Money matters

[Mud Dog]

(From Moneyweb Today -Ingé Lamprecht)

Nine things to know about tax-free savings

JOHANNESBURG – Over the past six months, Moneyweb has published a number of articles about National Treasury’s proposal to introduce tax-free savings accounts from March 1 next year.

Each time we have been flooded with e-mails asking for more information. This column gives an overview of these accounts and tries to answer a couple of these questions. The answers draw from prior discussion documents, the Taxation Laws Amendment Bill and engagements with Treasury representatives. Bear in mind that the draft regulations still have to be signed into law (this is expected to happen late this year) and that there may still be a few tweaks to the proposals before it is officially introduced.

1) What is a tax-free savings account?

This is a generic type of savings account that investors will be able to open from March 1 next year. Individuals will be allowed to hold a variety of underlying investments in these accounts. All proceeds on the investments through these accounts will be tax-free in the hands of the individual. This includes dividends, capital gains or interest.

Government hopes that this incentive will encourage consumers to save (in addition to their retirement savings). Many South Africans only save through a pension fund and often have to access these funds in the event of an emergency. National Treasury believes the tax-free savings account will reduce South Africans’ financial vulnerability.

Investors would be allowed to open multiple tax-free savings accounts annually with different underlying investments. However, investors would only be permitted to contribute up to a maximum of R30 000 per annum to these accounts (in total). The lifetime contribution limit will be capped at R500 000.

2) Who will be allowed to offer these accounts?

Several financial services providers will be permitted to offer these accounts. According to the draft explanatory memorandum on the Taxation Laws Amendment Bill, these institutions include “JSE authorised users, banks, long term insurers, collective investment scheme companies [unit trust companies], linked investment services providers and national government”.

3) What underlying investments will qualify?

Most unit trusts, bank savings accounts, fixed deposits, retail savings bonds and certain exchange-traded funds (ETFs) will be eligible for inclusion. Direct share purchases will not be allowed.

Investors would however be able to get equity exposure by investing in an equity-only unit trust in a tax-free savings account for example.

Financial services providers that already offer qualifying underlying products would not have to create a new product. They would be able to offer their existing products in a new “wrapper” – the tax-free savings account.

Regulations regarding the exact products that will be eligible for inclusion will likely be published later this year.

4) What happens to the current interest rate exemption?

While the initial proposal was for the interest rate exemption to be abolished, it has since been decided to keep this exemption in place. However, the current exemption of R23 800 for individuals below 65 and R34 500 for individuals above 65 will not be adjusted for inflation anymore and will therefore erode over time. This exemption will still be applicable to interest earned on deposits outside the tax-free savings account.

Any interest earned on deposits and investments within a tax-free savings account will be completely tax-free.

5) Will my existing unit trust investments automatically qualify as tax-free investments?

No. If you would like your current investments to qualify (and if they do indeed qualify), you would have to open a tax-free savings account with your financial services provider and transfer funds into the account (even if it has the same underlying investment).

As an example: If you currently have R30 000 invested in a Balanced Fund unit trust at Asset Manager X and would like this investment to be tax-free, you would have to open a tax-free savings account with Asset Manager X and transfer this R30 000 into the underlying investment (the Balanced Fund) in the tax-free savings account.

6) Does the scheme effectively mean that on March 1, 2015 it would be within the proposal for me to place R500 000 into 16 call accounts at R30 000 each and 1 at R20 000?

No. On March 1 next year you would be able to invest R30 000 in one or more of these accounts. The investment will be capped at R30 000 per annum and it will therefore take you around 16 years to reach the lifetime contribution limit of R500 000. In other words you will only be allowed to invest R30 000 again on 1 March 2016.

7) Is my understanding correct that the maximum balance allowable, covering all the relevant accounts, may not exceed R500 000?

No. Your capital contributions over a lifetime may not exceed R500 000. All interest, dividends and capital gains in excess of R500 000 may stay in these accounts to accrue even more interest and dividends.

8) What happens if I contribute more than the R30 000 annual limit?

According to the memorandum, the South African Revenue Service (Sars) will levy a penalty of 40% on the amount in excess of R30 000 in any year. This will also apply to contributions in excess of the lifetime contribution cap.

9) May I withdraw my money from these accounts at any time?

Yes. Investors will be allowed to withdraw money from these accounts as and when they see fit. However, in order to prevent withdrawals for impulse or unnecessary purchases amounts returned to the tax-free savings account will be subject to the annual contribution limit.

For example: If an individual invests R30 000 in one of these accounts on March 1 2015 and decides to withdraw R15 000 after six months, she has already reached the annual contribution limit for the year

(March 1, 2015 to February 29, 2016) and would only be able to “replace” the R15 000 in the next year (from March 1 2016 to February 28, 2017). If she decides to do so, she will have R15 000 of her annual cap “left” to contribute during that year (March 1, 2016 to February 28, 2017).

[Mud Dog]

Beware the apps you download

Sasha Planting

Users of smartphones beware; the applications you download could compromise the security on your phone. And this includes banking applications.

IT security experts have been warning for months that weaknesses in the applications people download, coupled with basic human error could result in the installation of spyware or malware on smartphones.

This could allow hackers to gain access to your contact list, phone calls, GPS location, and bank information, without you realising it.

In Russia security firm Group-IB recently warned that more than 541 000 smartphones running on Android in Russia, Europe and the US are infected with malware which grants the perpetrators full access to people’s mobile devices, according to a report on RT.com.

Another report, this time from the US says that many mobile banking apps, including those of major financial institutions, contain configuration and design weaknesses that leave them with weakened security.

Experts from security firm Praetorian tested 275 Apple iOS- and Android-based mobile banking apps from 50 major financial institutions, 50 large regional banks, and 50 large U.S. credit unions. Overall, they found that eight out of ten apps were improperly configured and not built using best practice software development, according to this report on DarkReading.com.

Among the big-name banks whose mobile apps the security firm tested were Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, Capital One Financial, and Suntrust Banks. Praetorian did not disclose how each bank's apps fared in the tests.

The security weaknesses identified in the mobile banking apps are not pure software vulnerabilities, says Nathan Sportsman, founder and CEO of Praetorian. "These aren't business-logic or application-specific issues. They are weaknesses across the mobile apps - things developers should be doing but are not,” he says.

Stirring the pot a little further, just last week a research team from IBM uncovered a vulnerability that will affect apps built on a popular platform for application development called Cordova, according to a report on SecurityIntelligence.com.

Up to 10% of the applications built on this platform are banking apps, the researchers found. While a patch has been released the point is that millions of people using apps built on this platform are at risk of having sensitive information, such as their login details, stolen the report says.

A scary fact is that 95% of successful attacks or security incidents are caused by human error, according to IBM’s Cyber Security Intelligence Index. As a result hackers continue to aggressively seek out such vulnerabilities to exploit.

These warnings come at time when mobile banking is growing in South Africa. All of the major banks offer mobile banking solutions, and while mobile banking isn’t mainstream yet, it is increasingly popular.

“What smartphone users need to understand is that all operating systems are vulnerable,” says Vodacom’s head of mobile commerce, Herman Singh, who was speaking in his personal capacity. “It’s the nature of the space. Operating systems are by design complex pieces of code. The process is complicated further because apps are written to go into an app store and are then downloaded onto an operating system.”

At each step – application development, the app store, the operating system – there is the potential for vulnerabilities to be exploited.

At the application level, apps can be deliberately infected, or become vulnerable because the developers have overlooked something.

“You have to consider who is writing the app, and who is vetting it before you just download it onto your phone,” Singh says.

At the application store level, not all app stores were created equal.

“The Apple screening process is the most rigorous. All Apple apps are very carefully tested before they are allowed into the store for download. None of the other app stores are as thorough,” he says.

The best-known app stores (digital distribution centres for application software) include Apple, Blackberry and Google Play. But because the Android operating system (launched by Google) is so ubiquitous there are over 30 different app stores flogging their wares for Android devices.

This is because the Android operating system is open and allows for a high degree of customisation. “This introduces vulnerability,” says Singh.

“The Apple operating system on the other hand is tightly coupled to iTunes and the Apple apps. The company has kept proprietary control over its system.”

First National Bank’s heading of bank apps, Giuseppe Virgillito agrees that there are potential vulnerabilities around smartphones and the apps one downloads – just as there are with laptops and PCs.

“We haven’t seen any problems [with the banking apps in South Africa]. But it is possible; particularly when it comes to those apps developed using Android. It is open source software after all.”

While the banks are taking steps to ensure their own applications are robust, he suggests various steps that consumers can take to protect themselves:

Always be on guard against cyber-attack. Just like with laptops, logging onto an unsecured Wi-Fi connection isn’t very sensible, especially if you’re going to be working with sensitive information.

Be careful what content you download and what sites you access from your device.

Don’t download apps from third party sites – stick to Apple, Google Play or the device manufacturer – Samsung’s app store for instance.

Make sure you always have an up-to-date version of the operating system on your phone. The same goes for the banking app.

Don’t jailbreak your device. This allows access to the operating system’s file system and manager, allowing the download of applications that are not approved by Apple, Google or the handset manufacturer.

[Mud Dog]

The horse has already bolted' - debt management firm

Hanna Barry

JOHANNESBURG –The severity of the unsecured lending crisis experienced by African Bank (Abil) could have been mitigated by the introduction of amendments to the National Credit Act (NCA) several years ago, according to Intelligent Debt Management (IDM) Group CEO, Ian Wason.

