Category: Economics

BRICS dilemma, folly or curse?

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Master of Junk

IT WAS never meant to be anything more than a political union, similar in status to the non-aligned states. Economically, only two of the five BRICS nations, China and India are doing well, the rest are all currently in junk status. Russia was junked in 2015, followed by Brazil in 2016 and South Africa in 2017. In many respect it is Russia which has tilted BRICS in favour of junk, and has lead the pack in this regard, with the result, there is now a Good BRICS and a Bad BRICS story.

Goodness BRICS

Let’s take a look at what is good here. So far as the China is concerned, the need to create markets for its overproduction of goods has meant that it is forced to continue investing in overseas markets, and the result is largely of benefit to us.

South Africa, an outlier so far as size is concerned, has seen several deals involving, variously, the creation of an entire city in Modderfontein, the relocation of a Hisense television factory to our shores, and the latest investment of 11Bn Rand towards a new car factory in PE. So in addition to our ample resources and export market, there is now significant beneficiation of goods within the country, in an evolving relationship, all producing goods which in turn end up in the West.

India, another global leader, has taken a slightly different tack. The past decade has seen successive major investments by Asian-based entrepreneurs in the South African economy. Beginning with Lakshmi Mittal, who bought former state-owned ISCOR shortly after democracy, to create ArcelorMittal. More recently the Indian billionaire Anil Agarwal bought a substantial stake in Anglo American, a traditional dual-listed South African business, which has relocated its headquarters to London. The pattern is thus one of picking up bargains, arguably to the benefit of stakeholders. Though trade between the two countries is booming, this is often however at the cost of local clothing and textile workers.

Badness BRICS

Where trade with the two Asian economic giants of BRICS has tended to benefit South Africa. The reverse is true when it comes to Russia. Instead of buying out state-owned enterprises (SOEs) as in Mittel, relieving taxpayers of an unnecessary drain on the treasury, or simply just investing money, the Russian strategy has been instead to hijack the remaining SOEs whilst foisting projects upon us of dubious merit. In effect it is Russia which has engaged in what can only be called a form of state capture, and nuclear colonialism.

The proposed Rosatom nuclear deal along with its many intrigues under Malusi Gigaba is very bad for South Africa, both economically and politically. Apart from the fact that the deal will result in an unnecessary 1Trn Rand expenditure from the treasury on nuclear technology already past its sell-by-date, — bringing to a halt and seriously compromising a highly successively renewable energy programme — it will not only relieve the country of taxpayers money, but will also remove scarce foreign exchange.

If implemented the Rosatum deal would commit South Africa to paying forward for its electricity in Dollars for the next 60 years — a currency that Russia desperately needs in order to balance its own books. In effect no money is being invested by Russia as such. Instead, the country would borrow money on the open market against its forward production, in order to buy moribund technology from Russia in a similar deal already concluded with Saudi Arabia. The ‘sukuk deal’ financed Medupi and Kusile in this way, and albeit local technology which benefitted, the resulting finance model is no doubt to the ultimate detriment of the economy and climate. See how Saudi money dried up.

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From NDP to Junk status without a Plan (or even a paddle) in three easy steps

ANYBODY remember the National Development Plan (NDP)? The economic initiative was the hallmark of successive ANC administrations. As late as January 2017 the plan was being touted as a vision for 2030, “the product of hundreds of interactions with South Africans, input from tens of thousands of people, extensive research and robust debate throughout the country”. When Pravin Gordhan was hastily recalled from London, whilst on an economic roadshow, it was the NDP, with its broad vision that he was selling to investors.

The markets were reassured by the long-term stability promised by Pretoria bureaucrats, and, after the Nene fiasco, (a foretaste of what was to come) not only was the economy in recovery, but the currency was even experiencing a bull-run, making the Rand one of the world-beating currencies of 2017, at least this was until President Jacob Zuma fired his finance Minister again, and then half-his cabinet while embarking on a course which took South Africa directly into the headwinds of currency volatility and the ire of ratings agencies. Within a short space of a week, the gains and momentum of the past 12 months were wiped out, as local banks lost heavily, and borrowing money on international markets suddenly became a lot, lot harder.

