Month: June 2024

That the Government of National Unity would include the Liberal DA and exclude the EFF (extreme left or is it extreme right?) has been well received by investors. That this would be the new shape of government in SA was only known late on Friday 14^th June after the markets were closed and that were only to reopen on Tuesday 17^th June. The run up to the election had seen SA listed shares and bonds and the ZAR well up from their mid-April lows. On the presumption that the ANC would be able to do business as usual with the assistance, if necessary, of one or two minor parties. A sense of better the devil you know seemed to characterise market sentiment. That the ANC collected a surprisingly low 40% share of the votes cast, rather than 45-47 per cent expected, raised more uncertainty about the future course of economic policy. The markets in SA assets reacted typically to the new dangers by falling back from pre-election valuations.

Early days surely yet the share and bond markets are now ahead of their immediate pre-election highs and have both gained about 7% in USD’s from the post-election aftermath. The ZAR has gained ground against the stronger USD and against the other EM currencies, the true measure of rand strength for South African, rather than US reasons. Of further encouragement is that the risks foreign investors attach to their SA assets have also narrowed.  These sovereign or country risks are best measured by the spread between the yields on a RSA dollar denominated bond and those offered by a US Treasury Bond of the same duration. The spread between a five-year RSA Yankee bond had narrowed to 2.3% p.a. from 2.7% in the run up to the election. Then post-election the risk spread had widened to 2.6% p.a. and is now helpfully lower at about 2.2%. A good first impression but much more is called for the move the markets higher (see the charts below)

South African Stocks and Bonds in 2024. Daily Data to June 18^th (January 2024=100)

Source; Bloomberg. Investec Wealth&Investment

The ZAR in 2024. Daily Data to June 18^th January =100

Source; Bloomberg. Investec Wealth &Investment

Interest Rates – Dollar denominated Five Year RSA’s (Yankees) and US Treasury Bonds and the Risk Spread. Daily Data; April to June 18^th 2024.

Source; Bloomberg. Investec Wealth &Investment

The DA will now carry a heavy responsibility for realising faster growth. Will the party and its leaders and followers be up to the task? Will they be able to manage change in an environment where the support of senior officials may not be fit for purpose? And when time spent in parliamentary debate and on the hustings may not have been the best possible preparation for expertly and vigorously executing the tasks at hand?

What specific government departments will be allocated to the DA members of the cabinet remains to be revealed. The DA should not be at all shy in coming forward to serve and be accorded a heavy responsibility for executing economic policy. There is apparently agreement on the initial economic policy reforms to be pursued, not surprisingly, given the weaknesses of government departments obvious to those who have sat for so long on the opposition benches and in parliamentary committees.

The Treasury and its Budget is in safe hands and can be supported by the DA in cabinet. It is the other economically vital Ministries that offer great scope for much improved governance and in executing policy and delivering value for the sacrifices taxpayers make to fund their government.  The management role to be played by the Ministers to be held responsible for Mining, Industry, Energy, Transport Water and Municipal Services, in and out of Parliament, will be all important promoting economic development. That is the essential growth stuff to truly add value to SA capital from which all South Africans will benefit, those in and out of work.

Will the new appointments be up to the task?  Businesses in South Africa can surely be a source of managerial talent. And a source of technical and financial advice to help fashion public-private partnerships to attract the necessary and available capital to revive the infrastructure.  The best and brightest will be needed and will not be found wanting. A government that regards SA business as a partner in progress rather than a threat to its power and privileges will be a huge asset value and growth promoter.

How much better would the governing ANC have been received by the voters everywhere had they been supported by a rising tide of incomes and jobs, painfully absent since 2019? Including a scarcity of good jobs in the public sector (teachers, nurses, doctors) that have proved unaffordable, absent the growth in government revenues that comes painlessly with growth?

Yet even impressive and necessary fiscal austerity has not soothed the investors in SA government debt that have to cover our lack of tax revenue. They continue to demand high nominal and after inflation returns funding the RSA for fear that slow growth in the economy and in tax revenues makes printing money and more inflation much more likely sometime in the future.

And households have had to ante up the extra taxes needed to pay the extra interest on their national and on more costly personal debt. And to support a growing dependence on poverty relief provided to half of all SA households. Leaving less spending power available to households to encourage businesses to supply them with more of goods and services they much desire. And businesses, largely bereft of growing markets, have hired fewer workers and added to their growth enhancing plant and equipment, at a slower pace. High interest rates have meant high costs of funding businesses- that further discourage the essential work providers.

Welfare rather than work has been the SA poverty relief programme – and unintendedly but inevitably -discouraged the supply of labour. With regulated minimum wages adding further dis-incentives to the demand for and supply of labour. A potentially very valuable economic resource thus goes wasted and potential workers become highly frustrated. 11 million South Africans are formally employed outside of agriculture, out of an adult population of 40 million. Many middle income participants in formal employment with access to excellent privately supplied medical benefits, apparently were put off by the promise of equally good health care, provided publicly. Their trust in effective government delivery has understandably been lost and will not be easily regained. A fact of SA political life that any political party, that depends existentially on support from the centre, should recognise.