Wason, whose group owns the well-known debt restructuring company DebtBusters, says the Department of Trade and Industry (DTI) has waited so long to introduce these amendments to the NCA, that the consumer debt crisis in South Africa is “far worse than it could have been”. “We have been warning on the lending of some unsecured credit providers for a long time. I do not think that African Bank is the only unsecured lender that has found itself in this position, but it is the first and definitely the biggest,” Wason tells Moneyweb.

The National Credit Regulator (NCR) announced draft credit amendments to the NCA just one day before Abil issued a trading update that would change its fortunes forever. Abil, which on August 10 was placed under curatorship by the South African Reserve Bank (Sarb), has been widely criticised for lending recklessly.

In February last year the NCR referred Abil to the National Consumer Tribunal, proposing the lender be fined R300 million for precisely this reason. African Bank blamed a handful of unscrupulous staff members and was eventually made to pay R20 million.

Founder of The Debt Counselling Industry Portal, Deborah Solomon this week described the fine as a slap on the wrist, criticising the regulator for failing to investigate all Abil’s 630 branches. She said the NCR had repeatedly ignored complaints of reckless lending submitted to it by debt counselors.

The NCR said it would “revert in due course” on the Abil matter.

Affordability assessments positive

Draft amendments to the NCA include proposals around affordability assessments, stipulating that lenders request three months of pay slips and three months bank statements (or similar credible income and expense verification) before granting a loan. Credit providers are also required to calculate discretionary income, as well as all existing debts and maintenance obligations, in order to make a call on whether the consumer can afford a loan.

“Accounting for all credit commitments and allowing for the cost of living will result in better quality credit being underwritten,” Neil Grobbelaar, CEO of credit provider Real People Grobbelaar tells Moneyweb. Real People exited the unsecured lending space in recent years in favour of “responsible finance”, which entails providing loans for housing, education and small business finance.

“Unsecured credit has already grown from R40 billion to R172 billion in the space of a few years,” Wason notes, saying the changes are positive but the “horse has already bolted”. He does not think the requirements go far enough on the percentage requirements for consumers’ expenses, describing them as “unrealistically low”.

“When these affordability assessments come into place, we are going to see a dramatic tightening of credit, which is going to push millions of South African consumers into arrears on their existing debt, as they are currently borrowing from Peter to pay Paul,” Wason adds.

The table below reflects proposed ‘Necessary Expense Norms’.

Screen+Shot+2014-08-12+at+10.39.54+PM.jpg (92.48 KiB) Viewed 5063 times

*If you earned R50 000 a month, the credit provider cannot accept monthly expenses less than R3 375 + R2 050, or R5 425 (R2 050 is 8.2% of R25 000, which is the difference between the minimum monthly gross income and maximum gross income).

Hennie Ferreira, CEO of MicroFinance South Africa (MFSA) says affordability must be considered within a wider context of the potential that circumstances change through, for example, retrenchments or strikes. “A major concern remains clients who do not disclose or understand their situation and will play the system,” he says.

With typical impairment charges on performing loans at around 15%, according to Grobbelaar, the cost of unsecured credit could be reduced by between 15% and 20% a year per customer if there were fewer defaults, since those customers who repay loans ultimately cover the costs of those who don’t.

Proposals by the NCR to ensure that credit providers impose “appropriate qualification requirements” on employees may go some way to curbing systems failures, ensuring that both lenders and borrowers act responsibly.

Credit information under threat?

Grobbelaar expresses concerns, however, over proposals to limit the periods for which credit bureaus can retain different kinds of negative information on a consumer’s credit report. For instance, information relating to enforcement actions taken by credit providers against consumers and adverse consumer behaviour might only be allowed to reflect on a consumer’s credit report for a year. Liquidations would be kept on a consumer’s credit report for just five years, the amendments propose.

“The moment you try to remove data used by credit providers in their score cards, they become less predictive of risk. The more conservative lenders will then assume higher levels of defaults, which results in a higher cost of credit for consumers,” Grobbelaar argues. “The less conservative lenders might take more risk and misprice that risk, which could prove damaging to the credit provider,” he adds. Grobbelaar says while consumers should not be punished indefinitely for past mistakes, removing adverse information remains fraught with risk.

Ferreira cautions that clients can often misunderstand the removal of adverse credit data, which breeds a culture where people believe that ultimately their credit record will be cleared. “The more complete the data, the better the quality of credit decisions and ultimately the more appropriate pricing and offerings to consumers,” he notes.

[ChrisF]

Andy there are some articles in the papers now BLAMING the National Credit Beuro for the ABIL crash.


Varies audits DID highlight issues with ABIL's business practices, and these were NOTED. But NO steps were taken against ABIL ....



no use having the right rules in place, AND audit processes, when the results of the audit is blatantly ignored !!

[Mud Dog]

No, I think the responsibility lies with the ABIL management (or mismanagement). I don't think they did due diligence either when formulating internal lending policy, or when issuing individual unsecured loans. Either way, it's ridiculous to now go point a finger at the national credit regulator - they were reckless. Why aren't the other banking institutions then not in the same predicament? .... they were obviously more prudent in their lending policy.

[ChrisF]

Andy YESm the buck stops with the Abil bosses (or were they in-Abil)


The DA is now pointing to the 2012 investigation into Abil, and other banks, actions - http://africanbank.investoreports.com/p ... regulator/" onclick="window.open(this.href);return false;

Then they refer to the 2013 documents talking about fining some Abil branches, but these were just refered to another department and NOTHING was DONE - http://africanbank.investoreports.com/s ... regulator/" onclick="window.open(this.href);return false;


The DA is now stating that the NCR failed its mandate and dit not protect the public and the share holders, thus did not fulfil their mandate - http://article.wn.com/view/2014/08/12/A ... monitoring_/" onclick="window.open(this.href);return false;


will be interesting to see how this one plays out .... IF anything does happen to the NCR expect a nice long ripple going through the system, and getting loans will be a LOT more strict (for a while) ....

[Mud Dog]

Prepaid electricity: Pay R100, get R90

Antoinette Slabbert

Moneyweb has uncovered an apparent widespread practice where electricity resellers illegally overcharge domestic consumers for electricity. This typically affects end-users in sectional title flats and townhouses.

After an investigation Moneyweb can reveal that a Pretoria reseller, MeinRoux (Pty) Ltd., trading as Prepaid Electric, has been unlawfully inflating electricity tariffs and pocketing R10 for every R100 voucher sold, in contravention of the Electricity Act and municipal by-laws.

Prepaid Electric chose not to respond to Moneyweb when offered an opportunity to respond to these allegations.

City of Tshwane spokesperson Selby Bokaba says the practice is widespread among resellers and is why Nersa and organised local government through Salga are proposing a regulatory framework to regulate the industry. “Many customers are not aware of their consumer rights”, he says.

Moneyweb earlier reported on the practices (How middle men pad your municipal electricity bill – expert) and Nersa’s public hearings on the subject (Rogue electricity resellers should be regulated – Sapoa).

Bokaba says electricity by-laws stipulate the customer buying electricity from a reseller should not be worse off than when buying directly from the municipality.

Applying unapproved tariffs is also a contravention of the Electricity Act. The national energy regulator (Nersa) is the only body authorised to approve electricity tariffs.

Following numerous complaints on social media about the cost of domestic prepaid electricity on social media Moneyweb investigated.

We submitted Prepaid Electric’s tariffs as stated on its website to the City of Tshwane. See the tariffs applied from July 1 2013 to June 30 2014 here. The new tariffs for 2014/15 are not on the website.

The reseller applied a sliding scale, also known as an inclining block tariff, to all its Tshwane prepaid customers. This means that end-users consuming more than 650kWh were charged R1.642 per unit. (1 Unit = 1kWh).

It says on the website: “Eskom implemented the sliding scale pricing system on 01 July 2011, to encourage a lower usage of electricity - in other words, the more electricity you use, the more expensive it becomes.”

According to Bokaba: “The (domestic) resellers tariffs for both prepaid and post-paid in Tshwane licensed area is fixed at 137.78 c/kWh and there is no inclining block(IBT) tariffs applicable to all the customers being supplied by or through resellers.”

Bokaba quoted the current tariffs, applicable from July 1 this year to June 30 2015. Moneyweb has established that the same principles applied in the previous financial year and end-users were all supposed to pay R1.2835 per kWh.

All end-users, except those consuming 100kWh or less were however subjected to higher tariffs by Prepaid Electric.

To add insult to injury Prepaid Electric states that in the case of sub-meters it needs extra revenue: “Take note, because the municipal system does not cater for prepaid solutions in sub-letting situations, the service is provided by private institutions - therefore the use of private software. The access to this software is made available at a reimbursement of 10% of electricity purchases and has been approved by Eskom (eg. R100 voucher will provide electricity to the value of R90).”

This, Bokaba says, is a widespread but unlawful practice among resellers. He says provision has already been made for the reseller’s costs in the approved tariffs (2014/15=120c/kWh). “The tariffs that the City submitted to the regulator (NERSA) for approval included all reasonable costs that the reseller would incur to service the customer”.

The situation varies from one municipality to another and to be able to verify whether they are being over-charged, consumers will have to establish what the local by-laws and tariff permit. The principle that consumers should not be worse off than when buying directly from the municipality, however applies countrywide.

Advocate Werner Zybrands, municipal consultant, says end-users who have been over-charged should lay complaints at the municipality and Nersa.

He says Nersa should act and order the reseller to credit clients who have been over-charged. If the reseller doesn’t comply, Nersa could get a court order preventing the reseller from selling electricity at all.

Zybrands says a wider investigation is needed into the activities of resellers. They typically also manage other municipal services on behalf of body corporates of sectional title complexes and add a layer of fat that from the face of it may be substantial.

Municipal customers are increasingly battling to pay their municipal bills. Anger about this is frequently directed at municipalities without taking into account the role of private companies, he says.