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What happened? Can one put this down to the simple cult of personality surrounding the President? The Guptas and the intrigues of Nkandla and Pretoria, or BRICS?  Here is one alternative version of events, and no doubt there will be others:

Frustrated by electoral inroads being made to the left and right of the party, the centrist ANC realised that something drastic needed to be done. Instead of meeting the official opposition the Democratic Alliance (DA) whose market-friendly policies and promise of renewal had resulted in astonishing gains at the polls, in both the City of Johannesburg and metros of Tshwane and Nelson Mandela Bay, NEC party insiders decided to quietly drop the NDP focus in favour of a new mantra —  that of ‘Radical Economic Transformation’ (RET)

In effect, the ANC were now adopting the policies of the far-left Economic Freedom Front (EFF), promising massive changes in ownership, whilst debating expropriation of property without compensation,  (an all too familiar bait and switch strategy) and thus a sure sign that groups such as Black Land First (BLF) were also beginning to dictate the ruling party agenda. Exactly what RET represents, is anyone’s guess. In all likelihood, it is mere code for a hodge-podge of incoherent leftist policies. If the ANC is to survive at the polls come 2019, it will have to enter into coalitions, and the dilemma remains that the DA and EFF are on opposite sides of the political fence so to speak.

The resulting drift to the far-left by the ANC under Zuma (even if by some accounts, simply empty promises) has had severe consequences. The fallout couldn’t get any worse than if Hugo Chavez had to suddenly arrive back from the dead, flogging the statist focus of big government and the anti-private property rhetoric which nearly destroyed Venezuela. So while ratings agencies were hammering the bond market, and the parastatals were still on life-support, we saw the travesty of Malusi Gigaba and the trillion-Rand nuclear debacle (read: expensive mega-projects) getting everyone in a tizz.

Unless Pretoria figures out a way to print money without encouraging further Rand depreciation, the big bucks flagship projects and renewable energy procurement touted before the downgrade are all but DOA. The only questions remains: Can the NDP be saved (or scaled back?), or will it take a defeat at the polls to realise, that when it comes to economic policy, nothing in South Africa is cast in stone? That the ANC is unlikely to be in power come 2019, with a workable NDP or not, is slowly dawning. Some 100 000 people from across the spectrum, marched on Friday while calling for the President to resign.

Here’s why Uber is eating your lunch

THE RISE of the smartphone alongside the Internet, has lead to a plethora of disruptive innovation. A paradigm shift has occurred, so profound and fundamental in its effects, that analysts refer to the fourth industrial revolution and the Internet of Things. The rapid pace of change has caught metered taxi operators sleeping.  Though more than two years has passed since the upstart Uber company appeared on our shores,  metered taxi operators have not found the means to get their proverbial shit together.

Instead of innovating, by producing smartphone apps and websites that would allow consumers to book taxis online, pay with bank cards and utilize the electronic transactions which litter our modern lifestyles — instead of producing efficiency and allowing clients to enjoy the benefits of GPS and other innovations — the metered taxi industry has instead resorted to a bit of disruption of their own. And it is not all good.

Following the equally myopic truckers blockade, the rise of taxi turf wars and a new form of strike action, all may be seen as the gross failure of operators to come to grips with the accomplishments of the new technology. Now one may sympathise with those critics who point out that Uber has merely shifted the cost of operating a taxi from the operator to the taxi driver, the company distributed as it is, allows own-vehicle drivers to enter an otherwise regulated marketplace, and has thus disrupted the cab industry in every city which has adopted mobile telephony. The thing is, Uber’s success is not simply a case of cutting costs.

For years, the cab market has relied upon a form of cartel behaviour, regulated monopolies and guaranteed markets.  The regulations that inform the industry have themselves been the very reason why cab operators have failed to innovate. The reliance on legislation instead of innovation, has resulted in the lack of motive force needed to deliver product and services efficiently, in a marketplace where the type of person who uses a cab is usually not able to afford a vehicle. Uber on the other hand has liberated consumers who would otherwise shirk at the cost of a metered taxi, and who risk being treated as tourists, from the up-market cab operators who seem only to cater to people on holiday.

Software has thus brought greater efficiency in routes, has allowed drivers to gain control over their lives, to save petrol by redirecting around traffic, to know who it is they are letting inside their vehicles, and it is these innovations which are driving the new market, concerned as it is, with safety and affordability, and which has sprung up like fresh daisies around the smartphone. Unless the entire cab industry adapts, then those laggards currently holding Jozi to ransom, must necessarily be allowed to whither away and die, the same way that Hansom cabs and cab drivers with horse-drawn buggies, died out when the automobile brought along a more efficient means of transport.

The current strike action in Gauteng is thus nothing less than the equivalent of a group of irate Hansom Cab drivers demanding protection from the new Anti-Horse technology. One can only feel a sense of pathos, for the inevitable.

