand Consolidated Investments with just US$10,000, which later became RMB. Known as the three musketeers, the founders subsequently laid the foundations for the FirstRand empire, with today includes First National Bank, RMB, WesBank and Ashburton Investments.

Despite quitting a job at one of their companies, Phake draws some inspiration from these South African banking pioneers. “Working at a corporate was very valuable and necessary – especially around understanding the governance of running a successful business… But I always knew in the back of my mind that I wanted to have my own company that I could grow and potentially have scale to becoming half-a-billion to a billion-rand business – and that’s my vision. And if someone else has done it on their own, such as FirstRand – why can’t I give it a shot?”

Exploiting a gap in the market

South Africa has a relatively well-developed health club industry, with Virgin Active and Planet Fitness standing out as some of the prominent chains. Virgin Active controls at least 60% of the market. It was established in 2001 when Nelson Mandela reportedly phoned Richard Branson to ask him to save thousands of jobs by taking over the liquidated gym brand Health and Racquet Club.

Read more: How this banker found success in the fitness industry

18 Oct

Four trend-driven franchising opportunities in South Africa

The resilience and vitality of the franchising industry in South Africa is more apparent than ever, and increasingly becoming a notable asset to the country.

Jeremy Lang, regional general manager at Business Partners, says that the franchising sector continues to grow on all fronts, and is increasingly offering business opportunities for local entrepreneurs and enabling the creation of jobs – something that the country desperately requires as the economy continues to shed jobs.

He points to recent Franchise Association of South Africa’s (FASA’s) statistics which show that, in a year of low overall economic growth, the franchising sector’s share of the country’s GDP in 2017 is reported at R587bn (about US$44bn) and accounts for 13.3% – an increase from the 11.6% of GDP recorded in 2016. The number of outlets (franchisees) reportedly increased from 31,111 to 40,528, and the number of franchise groups (franchisors) also grew from 757 to 845 in 2017.

The sector now also employs 343,319 people – an increase of 14,074 jobs when compared to 2016.

While franchise businesses aren’t entirely immune to the struggles of the economy, Lang says that the sector’s apparent ability to shrug off the economic malaise can be linked to their ‘tried-and tested’ business approach. “The fact that a franchised business has a proven business model gives it a relative advantage over independent businesses which may still be finding their feet through trial and error.

“Similarly, while an independent business has to double down on marketing to draw in reluctant customers, franchised outlets have the added advantage of brand strength and market acceptance.”

He adds that the continued entry into South Africa of overseas franchise systems looking for global expansion, is also driving the sectors growth and creating opportunities for local franchisees.

Commenting on the Business Partners R150m ($11m) Brands and Franchise Fund, Lang says since the Fund’s launch in 2014 the company has noticed increased interest from local existing and aspiring entrepreneurs seeking to own and expand their franchises through finance and mentorship in order to capitalise on franchising’s remarkable ability to grow in tough market conditions.

Read more: Four trend-driven franchising opportunities in South Africa


03 Oct

Here’s why South Africa’s online shoppers keep coming back for more

Online shopping is becoming ubiquitous in many parts of the world. The internet today enables retailers to open online and serve customers at any time of the day without the need for them to visit a physical store.

This is especially true in countries like China, the US and the UK, which lead the pack when it comes to e-commerce. Globally, e-commerce is a trillion-dollar industry and online retailing is a major part of it.

Online retailing is a relatively new phenomenon and still a small element of total retailing in Africa. In South Africa, for instance, total online sales in 2016 were estimated at R9bn (US$660m) which was only 1% of total retail sales.

The rapid penetration of internet technologies around the continent provides hope for e-commerce’s continued growth. Firms that want to enter the online retailing market must learn and develop strategies that will help them benefit from this growth.

I undertook a study that looked at various factors that influence customer attitudes towards online stores. It focused on existing online shoppers from South Africa’s Gauteng province, which is the country’s economic powerhouse. There were 201 respondents in the study. All were older than 18 and from the middle- to upper-income groups according to the South African Living Standard Measure. Ninety-eight were men and 103 were women.

The respondents completed a structured questionnaire. They gave answers on a scale from one (strongly disagree) with a statement to five (strongly agree). The customers were asked to have a specific online store in mind when answering the questions.

The findings

The findings showed that customers, in general, were positive about the online retail stores they were using. Four main factors influenced their attitudes and intentions to shop at a particular online store again. These were:

1. Store offerings: Denoted by the choice of products and the price at which the products are offered, this emerged as the main source of customer value associated with a store.