Moneyweb inivited Wayne Dennison, director of Meinroux last week to respond to the municipality’s statements. He initially set up an appointment with Moneyweb through his personal assistant for Monday morning, but on Sunday night she informed Moneyweb that Dennison decided against the interview. He did not respond to further invitations by Moneyweb to respond.

Resellers are middlemen that typically manage the electricity metering and billing of residential, commercial and industrial on behalf of landlords and body corporates. The licensed electricity distributor, be it the municipality, Eskom or in a few cases private distributors, bring the supply to one point on the property and issues one bill. From that point the developer distributes the electricity to individual units that have to be billed according to their consumption. The reseller is usually responsible for meter reading, billing, collections and paying the bulk bill. There is hardly any transparency for end-users to ensure that this is done in an equitable way.

[Mud Dog]

The moral rot in unsecured lending

Patrick Cairns

Over the last week and a half, African Bank (Abil) has been the target of some of the sharpest criticism that has perhaps ever been levelled against a public company in South Africa. Its decline has been met with fierce comment.

Perhaps any business that fails its shareholders the way that Abil has should expect some measure of outrage. But it seems that there has been an even deeper level of sentiment in the way that Abil has been attacked.

It may well be that this is because there is more to its story than just a business that has made some truly awful decisions. There is a very real moral and ethical problem here too that many people find distasteful.

Unsecured lending in South Africa has always had its detractors. Since 1992 when an exemption to the Usury Act was first granted to allow microlenders to operate legally, there have been people who are uncomfortable with the practice.

Quite simply, the whole thing is too easily corruptible. It doesn't take much to argue that, ultimately, the business models practiced by microlenders in South Africa are exploitative, degrading and profoundly negative in their impact on the economy.

This is a sentiment that is not limited only to lenders like Abil either. The unsecured lending industry also feeds another that is perhaps even more morally suspicious – one that is most prominently represented by Cambist.

Here is a company that promises South Africans incredible returns of 19.5% per year. How do they do that? By facilitating the sale of debt of unfortunate individuals who have failed to repay unsecured loans and have suffered the indignity of having garnishee orders granted against them.

Essentially, these are court orders that allow creditors to attach a portion of someone's salary for the repayment of a debt. The employer is obliged to pay the creditor directly to ensure that the funds are received.

So anyone with money on the Cambist platform is effectively collecting on the misfortunes of the poor. They are earning their 19.5% from individuals who are going home every week or every month with only a portion of the money they have worked for.

There is nothing economically uplifting about this. It is only making poor people even poorer.

It's not enough to argue that such people made their own bad decisions and shouldn't have taken on debt that they couldn't repay. Because the whole system is geared against them from the start.

By its own admission, Abil has not been strict enough in its lending criteria. It has lent too much money to people who had little hope of ever paying it back. What reason would it have for doing that other than greed? Why else would it push more and more credit onto a population that everybody knew was already struggling under a huge debt burden?

And there is a clear link between this reckless lending and what Cambist is doing, because the more risk lenders take in their writing of loans, the more likely borrowers are to default. And with garnishee orders being granted with far too much alacrity, that means more business on the Cambist and other similar platforms.

It may be stretching it to say that the likes of Abil deliberately write poor loans to create a market for Cambist. But whichever way you spin it, it is an appalling exploitation of the poor.

It's made even more unpalatable when you consider the way that Cambist markets itself. It promotes its business as something that will make its users rich.

A recent twitter post from Cambist reads: “They say it’s better to cry in an expensive car than on a bicycle… what do you think?”

Maybe I am naïve. Maybe I think too much of human nature. But what solace is there an expensive car bought with the 19.5% per annum earned off someone who can hardly afford a bicycle?

This sort of thing only highlights the ethical failure in the entire microlending cycle. It is not, and has never been, about uplifting the poor. It has been about how much money can be made off them.

As South Africans, we need to ask ourselves whether a business like Cambist belongs in a civilised, rights-based society? Can we be proud of a country whether the exploitation of the poor is sold as a means to buy yourself a nice car?

Cambist will argue that it is not doing anything illegal. It will argue that it is only facilitating the transfer of assets between willing buyers and willing sellers. The assets in question, it will say, are debt contracts. Isn't that what is traded on the bond market every day?

But that ignores what we are actually dealing with, because behind those debt contracts are human lives. There are people trying to make an honest living, feed their families and improve their lot in the world.

And we will never better our society if we continue to callously trade on their aspirations.

[Mud Dog]

Losses prompt Standard Bank to rethink vehicle finance

Hanna Barry

JOHANNESBURG – Standard Bank says it is relooking its vehicle finance model after a sharp increase in credit impairments drove a R29 million loss in the installment sale and finance leases arm of Africa’s largest lender.

In an interview with Moneyweb after the release of its interim results to June 30, joint chief executive Ben Kruger admitted that Standard Bank had made a mistake by going after high-yielding assets in the vehicle finance market. “If you’re more expensive you end up with negative selection and higher risk customers because people that end up taking your offering don’t have as many choices, so it was not a clever thing,” Kruger said.

Kruger said Standard Bank was in a weak competitive position compared to larger players like WesBank in that it didn’t have agents on dealer floors nor did it have joint venture agreements with any of the original equipment manufacturers (OEM). “Our business model is somewhat flawed in the personal market, we are looking at that,” he said.

He said that the Satinsky Group’s R699-car financing scheme had no connection to the poor performance, which was not a terminal problem and would see a turnaround in the second half of the year. Standard Bank has the lowest exposure of three banks that financed cars bought through Satinsky dealerships.

The bank has a R468 million exposure, having financed 3 600 customers. This compares with Absa’s R700 million exposure to 6 511 Satinsky deals and Nedbank Motor Finance Corporation’s (MFC) R1.6 billion exposure to 14 000 deals.

All three banks are respondents in the current class action that PE-based attorney Duncan Heuer is bringing against Satinsky and the banks that financed its cars. Kruger noted that Standard Bank not yet been cited in any of the transactions submitted as part of the class action.

Unsecured lending moderates

In South Africa, Standard Bank grew mortgage loans by just 2.5% to around R300 billion from the prior period. Standard Bank CFO, Simon Ridley, said this was a result of “holding the line” on pricing in preparation for Basel III regulation, which will test banks’ capital adequacy.

Growth in ‘unsecured inclusive banking’ in South Africa was down 31% to R2 billion on the prior period, having fallen from a high of R5 billion two years ago. The credit loss ratio improved from 7.36% to 5.8%. Ridley likened this segment to the African Bank book and Ridley said risk appetite continued to decrease in that part of the business. ‘Other’ personal unsecured lending, which is lending into the middle market, grew 19% to R51 billion and Ridley said it continued to perform “well within pricing and credit parameters”.

Card impairment charges in the South African business grew 43% to R642 million from the prior period. Kruger said the business was still profitable but the bank would “keep watching it” and it could see a risk pullback. Headline earnings in the group’s card business were up 5%, limited by the increased costs of credit card fraud.

“The economic environment remains challenging, particularly in South Africa, with continuing pressure on credit impairments,” Kruger said.

Headline earnings in Personal and Business Banking (PBB) South Africa, which accounts for nearly half the group’s headline earnings, grew 6% to R4 billion. PBB in the rest of Africa recorded headline earnings of R53 million from a loss of R201 million in the first half of 2013, supported by “broad-based improvements” across most of its Africa operations, Standard Bank said.

The group’s headline earnings from continuing operations grew 12% to R9.3 billion, growing 2% to R8.3 billion when accounting for the R854 million write-down relating to exposure to suspected metal financing fraud in China.

[Mud Dog]

Which medical expenses are tax deductible?

Ingé Lamprecht

JOHANNESBURG - The current tax filing season, which covers the 2014 tax year, marks the last time individuals will be able to claim a tax deduction for qualifying medical expenses.

From next year, this deduction will be replaced with a medical tax credit, similar to the one already applicable to medical aid contributions for taxpayers below the age of 65.

Over the last few years tax deductions for medical aid contributions and expenses have gradually been replaced with a credit system. While a deduction lowers a person’s taxable income, a credit (rebate) reduces the tax liability.

Somaya Khaki, project director for Tax Suite at the South African Institute of Chartered Accountants (Saica), explains that in the current filing season, taxpayers over the age of 65 will be able to claim a full deduction for all medical expenses paid in the 2014 tax year (March 1, 2013 to February 28, 2014).

Taxpayers under 65 with no disability or disabled dependent will be allowed to deduct only part of the excess medical expenses based on a formula in the Income Tax Act, she says.

Where the taxpayer is under 65 with a disability or a disabled dependent, qualifying medical expenses will be fully deductible.

But what types of medical expenses are allowed?

Khaki explains that taxpayers may claim out-of-pocket expenses for amounts actually paid, but not recovered from their medical scheme.

Examples of qualifying out-of-pocket expenses include services and medicine supplied by registered medical practitioners, as well as specialists and homeopaths. Expenses for hospitalisation in a registered hospital or nursing clinic and home nursing by a registered nurse, midwife or nursing assistant are also allowed, she says.

The deduction also covers prescribed medicines from a pharmacist and medical expenses incurred and paid outside South Africa, but does not include over-the-counter medication, she says.

Taxpayers have to be able to provide proof of payment for these expenses during the tax year. The deduction won’t be allowed if it was merely incurred and not also paid during the year.

Moreover, it is fairly common for the South African Revenue Service (Sars) to request supporting documents for medical expenses during its verification process.

Khaki says taxpayers will need the income tax certificate from their medical scheme for the period March 1, 2013 to February 28, 2014 as well as receipts of qualifying medical expenses paid and not recovered from their medical scheme.