SEE: Africa: Two Very Different Responses to Uber – Kenya and South Africa

Proposed tax on fruit juice is pure evil

PRAVIN GORDHAN found a sneaky way to avoid raising VAT and it isn’t healthy. Promoted as a health tax, the sugar tax quickly snowballed into an all-out tax on anything sweet, including dividends.

The problem with the finance minister’s health claims, is that they don’t hold up to scientific scrutiny, for starters, South Africa is a major fruit producing nation, and in the battle between fast food, sugared drinks and cola’s, the beneficiaries have invariably been the export fruit market and consumers overseas.

Now with a whopping 11% tax on sugared drinks being extended to literally everything, including ‘intrinsic sugars’, read 100% fruit juice, the health alternative is going to be even more out of reach of the poor, as well as pensioners, who are expected to consume what?

Bottled water?

And to live off what, five and dime spaza stores?

There is a major and significant difference between the active ingredients in all these products, financial, health or otherwise.

Fructose found in fruit breaks down in your liver and doesn’t provoke an insulin response. Glucose found in cola drinks starts to break down in the stomach and requires the release of insulin into the bloodstream to be metabolized completely. Fruit juice contains plant phenols and antioxidants, while ordinary sugar drinks do not.

Conflating the two, like the conflation of dividends and the banks who dish them out, will prove to be a costly and unhealthy error by the treasury.

For years, the sin taxes authored by treasury have targeted alcohol and alcohol drinkers, driving the beer market at the expense of more refined and hardtack liquor. Now with sugar in its sights, treasury has found a convenient scapegoat. Taken to its logical conclusion, we are likely to see a hit on fresh fruit and the proverbial fruit tree itself, which may  feature alongside sweets and chocolates, and milk products, in future budgets.

Talk about taking popsicles out of the hands of children, but this is exactly what Mr Gordhan has achieved this year.

The reason why budget 2017 is hugely problematic, more so than any previous budgets, is because of two vectors:

The first, is the ANC and its ‘tax and spend‘ strategy which has resulted in a budget deficit and resulting need to service debt, the cost of which runs at an enormous R162.4 Bn. According to reports, this burden is not projected to come down any time soon, and can only get worse.

Far from austerity and prudence, the budget is rather shy when it comes to trimming spending. To give you an indication, this interest figure is almost the same amount of money the government spends on healthcare each year, projected to be R187.5 Bn.Then there is the enormous burden placed upon individual taxpayers, who must feel a bit like victims of a hit and run.

Personal income tax in South Africa is currently in an alarming disproportion to income tax generated from corporate taxation. Private taxpayers thus contribute almost 2.5 times as much as corporations, the figure grows to 3.6 times if one adds VAT and even more when one considers the fuel levy.

This trend is global, as more corporations hide behind tax havens, while ordinary citizens increasingly fork out more tax to cover the deficit.

The state will continue feeding SOEs such as ESKOM and SAA in the dirigiste economics that has become the hallmark of the ruling party. Tax on road transport has increased via the fuel levy. On a brighter note, the government intends to roll out new trains and public transport services. One can only remark on the contradiction between the national airline, and the rail agency.

NOTE: At writing this, there was no clarity from the media on whether there is a current exemption for fruit juice or not, and exactly how the new intrinsic sugar regime is being implemented. Health24 reports that fruit juice is included while The Herald reports that the deputy director-general Ismail Momoniat has told journalists that ‘Treasury proposed to introduce a threshold that would make the first 4g of sugar per 100ml beverage exempt from the sugar tax. He said 100% fruit juices and milk products would be exempt.’

Mathematician predicts end of world by 2020

Peter Turchin, a professor at the University of Connecticut’s department of ecology and evolutionary biology, said the next decade would be marked by political turmoil and social unrest.

The academic is the world’s leading advocate of a discipline called cliodynamics, which believes historical events such as the growth and collapse of empires or religions follow clearly definable patterns.

Unfortunately for us, he believes America is facing a grim future which could lead to its downfall.

If the US collapses, it seems likely that Europe and Britain will suffer a similar fate.

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Nepad in Nairobi 2016 gives hope for African Renaissance 2.0

NEPAD together with Tokyo International Conference on African Development (TICAD) are hosting a continental get-together. With the backing of Shinzo Abe, Prime Minister of Japan, and heads of the AU via the continents very own NEPAD agency, the African Union is finally  producing a “brilliant blue-print for African development in conjunction with Japan.

Since I am barely, what one could even consider a Japanophile, and thus only speak a smattering of Nihonji, and read absolutely no Kanji, lest I end up rewriting history, I  will instead post an official message below from Abe, addressing our “African Dream” ,  TICAD IV, (and thus NEPAD, and AU) to be held in Nairobi, later this month.