Read more: Here’s why South Africa’s online shoppers keep coming back for more



20 Sep

The budget bank rattling South Africa’s financial sector

STELLENBOSCH, South Africa (Reuters) – A budget bank is booming in South Africa’s economic slump, challenging the decades-long dominance of the “big four” lenders and prompting a price war that is driving down banking costs in a country where many people can’t afford an account.

Capitec Bank has doubled its customer numbers over the past five years and quadrupled in market value, even as South Africa’s economic growth has stalled and the country has slid into recession, squeezing household incomes.

It offers a single “no-frills” bank account with low fees, as well as unsecured loans to customers including low-income borrowers, but steers clear of the more complex financial products offered by rivals.

This model has insulated it from the downturn, which has constrained mortgage lending and vehicle finance, key business areas for the four biggest banks: Standard Bank, FirstRand, Barclays Africa and Nedbank.

Those four heavyweights have reigned unchallenged over South Africa’s financial sector since the 1990s.

But Capitec, whose shares have risen more than 300 percent since 2012 and over 30 percent this year, now has a market value of 103 billion rand ($7.9 billion) – closing in on the number four lender Nedbank, which is worth 110 billion rand.

The Stellenbosch-based bank, which launched in 2001, has 9 million customers, of which 4 million are so-called primary clients who have their salaries deposited into these accounts.

“Most of them we’ve taken from other banks,” Capitec Chief Executive Gerrie Fourie told Reuters in an interview, saying that his bank attracts 100,000 to 150,000 new customers a month.

“The economy is helping us,” he added. “People have started questioning why they have to pay banking costs.”

There are clear risks to the bank’s business model of offering unsecured loans to lower-income borrowers without any other forms of lending to counter any losses, according to industry experts.

Capitec’s rise is nonetheless forcing its rivals to respond. They are all fighting back with their own no frills accounts aimed at hard-pressed consumers.

Read more: The budget bank rattling South Africa’s financial sector

19 Sep

Africa: Egypt Knocks SA From Top Investment Spot in Africa – RMB Report

Egypt has knocked South Africa from its long-standing top spot regarding investments in Africa, according to Rand Merchant Bank’s latest Where to Invest in Africa report for 2018, released on Monday.

This is the first time SA has not been in top spot since the report was initiated seven years ago. Nigeria, on the other hand, has for the first time not featured in the Top 10. This is due to its short-term investment appeal having been eroded by recessionary conditions, according to the report.

The report focuses on the main sources of dollar revenues in Africa, which allows it to measure the most important income generators and identify investment opportunities. The 2018 report also balances economic activity against the relative ease of doing business.

Egypt displaced SA largely because of its superior economic activity score, while SA has shown sluggish growth rates, which have deteriorated markedly over the past seven years.

While the report found that SA also faces mounting concerns over issues of institutional strength and governance, there are some things still counting in the country’s favour. These include the rand, equity and capital markets, which the report points out are still “a cut above the rest” compared to many other African nations facing liquidity constraints.

The report also points out that, although Botswana, Mauritius and Namibia are widely rated as investment grade economies, they do not feature in the report’s Top 10 mostly because of the relatively small sizes of their markets. Market size has been a key consideration in the report’s methodology.

“From a global perspective, African countries are still at the lower end of the global-performance spectrum, which continues to be dominated by the US, UK, Australia and Germany,” the report states.

Brink of disaster

One of the conclusions of the report is that Africa could find itself hovering on the brink of disaster if it continues to depend on its current economic fundamentals and does not usher in economic diversification.

Read more: Africa: Egypt Knocks SA From Top Investment Spot in Africa – RMB Report

11 Sep

Nigeria and South Africa emerge from recession

Two of the largest economies in Africa are growing again after recessions.

Nigeria’s GDP expanded by 0.55% in the second quarter of 2017 year-on-year, according to the National Bureau of Statistics, ending five consecutive quarters of contraction. Quarter-on-quarter growth for the same period was 3.23%.
The South African economy grew by 2.5% quarter-on quarter for the three months to June 30 after two quarters of decline, according to official statistics.
Historic decline
Growth in Nigeria marks the end of its worst recession in 25 years.
Africa’s leading oil producer has been hard hit by falling prices for the commodity, which accounts for the majority of its export revenue.
But the oil sector has recovered slightly in the last quarter, with growth of 1.6% year-on-year.
Nigerian agriculture, which contributes around 23% of GDP, has also rebounded with growth of 3% over the same period.
Agriculture boom
South Africa’s recovery from a shorter recession has been supported by growth across a range of industries.
The agriculture sector expanded by 33.6% quarter-on-quarter, boosted by strong harvests of crops such as maize and wheat.
The finance industry also performed well with growth of 3.5%, and the mining industry expanded by 3.9%, supported by increased production of coal and gold.
But despite these positive indicators, Statistics South Africa warned that the recovery remains fragile as “longer-term indicators show subdued growth.”
[Via CNN]
11 Aug

The government are targeting retirement funds and pensions to force investment in the state


South Africa is looking to bolster its finances by making prescribed assets a vehicle to fund government-approved institutions. This includes those who are in possession of retirement funds or pensions, who will have no choice but to make contributions to state assets – regardless of their financial situation.