If the taxpayer or one of his dependents has a disability, the taxpayer would also need a completed Confirmation of Diagnosis of Disability form (ITR-DD).

“The form is available on the Sars website and must be completed by a registered medical practitioner. All receipts for expenses incurred in respect of a disabled dependent must be kept for at least five years,” Khaki notes.

[Mud Dog]

Lonmin aims to cut up to 5,700 South Africa jobs - sources

Reuters

Platinum producer Lonmin aims to cut around 5,700 jobs, about 21 percent of its South African workforce, as part of a drive to restore profits after a five-month wage strike this year, sources familiar with the plan said.

The plan would see the closure of four to six of the company's 11 shafts, the two mining industry sources, one in London and the other in Johannesburg, told Reuters.

Lonmin spokeswoman Sue Vey said in response to questions from Reuters that she had "no knowledge" of the plan.

The company, the world's third-largest producer of the precious metal used for emissions-capping catalytic converters in automobiles, said in June that the strike and low prices meant "restructuring of our business has become inevitable".

Job cuts could trigger more labour unrest, including potential strikes by the hardline Association of Mineworkers and Construction Union (AMCU), whose members have downed tools in the past to protest against planned lay-offs.

"There will be six shafts closed and 5,700 jobs will go. That is the plan," the Johannesburg source, who declined to be identified, said. Lonmin has a staff of around 27,000.

The source did not disclose which shafts would go but said Lonmin had decided it "could no longer subsidise the loss-making shafts and had to focus on the profitable ones".

A key reason behind the restructuring is the wage settlement reached in June with AMCU to end the strike, which will see its members get pay increases of up to around 20 percent annually for the next three years.

"The settlement was a short-term solution to get the mines running again. But the only way Lonmin can afford it is to cut marginal shafts," said the source, who added he had been provided with an outline of the plan by a top Lonmin official.

The London-based source said at least four shafts would be closed and the board was putting together a plan that should be announced before the end of the year.

The plan may be Lonmin's best chance at returning to healthy profit margins as it struggles to recover from the strike at a time when platinum prices are depressed.

Lonmin raised $800 million to shore up its balance sheet in 2012 after it was hammered by a violent wildcat strike that killed dozens of people, but analysts say the company would struggle to get more funds from shareholders so soon.

AMCU's 2014 strike, the longest and costliest in South African history, also affected Lonmin's bigger rivals Anglo American Platinum and Impala Platinum.

Amplats has since said it plans to sell or spin off a number of the mines that were shut during the 2014 strike. Implats is expected to update the market on potential restructuring when it reports full-year earnings on Thursday.

[Mud Dog]

So we avoided a recession. Do we care?

Sasha Planting

South Africa’s economy avoided falling into a technical recession by expanding by an annualised 0.6% in the three months through June.

This is no cause for celebration.

The drift towards negative growth is accelerating with four sectors moving into negative growth, compared with two in the first quarter of the year.

Mining and manufacturing reflected their second quarter of negative growth. They were joined in the second quarter by the consumer economy denoted by Stats SA as “wholesale, retail and motor trade; catering and accommodation” which declined by 0.2%; as well as the electricity, gas and water sectors which declined by 0.6% compared with the first quarter.

“Despite the fact that good performance from certain sectors pushed the overall growth rate into the positive, this suggests the negativity has spread, ” says Mike Schüssler.

Positive growth in the second quarter came from construction (+5%q/q), transport, storage and communication (+4% q/q), general government (+2.9%q/q) and finance, real estate and business services (+1.5%q/q).

However, the best of these figures, construction, warrants scrutiny. Within this number private sector construction declined – this includes private homes, shops and offices.

“The decline in buildings completed between the first and the second quarters of 2014 was 16.2% or 50.7% on a seasonal and annualised basis,” says Schüssler. “This is the biggest decline since April 2010 and again shows how fragile South African consumer and business confidence is at present.”

The fact that the construction sector advanced by 5% can be put down to government-led construction such as Medupi, the coal lines and the ports, he adds.

“With furniture sales in decline, car sales in decline and now buildings and the construction of new buildings in particular also in decline, we can see that the durable sector in South Africa is under severe pressure. This certainly means that a lack of long-term confidence has hit the economy hard.”

“This is a remarkably bad number no matter how you spin it,” says Mohammed Nalla, head of strategic research at Nedbank Capital. “Growth in the third and fourth quarters will most likely not be enough to push full year growth ahead of 2%. That is absolutely shocking. Even developed economies are growing at 2% or 3% and they face considerably lower risk.”

This means that South Africa faces the likelihood of achieving growth of less than 2% for the sixth year in a row.

The strikes across the platinum sector and metals industries have cost the economy dearly. While the industries themselves were harmed (witness the 9.4% decline in mining and 2.1% decline in manufacturing) the second round effects are underestimated. “For every person employed another five to ten people are supported. This is the multiplier effect which filters into the broader consumer economy,” he says.

The latest results season on the JSE bears testimony to this. Companies like Shoprite and Massmart revealed disappointing revenue and profitability growth.

Other macro-indicators are also negative. The purchasing managers index, an important indicator of conditions in the business sector has been below the 50-point mark, signaling a contraction, for four straight months.

In June the number of forced liquidations reached 89. “This was the highest number in five years and was followed by a high number – 47 – in July,” says Schüssler.

This is not conducive to attracting foreign direct investment, or to growing the number of jobs in the economy. Government has driven employment in the past five years. The government salary bill, at 14% of GDP is one of the five highest in the world. It accounts for 29% of the total salary bill in the country and 22% of the workforce. “Government cannot employ more people unless public sector workers take a paycut. We have to grow private sector jobs,” he says.

One hope is that growth in the global economy, combined with a weaker currency will help to boost exports. “If the global economy builds momentum we should get trickle-down. But that is not a strategy,” says Nalla. “That is simply rising with the rising tide. We need a plan to take this economy to the next level.

“We need foreign direct investment, but unfortunately investors are looking for the growth story – and that is not here.

“Blaming labour or under-investment by the private sector or monetary policy, is not the solution,” he says. “We need to step back from issues and look at the problem from 50 000 feet.”

But no-one is listening.

Judging from these latest numbers, the state, in its desperation to drive growth, is crowding out the private sector. That cannot lead to strong growth in the long run.

[Mud Dog]

Ramaphosa says South Africa seeks policy clarity for business

Amogelang Mbatha, Bloomberg

South African Deputy President Cyril Ramaphosa said the government will seek to provide more clarity to businesses about its policies in order to bolster confidence and spur investment.

“We recognize that a major reason for the low level of investment is weak business confidence,” Ramaphosa told delegates at a central bank leadership conference in Muldersdrift, west of Johannesburg. “This is driven, at least in part, by perceptions of policy uncertainty.”

Ramaphosa, 61, a frontrunner to become the nation’s next president, underscored the government’s commitment to its 20- year economic plan that seeks to boost growth to 5 percent and slash a 26 percent jobless rate. Africa’s second-biggest economy is set to expand this year at its slowest pace since the 2009 recession as a series of strikes in mining and manufacturing, coupled with energy shortages, disrupted output.

“Government is acutely aware of the challenges in our economy,” Ramaphosa said. “While we are much affected by global conditions, the challenges in our economy are caused in great measure by domestic factors.”

President Jacob Zuma plans to hold a business summit soon, which will give the government the opportunity to explain its policies, he said.

Ramaphosa, who was elected deputy president of the ruling African National Congress in 2012, is the nation’s second- richest black businessman, accumulating his wealth through stakes in companies such as Standard Bank Group Ltd., Africa’s largest lender.

Ramaphosa reiterated the independence of the South African Reserve Bank to execute monetary policy without political interference. The government is committed to a stable exchange rate, while raising the level of foreign-currency reserves in a prudent manner, he said.

The rand fell 0.3 percent against the dollar to 10.6451 as of 6 p.m. in Johannesburg, extending its decline this year to 1.4 percent.

©2014 Bloomberg News

[Mud Dog]

Ford, IBM win dismissal of 12-year lawsuit over apartheid abuses

Reuters

A Manhattan federal judge has dismissed a 12-year-old lawsuit accusing Ford MotorCo and IBM Corp of encouraging human rights abuses in apartheid-era South Africa, reluctantly concluding that the case does not belong in U.S. courts.

U.S. District Judge Shira Scheindlin on Thursday said the black South Africans who brought the case did not show "relevant conduct" by Ford and IBM within the United States to justify holding the companies liable.

The plaintiffs had accused Ford, IBM and other companies of having between the 1970s and early 1990s aided South Africa's former apartheid government in abuses such as killings and torture, by having made military vehicles and computers for government security forces.

"That these plaintiffs are left without relief in an American court is regrettable," Scheindlin wrote. "But I am bound to follow [legal precedent], no matter what my personal view of the law may be."

The case had been brought under the Alien Tort Statute, a 1789 law that lets non-U.S. citizens pursue some cases in U.S. courts over alleged violations of international law.

In April 2013, the U.S. Supreme Court said that law was presumed to cover only violations in the United States, or violations elsewhere that "touch and concern" U.S. territory "with sufficient force."

Four months later, the federal appeals court in Manhattan applied that holding, and said the Ford and IBM cases should be dismissed altogether.

In April, Scheindlin nonetheless gave the plaintiffs one more chance, to meet the new standards imposed by those higher courts.

But in Thursday's decision, she said the bar proved too high, and that any alleged international law violations were by Ford's and IBM's South African units, and occurred abroad.

"It has been 12 years. We're really disappointed, devastated by the decision," said Diane Sammons, a partner at Nagel Rice in Roseland, New Jersey, who represents some plaintiffs.