THE TICAD VI in Nairobi will have historical significance, as it will be the first-ever TICAD to be held on the African soil. TICAD, the most traditional forum with African countries, was launched after the end of the Cold War under the initiative of the government of Japan to promote development in Africa.

TICAD is a process in which Africa draws up a brilliant blueprint for its own development. The African Continent is the biggest frontier of the 21st Century. Having the highest economic growth rate among the major regions of the world, it needs the vitality of the private sector first and foremost to develop even further. Under the principle of “From Aid to Trade and from Debt to Investment,” the Japanese private and public sectors will support the development of Africa, led by Africans themselves.

Currently the “African Dream” is being crystallized in the form of Agenda 2063″. To realise this dream, Japan will contribute to two of the key pillars of the Agenda in particular, which will be addressed in depth at TICAD V1.

First, development of quality infrastructure is imperative. Infrastructure is essential for growth and therefore, it is necessary to have high quality and longevity of infrastructure. Japan will provide the African continent with quality infrastructure according to the needs of each country.

At the same time, Japan will work on establishing healthcare systems to protect people’s lives. Japan played a central role in incorporating the realisation of universal health coverage (UHC) into the SDGs, which was one of the main agenda items at the G7 Ise-Shima Summit in July this year. Japan will promote the realisation of UHC in Africa as well.

TICAD is an opportunity for Africa to present its own “African Dream” and work hand-in-hand with Japan to realise it. I sincerely look forward to meeting you in Nairobi on August 27 and 28 to discuss what Africa aims to become in 20 to 30 years from now.

Shinzo Abe, Prime Minister of Japan

Will Brexit give way to a Brixit?

THE EXIT of the United Kingdom from the European Community is not solely a result of economic forces (who would vote for market turmoil?), but is rather an abject political lesson in democratic power relations. Will Brexit give way to a Brixit, the dissolution of BRICS?

If it wasn’t the constant flow of immigrants from the continent that riled the British voter, then it was the growing centralisation of power in Brussels, the plethora of EU legislation, the imposition of European laws and legal precedents and the resulting erosion of the powerful common law in Britain, which appears to have put paid to the European union for the meantime.

As Larry Kudlow writing for CNBC online put it: “For a country which has routinely acted to limit the power of royalty, which holds stock in documents such as the Magna Carta … Britain will regain its political freedom, its autonomous self-government, and its independence from an European Union that is spinning out of control under the power of establishment elites, unelected and unaccountable socialist bureaucrats, and a court that is increasingly making legal decisions that replace Britain’s powerful common law.”

The same uneasy indictment could easily apply to other economic blocs such as SADC, the AU and its much vaunted rival and successor, BRICS. In the short space of two decades, South Africa’s political leaders have taken our nation into a number of regional and international, monetary and economic unions. The introduction of the Rand-based Southern African Development Community (SADC) on 17 August 1992 was quickly followed by the African Union (AU) 26 May 2001, and then BRICS on 16 May 2008.

By all accounts South Africa is thus a serial unionist. Having arisen like the United Kingdom as an aggregation of several states, including the Boer Republics, Cape Colony and Natal. The country’s first experience as an economic and political union was as a member of the British Empire, followed by the Commonwealth, a block of 52 nations. Then another bout of Republican nationalism followed, with successive periods of relative isolation resulting from apartheid.

Upon the emergence of the new era, a majority government,the Bill of Rights and an inclusive democracy, South Africa embarked on an outward path, which lead to a regional 15 member economic block in Southern Africa including Botswana, Namibia, Lesotho and Swaziland. This was quickly followed by the rise of the 54 member African Union under Mbeki. By all purposes, an attempt to emulate the emergence of the EU.

The result inside the country was a long boom, as South Africa became the gateway of choice to the rest of Africa. But then things began to unravel somewhat. Not content with being a regional superpower within the AU, South Africa, ever much the Casanova of politics, jumped into bed with Brazil, Russia, India and China to form BRICS. All of which, except for India, have atrocious levels of public debt and weak currencies. Brazil was recently given junk status.

It is this awkward attempt to create an alternative to the Post-WW2 Bretton Woods structures such as the IMF and World Bank, which has presented huge problems. The grouping is not simply a marriage of convenience, predicated on the numbers, like the G20, but has come to dominate foreign policy, to the detriment of both the SADC region and the increasingly insignificant AU. Under the Zuma administration, one could be forgiven for thinking that both SADC and the AU no longer exist. The result can be seen in the re-emergence of regional conflict, such as the political turmoil in Mocambique and continental instability.

Time to think the unthinkable. Time for a Brixit?