The legislation has certainly flew under the radar, and the ANC really did do their best to hide it: They only announced these plans on the last day of their policy conference in July and it doesn’t feature in any of their proposal documents.

Changes to pensions in South Africa

This decision was only announced after their ill-advised plans to nationalise the Reserve Bank, making it a good day to bury a change that will surely prove divisive amongst its effected audience.

Albert Botha is the fixed income portfolio manager at Ashburton Investments: He firmly believes that applying prescribed assets in pensions will ultimately have a negative effect on our citizens:

“Assume that 50% of assets are prescribed and this leads to a 1% per annum lower return for your pension – this would result in the average pension fund returning 3% above inflation rather than 4%.”

“In real terms, the average person would have to work and save for 2 years and 8 months longer to reach the same retirement goals over 30 years.”

What’s the retirement age in South Africa?

According to Botha, this would result in South Africans having to work until they are 68 rather than 65. Conversely, a worker wanting to stick to the retirement age of 65 may have to be content with a pension that’s 16% less than that of 68-year-old retiree.

It’s not necessarily a bad idea, though. Although it has the potential to hit pensions, Botha claims that similar schemes across the world have helped regenerate failing economies.

He cites the USA (tax exempt bonds for states/cities) and the European Union (first-loss guarantees for investors) for getting their prescribed assets strategies right.

Botha’s Ashburton Investments worked with the Treasury’s Job Fund to create over 9,000 jobs using 90% non-state finances. So there are methods that can benefit the average worker and the economy in tandem.

source from The South African

10 Aug

Weaker inflation ups real South African economic transaction activity

transactional activity

Cape Town – For the first time in 10 months, economic transactional activity in South Africa picked up in real terms on a year-on-year basis in July, according to the latest BankservAfrica Economic Transactions Index (BETI) released on Thursday.

According to the BETI report it was mainly due to weaker inflation.

At the same time the index reflected slow growth on a quarterly and monthly basis.

The monthly transactional activity – as measured by BankservAfrica’s national payment system – for July showed a 0.6% year-on-year increase in the actual value of transactions.

“This change is the result of a very weak July 2016 which saw the transaction values fall out of the current annual numbers. Therefore, the annual increase is a ‘base effect’ that lifts the actual index numbers above last year’s lows,” explained Mike Schüssler, chief economist at Economists dotcoza.

The quarterly numbers are negative due to the very low May 2017 BETI numbers and follow from the sovereign credit rate downgrades for SA by the global ratings agencies.

Schüssler told Fin24 that the BETI shows how the uncertainty in the SA economy is just dragging on. It makes consumers hesitant about spending. They might, for instance, rather opt to buy a cheap laptop, eat at fast food outlets perceived to be less expensive than restaurants and shop at general merchants rather than upmarket stores.

“They will buy cheap, because their outlook is rather shorter term,” said Schüssler.

The same tendency goes for businesses, where they would, according to Schüssler, rather buy stock in smaller quantities and more often than in big quantities.

“The uncertainty created in the run-up to the downgrades and the changing of the minister of finance, has grabbed hold of SA businesses and creates a problem for all of us. Everybody rather buys something they can pay off in two to three months than taking on long term repayments,” said Schüssler.

“They are watching their costs and do not want to take on more risk.”

Between June and July, the BETI declined by 0.2%. This, however, is minor in comparison to other monthly declines since 2015.

In July, the number of transactions increased by 6.7% on a year-on-year basis, but the average value per transaction declined by 1.3% on a year-on-year basis. The standardised value of transactions for July was R789.2bn, a 5.4% year-on-year upturn.

In the last 43 months, 21 of the monthly changes in the BETI have been declines and one month had no change, while the other 21 months showed increases. These are all indicative of a flat economy, according to Schüssler.

“There is hope that further interest rate reductions will boost consumer confidence and a better understanding of the economic situation by policymakers will help the SA economy,” he said.