"The end result of the ruling is that corporations can act abroad with impunity, even if they're totally controlling the activities of their foreign subsidiaries," she added. "I don't think the Supreme Court's decision was that narrowly defined."

She said the plaintiffs had not decided whether to appeal.

Jonathan Hacker, an O'Melveny & Myers partner who represents Ford, did not immediately respond to requests for comment. Keith Hummel, a Cravath, Swaine & Moore partner who represents IBM, did not immediately respond to similar requests.

Germany's Daimler AG and Rheinmetall AG were dismissed as defendants in December.

Apartheid ended in 1994 when South Africa held its first all-race elections, bringing Nelson Mandela and the African National Congress to power.

IBM's full name is International Business Machines Corp.

The case is In re: South African Apartheid Litigation, U.S. District Court, Southern District of New York, No. 02-md-01499.

[Mud Dog]

Reserve Bank investigating Abil
(Hanna Barry)

The South African Reserve Bank (Sarb) has instituted a formal investigation into the affairs of failed unsecured lender, African Bank (Abil), it said on Tuesday.

The investigation is being done in terms of Section 69 (A) of the Banks Act, which allows the Registrar of Banks to investigate a bank that has been placed under curatorship. In a statement on its website, the Sarb said it recognised the importance “of investigating the circumstances that gave rise to African Bank being placed under curatorship”.

The Sarb placed Abil under curatorship on August 10, days after it issued a trading update that sent its share price into free fall on news that it needed to raise at least R8.5 billion capital, CEO Leon Kirkinis had resigned and the lender expected a headline loss of at least R6.4 billion for the year to September 30.

The Registrar of Banks, Rene van Wyk, has appointed Advocate John Myburgh, chairman of the Ombudsman for Banking Services, as Commissioner of the investigation. Brian Abrahams and Senior Counsel Vincent Maleka will assist Myburgh, who is also chairman of the Ombudsman for Short-term Insurance and a former High Court judge.

The investigation will probe the business, trade, dealings, affairs, assets and liabilities of African Bank, according to the Sarb. It will be conducted in terms of sections 4 and 5 of the Inspection of Financial Institutions Act (IFIA).

These sections of the IFIA give investigators significant powers, including the right to search business premises at any time and without prior notice; examine any person who is believed to have information pertaining to the institution; open any strong room or safe that is believed to house sensitive documents; and retain seized documents for as long as is required.

Myburgh has five months to complete the investigation, starting from his appointment on August 30. He must submit a written report within 30 days after the investigation has been completed.

A statement from the Sarb says the report should indicate, among other things, whether or not “any business of African Bank was conducted recklessly, negligently or with the intent to defraud depositors, other creditors or any other person for any other fraudulent purpose”.

The report should also reveal whether or not “questionable management practices and material non-disclosures, with the intent to defraud depositors or other creditors” were involved in Abil’s business.

“Should this appear to be the case, the Commissioner should indicate whether any person party to such questionable practices has been identified,” the Sarb said.

Last month, independent debt counselor Deborah Solomon issued a statement saying that the National Credit Regulator (NCR) had “seriously erred” in not launching a full-scale investigation into the lending practices of African Bank’s 630 branches after it fined a KwaZulu-Natal branch R20 million late last year for contravening provisions of the National Credit Act (NCA).

“I’ve never seen a single African Bank affordability assessment filled out correctly and I challenge anyone to send me a correctly completed application form as per the NCA,” she told Moneyweb at the time.

[Mud Dog]

Is SA getting a furniture store shake-up?
(Janice Kew and Chris Spillane, Bloomberg)

The business rescue of South African furniture retailer Ellerine Holdings Ltd. may herald the start of a broader industry shakeout as competitors ponder store closures and reconsider how they grant customers credit.

Retailers such as JD Group Ltd. and Lewis Group Ltd. have become over-dependent on credit sales after years of expansion and are now finding it tough to make money as consumers struggle to repay loans, according to Mark Hodgson, an analyst at Avior Capital Markets Ltd. in Cape Town.

“I expect a shake-out with net store closures and brand rationalization,” Hodgson said by phone.

Ellerine, acquired by African Bank Investments Ltd. in 2008, started voluntary rescue proceedings last month after its parent company withdrew funding because of persistent losses. The retailer’s difficulties stemmed from declining sales and rising bad debts in a market where most South Africans can’t afford to pay cash upfront for items such as furniture.

Ellerine isn’t the only one struggling. JD Group, a seller of furniture and provider of unsecured loans, was shored up by parent Steinhoff International Holdings Ltd. in March, while Lewis Group said last month that debtor costs rose 30% in the four months through July.

JD Group’s store numbers have risen 31% since 2009 to 1,223 stores as of December 2013. Lewis’s store estate has increased 19% to 636 outlets in the same period.

‘Serious questions’

“Steinhoff has invested a lot of time and money in JD Group,” Jean Pierre Verster, an analyst at Johannesburg-based 36ONE Asset Management, said by phone. “If it wasn’t for Steinhoff’s support I think there would be serious questions about the continuation of the business.”

The weakness of the economy is weighing on retail sales of household furniture and appliances, which totalled R34.9 billion in 2013. Rising inflation, an unemployment rate exceeding 25% and protracted mining strikes that began in 2012 left almost half of South Africa’s 20.6 million credit-active consumers with impaired records at the end of December, according to South Africa’s National Credit Regulator.

Ellerine, which has more than 1,000 furniture stores under brands including Beares, Furniture City and Geen & Richards, leads the South African market, followed by JD Group, Lewis and Shoprite Holdings Ltd.’s furniture unit with about 368 stores.

JD Group this week said it agreed to sell its lending unit to an international consumer-finance provider, providing a boost for the unprofitable company, which raised about R1 billion through a rights offering earlier this year. The offering was underwritten by Steinhoff, whose stake in the retailer now stands at about 86 percent. JD Group also forecast a loss per share of as much as R8.70 for the fiscal year through June, compared with a R2.76 profit a year ago.

Price cuts?

The retailer may consider cutting prices to boost sales and to ensure “its ability to survive at all,” Verster said.

The subdued consumer climate hasn’t precluded a “high level of interest” in Ellerine’s stores and brands, business rescue practitioner Leslie Matuson said Aug. 20. About 700 people, including credit insurers and suppliers, attended the first creditors meeting. Some Ellerine outlets are expected to close, Verster said.

Shoprite plans to double its number of furniture stores over the next five-to-seven years and would “certainly look to buy some of the Ellerine stores,” Aubrey Karp, the unit’s managing director, said after an Aug. 19 earnings presentation. While a furniture bad-debt provision of 12% “more than adequately covers arrears” of 9%, the Cape Town-based company is keeping a close eye on its debtor book, Karp said.

“Ellerine’s demise has made other furniture retailers think about how they make money,” Verster said. “Some furniture retailers might go for a higher turnover, less margin approach. By saying ‘let’s cut prices a little bit, but let’s sell more.’ But I think the jury is out on that.”

[Mud Dog]

Treading water lightly

Sasha Planting

South Africa and Nigeria may enjoy the prestige and investor interest associated with being Africa’s two largest economies, but size isn’t everything when it comes to competitiveness rankings.

According to the Global Competitiveness Report 2014, launched on Wednesday, South Africa and Nigeria were the only two sub Saharan countries to go backwards in the ranking, which measures country competitiveness across twelve categories.

South Africa declined three places to 56, out of 144 countries, making it the third most competitive BRICS economy after China (28th) and the Russian Federation (53rd). Nigeria fell seven places to 127th.

For South Africa the news was softened by the fact that along with Mauritius (39th) and Rwanda (62nd), it is still one of the three sub-Saharan countries to score in the top half of the world’s most competitive economies.

Of these, Mauritius continues its strong upward trend, climbing six places - somewhat slower than its leap of 17 places in the previous year. Rwanda climbs four places. Other countries, including Namibia, Kenya, Ghana and Ethiopia have improved their standings – albeit off a very low base.

These gains have been made while sub-Saharan economies register some of the best economic growth rates in the world – of close to 5% in 2013. Yet risks remain in the region. For one, although inflation has been coming down from the high rates of the past two years thanks to prudent monetary policy and moderating food prices, rising fiscal deficits — which are most exacerbated in Zambia, Ghana, and Gambia — and a slowdown in emerging markets could dampen growth prospects.

More importantly, more than a decade of consistent high growth has not yet trickled down to all segments of the population. Going forward, the main challenge will be to turn high growth into inclusive growth – something South Africa is keenly aware of.

South Africa has not been as fortunate when it came to the macroeconomic environment, and its ranking, which dropped sharply last year, remains at 89th. Low scores for the diversion of public funds (96th), the perceived wastefulness of government spending (89th), and a more general lack of public trust in politicians (90th) remain worrisome. Security (95th) is another concern and adds cost to doing business.

Job creation in SA is being constrained by higher education and training (86th), labour market inefficiency (113th), rigid hiring and firing practices (143rd), wage inflexibility (139th), and continuing significant tensions in labour-employer relations (144th).

top-african-countries.gif (7.98 KiB) Viewed 4789 times

As usual the country scored well when it comes to the quality of its institutions (36th), including intellectual property protection (22nd), property rights (20th), the efficiency of its legal framework in challenging and settling disputes (9th and 15th, respectively), and its top-notch accountability of private institutions (2nd).

Furthermore, South Africa’s financial market development remains impressive at 7th place.

While South Africa did not necessarily score any worse than last year, it has slid backwards as other countries – notably in South East Asia - have worked harder to improve their competitiveness and ability to attract foreign investment.

Nigeria has its own unique challenges and has fallen down the rankings due to a weakness in public finances (as a result of lower oil exports), continuing institutional frailty and deterioration in national security.