Slow growth has its own vicious spiral downwards and faster growth lifts all boats including those piloted by government agencies. And any governing party chastened by their electorate would surely look to the economy to improve their own re-election prospects next time, as well as the prospects of the citizenry. They would put both Party and SA in joint first place encouraging a stronger economy.
The ANC government, recently, especially it’s Treasury, has not wanted for plans for reform. Private-public partnerships to invigorate the failing infrastructure feature prominently and are welcome. And its Budget deserves support from the economically literate. Being allowed to proceed on its announced path, with the hope they could do much better in executing its plans, would clearly be a relief to SA business and its funders. The largely stable stock, bond and currency markets suggest that it will be so allowed.

The essentially market friendly DA party and its fellow travellers, with about 120 of the 400 MP’s under its wing, would offer the much preferred partner for the ANC in government were growth and re-election prospects front of the ANC mind. The EFF and the MK do not offer or even promise faster growth -they have other growth destroying re-distribution objectives.

The very different approaches to racially biased interventions in the labour market, rather than merit based value for money contracts for labour, goods and services, is a serious difference between the ideologically interventionist ANC and the instinctively more market friendly DA. Yet the interference in the SA markets based on racial identity and preferments of one kind and another has been a primary contributor to persistently slow growth. Both by making business less efficient and confident and less valuable than they would otherwise have been. And indirectly when the economic agenda- what government does – is set by rent seeking opportunists – rather than determined by a national interest in value for tax money. Any political development in SA that leads to more meritocratic efficiency and less crony capitalism would be growth and vote gathering.

Chairman Trevor Manuel is “very proud” that Old Mutual has raised the minimum it pays employees to R15,000 a month, “so taking a decisive step towards narrowing the wage gap” One presumes that this minimum does not apply to the cleaners, security guards and canteen staff contracted to supply such services. Fortunately because, if so extended, it would mean many fewer of them would be employed in these humble categories.

I would be much more inclined to share the pride in firms paying more if it was accompanied by a growing pay roll. An outcome difficult to realise when improved rewards must be accompanied by improved performance– if the firm is to survive – productivity augmented by computers, robots and AI and on the job training. The true employment heroes are the firms that can grow salaries and the numbers employed, especially at entry level, enabling the young to begin a lifetime journey up the salary scales.

It appears that this new Old Mutual minimum is very close to industry wide practice, sensibly so. It is reported that the equivalent minimum at Standard Bank is a cost-to-company salary in 2023 was R231,050 (R19,254 a month). Santam, another insurer, has also announced a comparable minimum wage of R15000 per month, noting that its “….remuneration policy has ensured that we remain competitive against market salaries, so as a result of this policy we had a very low number of employees below the living wage. However, as part of our commitment to fair pay, we formally adopted the principle of paying a living wage at minimum.”

It makes good sense for a business to be competitive for all the skills it requires, including how it rewards its senior management and also the Board of Directors who appoint the CEO’s and approve their packages. The more competitive the packages on offer, the more selective the company can be in hiring the best and the brightest. And in firing. Paying market related wages and salaries and bonuses, is not an act charity, at least in the private sector. They must be earned and continuously justified. Though proving the point to those who have never had to meet a payroll, or survive a performance review, and who may not be especially well rewarded, despite their superior intelligence, may be very difficult. Think of convincing envious academics with tenure.

The notion that there will be some gap or ratio between the rewards of those at the top and the bottom of the ladder acceptable to public opinion, is an economic nonsense that needs to be resisted in the interest of any company with an eye to the bottom line. That is given the very different supply and demand forces, sometimes global (visas permitting) that apply to top managers and entry level employees alike.

South Africa’s problem is not the lack of benefits earned by those employed in the formal sector. It is the absorption rate in SA (employed/ population) a tragic 40.8% and lower for the youngest cohorts. Absorbing the entrants to the labour force is the huge challenge for economic policy. But it will surely not be solved paying those in good jobs ever more, after inflation, as has been the practice. And thinking how wonderful it all is to do so.

There are many potential workers who might accept the minimum wage –that is not offered to them or accept even less if allowed to do so. These regulated minimums however exceed the contribution they are thought likely to make to potential employers. Because many potential workers are just poorly equipped by training or education to do so. Yet others, classified as unemployed, might find the minimum wage below their reservation wage. That is below the wage that makes it sensible for them to go to work, that will not exactly be fun, and possibly expensive to get to. That is given benefits in kind, perhaps occasional work, perhaps only a bare subsistence, provided for by an extended family.

Such potential workers are not unemployed, they are just not working – for their own good And foreign workers, with a lower reservation wage, in unknown numbers, take up the employment opportunities.