Mozambique, and Angola, Africa’s two fastest growing economies continue to languish in 133rd and 140th position respectively.

The top rankings continue to be dominated by highly advanced Western economies and several Asian tigers. For the sixth consecutive year Switzerland leads the top 10, and again this year Singapore ranks as the second-most competitive economy in the world.

Overall, the rankings at the top have remained rather stable, though it is worth noting the progress made by the United States, which climbs to 3rd place this year, and Japan, which rose three ranks to 6th position.

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What differentiates these economies from the rest is their track record in developing, accessing and utilising available talent, as well as in making investments that boost innovation. Their smart and targeted investments have been possible thanks to a stable regulatory and policy environment enabling a coordinated approach between the public and private sectors.

[Mud Dog]

What property indices and car sales data don't tell you
(Ingé Lamprecht)

JOHANNESBURG – Is the residential property market in fairly good shape while the automotive market is struggling?

At first glance, the most widely cited data tracking the performance of the property market and new vehicle sales seem to suggest that.

According to the FNB House Price Index released earlier this week the average house price for August rose 5.4% year-on-year. This represents the 7th consecutive month of gradual slowing, but the bank points out that while the pace of improvement has reduced, “it should not be confused with a deteriorating market”.

Data from Absa Home Loans note that growth in the average nominal value of houses in middle-segment categories of the residential market varied between 6.5% and 8.5% year-on-year in the first seven months of the year.

At the same time figures released by the Department of Trade and Industry indicate that new vehicle sales declined 1.4% year-on-year to 55 722 vehicles in August. This brings the decline in new vehicle sales in the year to date to 4.3% year-on-year.

A direct comparison of the performance of these two markets is difficult. The data measure different aspects of performance and it is somewhat problematic to try and compile a tool that would allow for an “apples with apples” comparison. Merely focusing on growth numbers could be misleading.

The background

John Loos, household and property strategist at FNB, says new vehicle sales growth materialised earlier after the economic downturn as vehicle affordability did not deteriorate nearly as much as home affordability during the boom years because of the “unlimited” supply. It was easier to import more cars or increase production.

The housing market on the other hand couldn’t keep up with the pace of demand during the good times, house price inflation surged significantly and it hasn’t really corrected downwards in a meaningful way, he notes.

As a result the housing market was worse off in terms of affordability (compared to the vehicle market) which led to a much slower pace of volume recovery in the housing market.

Moreover, for a lot of South Africans a car is a bigger priority than a house, he says.

Public transport is insufficient and where aspirant first time home buyers can’t yet afford a house, they can stay home with their parents or rent for longer, but they will likely need a car, Loos notes.

Therefore the recovery in the housing market has been slower – the first priority was to replace aging vehicles and for newcomers to enter the car market as soon as interest rates came down.

However, the replacement cycle has now largely been complete.

Christie Viljoen, senior economist at NKC Independent Economists, adds that recent strike action has been to the detriment of new vehicle market. In the last year the depreciation of the rand also led to new vehicle price inflation outpacing official inflation numbers. This has negatively affected sales volumes.

The current situation

Loos says in a way the housing market still reflects a weak consumer situation. Volumes and new residential building completions are still relatively low compared to the boom years.

He says the fact that house price growth has remained in single digits over the last couple of years despite extremely low interest rates highlights the financial constraint faced by the household sector.

While some estate agents maintain that the property market is performing well, one should also keep in mind that there are considerably less estate agents operating in the market than during the boom period, he says.

The residential property market is still propped up by very low interest rates.

“Will it maintain its strength if interest rates were to rise by two, three, four percentage points? I doubt it. It will weaken quite substantially,” Loos says.

He says the significant stimulus injected into the world economy and the local economy has supported both markets.

But with the stimulus for the world economy about to be witdrawn, and the stimulus for the local economy gradually being withdrawn one should expect some weakening, Loos says.

Viljoen expects new vehicle sales to continue on its negative growth trajectory for the remainder of the year while rising interest rates will likely also result in a muted situation next year. He also expects average house price growth to remain on current levels for the next few months.

[Mud Dog]

Now why can't the same be done with fuel pricing when neighbouring countries can provide SA produced fuel with a lesser price at the pumps - probably because of all the govt taxes and levies we have here.

DTI to pressure ArcelorMittal and Sasol to lower prices
(Reuters)

South Africa will put pressure on steel producer ArcelorMittal SA and petrochemicals firm Sasol to reduce prices and help cut input costs in the steel, platinum and polymer industries by up to 15%, a government minister said.

The government in Africa's second largest economy is pushing to revitalise industrial capacity by encouraging companies to add value to minerals; a process referred to as "beneficiation" locally; before exporting them.

"We've got to ensure that the mineral inputs are available at a competitive price, a lower price in South Africa than it is available outside of this country," Trade and Industry Minister Rob Davies said in parliament this week.

"If ArcelorMittal were able to reduce current prices by 10% then I think that would amount to a very significant injection into industries using steel product," he said.

A similar 10-15% discount for polymers at Sasol would also benefit downstream manufacturers, he added.

Competition authorities fined the petrochemicals group R543 million in June for excessively pricing its propylene and polypropylene products.

Both are key ingredients in the making plastic buckets and motor car parts. Sasol is appealing the fine.

[Mud Dog]

Opinion

SA needs counter-intuitive leadership
( by Max du Preez)

“Counter-intuitivity” was what made our country’s greatest leaders great: the ability to think beyond the obvious; the vision to recognise that what appears to be a logical solution, could actually exacerbate the problem; and the courage to push for better outcomes. It is the gift of being aware of the unintended consequences of what may appear to be an obvious course of action.

It is not a fanciful, post-modern Western construct. We have some of the best examples of counter-intuitivity right here in Africa.

Like King Moshoeshoe, who was born in 1787 and formulated his own political philosophies before he ever met a European or took notice of European thinking.

King Moshoeshoe

Moshoeshoe was a young chief of a minor Sotho-speaking clan in central South Africa when the Difaqane started: that devastating period of conflict and warfare between 1815 and 1840 in the central and eastern parts of the subcontinent that saw hundreds of thousands of people killed or traumatised. Crops were razed, cattle killed and the famine was so great that some people turned to cannibalism to survive.

When Moshoeshoe led his clan in the trek to his new capital at Thaba Bosiu, his beloved grandfather Peete was caught and eaten by cannibals. His councilors were outraged and demanded the guilty be caught and slaughtered. No, he said, killing them would mean defiling his grandfather’s grave. He caught the guilty parties, performed cleansing rituals on their bodies and incorporated them into his kingdom, where they became productive citizens and allies.

Moshoeshoe followed a very different approach to other leaders of the time, such as Shaka of the Zulu and Mzilikazi of the Matabele whose armies were doing most of the damage.

Moshoeshoe’s own people urged him to use his powerful army to take on all opponents. But he chose an impenetrable flat mountain fortress as the centre of his kingdom from where he would defend rather than attack. At a time of great famine, he accumulated a vast herd of cattle and planted large crops to feed his own people, and then started inviting the starving, the refugees and even his attackers to join his kingdom, regardless of their tribal or ethnic affiliation. So the Basotho nation was formed.

European missionaries

When the first European missionaries reached him in 1833, he controversially embraced them, not as masters or teachers, but as allies, as Basotho themselves, and used them to help deal with the new threat of the Boer settlers and the British colonialists who were beginning to invade his land.

Moshoeshoe was the quintessential counter-intuitive leader. When it was clear to all that he had to build the strongest army in the region and annihilate his enemies, he had his able-bodied men raise cattle and plant maize. When logic dictated that this was a tribal war and enemy tribes had to be wiped out, he invited them to join his kingdom.

If Moshoeshoe had matched the violent actions of the other African, white settler and British colonial leaders of the time, South Africa would not have developed into the beacon of stability and progress it is today.

Nelson Mandela

It was this same talent for counter-intuitive logic that made Nelson Mandela a great leader rather than just a good one.

In one of the most insightful pieces on leadership, South African author and public intellectual Professor Njabulo Ndebele points to this quality in Mandela. “Nelson Mandela’s supreme gift to us is to expose us to the notion of counter-intuitive leadership and its immense possibilities. The characteristic feature of this type of leadership is in the ability of a leader to read a situation whose most observable logic points to a most likely outcome, but then to detect in that very likely outcome not a solution but a compounding of the problem. This assessment then calls for the prescription of an unexpected outcome, which initially may look strikingly improbable. Somehow, it is in the apparent improbability of the unlikely outcome that we can derive principles for its sustainability. A leader then has to sell the unexpected because he has to overcome intuitive doubts and suspicions that will have been expected. In this act of salesmanship is the content that crucially counts.”

It can be argued that it was within Mandela’s grasp to enforce a different kind of settlement with the white government of South Africa and then proceed to punish whites for their role in his and his people’s suffering, in doing so satisfy the desire for retaliation many black South Africans felt. Instead he risked the wrath of his own party’s radicals and many of the former oppressed and embarked on a remarkable charm offensive that not only disarmed white intransigents and ensured the end of right wing militancy, but ensured stability and economic continuity.

Today’s political leadership

Counter-intuitivity is the one quality completely absent in the political leadership in South Africa today. The uncontrolled, cheap populism that has overwhelmed the ANC since Polokwane in December 2007 and the vicious infighting and power struggles inside the party make any such possibility virtually impossible.

We stumble from one crisis to the next and the only constant is that the political elite and their cronies look after themselves well. There is no vision, no thoughtful and courageous leadership.

When Thabo Mbeki took over as president in 1999, he fast-tracked the transformation in the civil service and thousands of white bureaucrats were replaced by black ones in a short time. This was very understandable after five years of democracy and widely supported. But if he had been counter-intuitive, he would have argued that if this process went too fast, it would be to the detriment of the black majority it meant to serve. The skills and experience first had to be transferred and new civil servants properly trained.

Counter-intuitivity for today’s problems?

It has become fashionable among politicians to flirt with full-on or slightly watered down “indigenisation”, state control of the economy and nationalisation. A national minimum wage and a ban on labour brokering are also popular positions. Poverty, unemployment and inequality are still with us, so let’s jump to new solutions.

Sensible and responsible politicians would ask: what are the potential unintended consequences of these proposals? Will the poor and the working class really benefit if mines and banks are nationalised, or would it mainly benefit the present mine owners and the political elite? A minimum wage and a ban on labour brokers would please a lot of people politically, but would it not lead to greater unemployment?

Don’t hold your breath to see any counter-intuitive decision-making while Jacob Zuma and the hotchpotch of communists, traditionalists and constitutionalists in Cabinet are in power.

But perhaps we can again dream of this once he had been replaced by Cyril Ramaphosa, Nkosazana Dlamini-Zuma or Zweli Mkhize. May that happen sooner rather than later.

[Mud Dog]

Problems with Abil side-pocketing
(Patrick Cairns)

CAPE TOWN – On 15 August the Financial Services Board (FSB) announced that unit trust funds which held African Bank (Abil) debt would be able to separate this out of their main portfolios. This process, known as side-pocketing, was intended to provide some protection to investors.

Since the Abil debt could not be traded and was not earning any interest, the FSB allowed asset managers to create separate funds that contained only the Abil paper. Investors would not lose any money, but would now hold units in two funds where before they only held one – both the original fund and the new side-pocketed Abil fund. However, the investment in the side-pocket fund could not be sold.

A total of 50 funds took this option. The list of those that did is available here on the FSB website.

The advantages of doing this were twofold:

Firstly, it meant that anyone who was already invested in the fund could not just exit and leave everyone else with the Abil debt. They would continue to hold their Abil exposure, even if they sold out of the original fund.

And secondly it meant that any new investors into the fund would not be exposed to what is essentially a non-performing asset. Since the Abil paper was separated out, they would only buy units in the newly-constituted fund that was Abil-free.

Not all funds with Abil debt in their portfolios followed this option, however. It tended to be those with larger exposures that took this route.

“The larger the Abil position the more challenging the issue becomes as, even after the write-down, any subsequent outflows can mean that the illiquid Abil holding would become a bigger and bigger portion of the fund,” explains John Kinsley, the MD for unit trusts at Prudential. “Thus, in an extreme scenario the 'last man standing' could be left holding the Abil exposure. To protect against this, and to protect new investors buying into a large Abil exposure, side-pocketing has its merits.”

So in theory, this sounds pretty appealing. It means that new investors would not be prejudiced and old investors couldn't run off and leave others to face the Abil problem.

But unfortunately it wasn't quite that simple. The FSB's announcement came four days after Abil was placed under curatorship and the date set for side-pocketing to take place was 18 August, ten days after any Abil assets were last traded.

In other words, there was a period of a week in which the Abil debt was still “in play”.

Investors who exited these funds during that time would have got out without having to hang onto the Abil portion of their holding. And any investors entering these funds would have become victims of unfortunate timing.

This was brought to Moneyweb's attention by a reader who made a significant investment in a money market fund on 15 August. Even though this investment was made after Abil was placed under curatorship, Abil was part of the fund's portfolio. So when the side-pocketing was implemented on 18 August, this new investment was have been subject to it as well.

It is quite obvious that this is not fair and that side-pocketing in this instance did exactly what it was meant to avoid. A new investor was prejudiced even though he made the investment after the Abil debt was already non-performing.

For the side-pocketing to have the desired effect, it should have happened on the same day as the haircut. That would have been the only way to ensure that only those investors who were in the fund at the time were affected by it.

By waiting a week before allowing side-pocketing, the FSB created this inconsistency. Perhaps this happened because side-pocketing has not happened in South Africa before and the FSB was caught unprepared. But it should be a lesson learnt.

It is not within the FSB's power to implement regulation retroactively, so side-pocketing could not be back-dated. It would also not have been possible to do that anyway, since the amounts invested in funds would have changed in the period between the haircut and the FSB's decision.

Funds will probably argue that side-pocketing was fair to the majority of investors, and that some either benefited unduly or suffered unfortunately could not be helped. They are a small minority in relation to the whole.

However, that is no consolation to the small minority affected. They would have every reason to be extremely displeased.

Kinsley also points out that there are other potential problems with side-pocketing. Prudential did not employ side-pocketing as they believed that their exposure was not large enough.

“Our concerns were primarily administrative,” he says. “You essentially have to run two separate portfolios with increasingly different unit holders, reporting and possible even tax consequences. When liquidity eventually returns to the Abil instruments I am also not sure that side-pocketing will help manage the strong desire to liquidate any better than holding the exposure in the main fund.”

He also suggests that because side-pocketing is unprecedented it may result in consequences that are as yet unforeseen.

“Already, Morningstar has its work cut out trying to determine what the genuine performance of a portfolio is where the election to side-pocket has been made,” Kinsley says. “For the retirement fund industry it could become a major challenge – how does someone exit a fund at retirement when some of the proceeds have to remain invested in the side-pocket. How do you issue the correct tax directive in such an instance?”

[Mud Dog]

Abil assets' IPO planned for February
(Renee Bonorchis, Bloomberg)

African Bank Investments Ltd.’s state-appointed curator is readying the company for a return to Johannesburg’s stock exchange next year, a month after the failed lender sold a book of bad assets to the central bank.

“We need to submit applications with the JSE by the end of October or early November,” Tom Winterboer of PricewaterhouseCoopers LLP, curator for the bank known as Abil, said in an interview. An initial public offering is planned for the second half of February. There have been “one or two expressions of interest for Abil, but nothing firm, so we’re going with the best route available for now,” he said.

Abil collapsed after saying on Aug. 6 it needed to raise at least 8.5 billion rand ($776 million) to survive. That caused the stock to drop 95 percent in three days, while bond prices slumped by more than half. The central bank stepped in on Aug. 10 to split the lender into a “good bank” and a “bad book.”

Abil’s securities were suspended Aug. 11, with the central bank saying senior debtholders will take a 10 cent loss in every rand while subordinated debtholders, preference shareholders and ordinary shareholders may lose everything.

“That’s still the way it’s looking,” Winterboer said in Johannesburg yesterday.

Abil has continued lending and there have been no staff cuts as the curator’s team tries to recoup bad debts amounting to at least 17 billion rand. The central bank bought that book for 7 billion rand last month.

Loan Customers

To set up the company that may be listed on the JSE, a new holding company and a new lender with a banking license are being established. The moves may result in a name change, depending, on the extent of damage to the African Bank brand, he said.

“People are still coming to Abil for loans, although there’s a slight decline in applications,” Winterboer said. “People are also paying back their loans so collections are in line with the pre-curatorship period.”

African Bank’s collapse caused Moody’s Investors Service to downgrade South Africa’s biggest banks while money market funds recorded losses and moved to isolate Abil debt from the rest of their funds.

Six banks, including Standard Bank Group Ltd. and FirstRand Ltd., and government pension fund administrator the Public Investment Corp. will underwrite 10 billion rand of the proposed new listing shares, investing their own money if there are no buyers for the stock.

‘Good Quality’

“If there are good quality assets, then definitely we’d take a punt,” Owen Nkomo, head of Inkunzi Investments, said in a phone interview from Johannesburg yesterday. “We’d want to see loans that are active and being paid back nicely and consistently and hopefully the bank will transform itself into other lines of business, or who’s to say it won’t end up back in the same place.”

In the past month, to make it easier for customers to repay loans, point-of-sale terminals have been placed in African Bank branches and retailers like Pick n Pay Stores Ltd. and Shoprite Ltd. have been enabled to collect money on Abil’s behalf, the curator said. For the future bank, while offering mortgages isn’t being considered, automobile financing, transactional banking and virtual banking are all under discussion, he said.

Leon Kirkinis, who founded Abil in 1999 and resigned on Aug. 6, isn’t involved in the rescue, according to Winterboer. While the central bank has, as is standard, appointed a commission to investigate the bank’s collapse, the curator’s team won’t scrutinize Kirkinis’s assets until the report covering the Abil probe is published in February or March, Winterboer said.

A stock exchange statement to update the market is due on Sept. 16 at the earliest. Abil’s full-year results will be released at the end of November, according to Winterboer.

©2014 Bloomberg News

[Mud Dog]

Government plans support to avert debt downgrade of Eskom
(Renee Bonorchis, Bloomberg News)

Eskom Holdings SOC Ltd., which provides about 95 percent of South Africa’s power, will get government support including an equity injection after Standard & Poor’s said in June it might downgrade its credit rating.

“Cabinet approved a package to support a strong and sustainable Eskom to ensure that the energy security of the country is maintained, as well as supporting gross domestic product growth,” South Africa’s Pretoria-based National Treasury said in an e-mailed statement today.

Eskom has a R225 billion ($20 billion) shortfall in funding over five years through March 2018. S&P rates its debt as BBB-, the lowest investment grade. On June 20, the ratings company placed Eskom on negative CreditWatch, meaning it had a 50 percent chance of being cut again to junk within 90 days.

Eskom will sell an additional 50 billion rand in bonds and the government will use “non-strategic” assets for an equity injection, the Treasury said. S&P said it was awaiting the government’s decision before deciding whether to cut Eskom’s credit rating to junk.

The equity injection means “an allocation of funding will be given to Eskom to help relieve the impact on electricity consumers, as well as add additional support to Eskom’s balance sheet,” the Treasury said. “Raising more debt is supported by the substantial guarantee facility available to Eskom from government, which will be used to reduce Eskom’s cost of debt.”

Energy policies and regulations will be refined, electricity demand will be balanced, free electricity will be provided for the poorest households, independent power producers will be supported by government and Eskom’s operations will be made more efficient, the Treasury said.

‘Downgrade Pressure’

“It was always something of a foregone conclusion that the state would provide Eskom the necessary support,” Razia Khan, head of Africa macroeconomic research with Standard Chartered Plc in London, said in an e-mailed note today. Leveraging non- strategic government assets “hints at potential privatization of some state assets.”

The decision could affect South Africa’s own rating, she said.

“With South Africa’s rating already threatened by its weak growth outlook, and an almost-across-the-board deterioration in a number of credit metrics, the decision of cabinet to approve an equity injection for Eskom, although expected, adds to potential downgrade pressure,” Khan said.

South Africa’s energy regulator in July found the utility’s costs exceeded projections for the three years through March 2013, allowing the company to raise tariffs next year by more than the average 8 percent agreed.

Eskom, which has installed capacity of 41,995 megawatts of electricity across 27 plants, has been forced to implement managed blackouts this year as power demand exceeded supply.

[Mud Dog]

Eskom is over-stating its financial need – IEUG
(By Antoinette Slabbert)

Eskom is disingenuous when it puts its revenue shortfall at R225 billion, says the Intensive Energy Users’ Group (IEUG).

The IEUG represents about 30 of Eskom’s biggest industrial customers using about 45% of the electricity Eskom generates.

Shaun Nel, IEUG spokesperson was reacting to government’s announcement of an aid package, including a further R50 billion finance guarantee, an equity injection that has not yet been quantified and support for further tariff increases through applications to the national energy regulator (Nersa).

Eskom has repeatedly ascribed its financial woes to a R225 billion revenue shortfall after Nersa awarded it an 8% annual tariff increase from 2013 to 2018, instead of the 16% it applied for.

Nersa came to the decision after a prudency test, which means it considered an 8% annual increase enough for Eskom to fulfil its mandate.

Nel says the IEUG considered the 8% increase as too low and calculated that 10% would be enough for Eskom to achieve stand-alone investment grading in seven years. “That could be accelerated to five years if Eskom achieved further savings”, he said.

“We always knew 8% would not be enough and it was a matter of time before Eskom would need government assistance.” Nel said.

By persistently basing the calculation of its shortfall on the 16% increase applied for, Eskom however creates the impression that it just doesn’t get Nersa’s message that it should become more efficient.

National Treasury, when it announced the aid package, referred to the shortfall, but did not put a number to it. Minister of Public Enterprises Lynne Brown however seems to have accepted Eskom’s calculations, as judged by her statements and comments in public.

The extent of the shortfall will be crucial in determining the extent of further assistance.

Chris Hart, chief economist at Investment Solutions, said the aid package does not deal with Eskom’s inefficiency. Instead of changing its ways, Eskom asks government as its shareholder for assistance that is ultimately paid by the taxpayer, he said. Eskom is inefficient at four levels, he said. On a regulatory level it is forced to purchase electricity from private power producers, but has no control over the prices it has to pay. These prices should be determined by market forces, Hart said.

Eskom’s capital structure is inefficient as is its operations, with high salaries being paid to staff, Hart said. The fourth level of inefficiency is procurement, which includes Eskom’s new build programme that has seen huge delays and cost overruns.

Hart said Eskom is not exposed to the discipline of the market. “Any other business would price its product according to what that market can afford and adjust its operations to that.” Eskom, on the other hand, starts by deciding how much money it needs.

Economist Mike Schϋssler said while Eskom definitely needed assistance, it is not clear that extending its guarantee was the best way to do it. He said the additional R50 billion guarantee will increase government’s borrowings and guarantees by 1.4% to 53.4% of GDP.

“Government should be careful that its assistance to Eskom, aimed at preventing Eskom [from] being downgraded, does not lead to the sovereign being downgraded,” Schϋssler said.

An alternative would have been for Eskom to sell its power stations. “Pension funds would have jumped at the opportunity, because the demand for electricity will always be there.” It should also focus on collecting its debtors, managing its creditors and buying all the available energy from private power producers, Schϋssler said.

In reality Eskom will increase electricity tariffs further which will result in a further dampening of the economy, Schϋssler said.

He said Eskom is a huge weight on the South African economy and its inefficiency has over the last seven years become unaffordable

[Mud Dog]

Electricity tariffs may increase by 12.69% in 2015/16
(BY Antoinette Slabbert)

The electricity sub-committee of the National Energy Regulator (Nersa) on Wednesday recommended that R7.8 billion of revenue Eskom under-recovered in the previous tariff period all be added to electricity tariffs in the next financial year.

If the recommendation is accepted by the regulator at its month-end meeting, Eskom tariffs will rise by 12.69% and not the 8% Nersa earlier granted annually for the current tariff period stretching until 2018.

It will also apply to municipalities that will pay 12.69% more for bulk electricity and will have to factor that into their tariffs to end-users.

The additional tariff increase is over and above the aid package government has put together to stabilise the finances of the struggling utility, including a further R50 government guarantee.

Nersa earlier announced that Eskom under-recovered R7.8 billion in the period 2010/11 to 2012/13 after considering an Eskom application that put the under-recovery at R18 billion.

The regulator still has to make public the reasons for its decision, but from the discussion on Wednesday it transpired that the under-recovery relates largely to lower sales volumes in 2012/13.

The committee argued that the loss (under-recovery) happened in one year and should therefore be recovered in one year. That swayed the recommendation in favour of a once-off tariff increase, rather than smaller increases over two or three years.

The committee also had a lengthy discussion about tariff increases in the subsequent years.

If tariffs increased by 12.69% in 2015/16 and the approval of an 8% annual tariff increase until 2017/18 stood, it would lead to an over-recovery of R8.5 billion in 2016/17 and R9.4 billion in 2017/18, because the 8% would be applied to a higher base.

One argument was that tariff increases in the subsequent years should be adjusted downward in percentage terms to deliver the same revenue Nersa approved in the multi-year tariff determination until 2017/18 (MYPD3). That would see consumers paying the same amount of money in those years, but the percentage increase would be considerably lower.

The other argument was that the 8% tariff increase should be retained in the latter years to provide for further applications from Eskom relating to under-recovery in MYPD3. The argument is based on government policy that Nersa has to anticipate price shocks and act to smooth tariffs over a period.

No such application has been received by Nersa yet, but Eskom did indicate that it may submit annual applications to this end.

The sub-committee did not make any recommendation regarding the latter years of MYPD3 and this is expected to be debated further at the regulator meeting.

[Mud Dog]

Ramaphosa declares R76m, rest confidential
(Sapa)

The 2014 Register of Members' Interests, tabled at Parliament on Wednesday, reveals Deputy President Cyril Ramaphosa is a very wealthy politician.

Over and above the more than R76 million he has accumulated in company shares, the document shows the former trade unionist and businessman owns 30 townhouses, all in Johannesburg, and two flats in Cape Town.

The register also confirms his resignation from the board of platinum producer Lonmin, a directorship for which he was loudly criticised in the wake of events at Marikana two years ago.

But it is what the register does not show that suggests his share holdings declared in the register are just the tip of a massive wealth pyramid accrued by Ramaphosa during his years outside active politics.

This is due to many of Ramaphosa's financial interests being reflected only in the confidential and not the public section of the document, for the reason that they are held together with private individuals.

Openly declaring the value of his shareholding would reveal the value of theirs.

This is the case, among others, with interests held by the Ramaphosa family's Tshivhase Trust, which was the biggest shareholder in Shanduka, the company Ramaphosa started in 2001, which grew to a business worth more than R20 billion.

In May, Shanduka and Pembani struck a deal to create a new black-controlled natural resources and industrial group, which enabled Ramaphosa to leave Shanduka.

The aim was to ensure that he made an exit from all state-regulated sectors, and to ensure that his family's business interests did not pose any risk of conflict of interest.

The public section of the register of interests reflects a range of directorships and partnerships Ramaphosa retains, but puts no rand value on his involvement in these, for the same reason that it could reveal the financial rewards others involved draw from the same enterprise.

This includes his continued involvement in the McDonald's fast food chain.

Ramaphosa resigned from a spate of business positions after his election as deputy president of the ANC in December 2012.

However, it is not clear whether this will ultimately include his links with McDonald's. The deputy president has been the development licencee for the fast food chain in South Africa since 2011, with a 20-year master franchise agreement.

Earlier this year, Ramaphosa asked President Jacob Zuma for a four-month extension to wrap up his divestment from business where he felt his continued involvement would create a conflict of interest.

The business interests that will endure after this process, include Tshivashe share trading, his involvement in cattle and game farming, as well as property interests, and one in a modest automobile business called Puma sports cars.

Though his resignation from Shanduka, Lonmin, and New Nation Development Holdings was concluded last year, this is not yet reflected on the CPIC database.

Ramaphosa quit MTN, Mondi, Alexander Forbes, Standard Bank and SA Breweries, among others, last year.

[Mud Dog]

Wage price spiral a concern – Reserve Bank
( By Hanna Barry )

PRETORIA – The South African Reserve Bank (Sarb) remains concerned about the risks of a wage-price spiral, “should settlements well in excess of inflation and productivity growth become the economy-wide norm”, it said Thursday.

Wages rising faster than inflation and productivity could also undermine the country’s international competitiveness and delay the current account adjustment, Sarb Governor Gill Marcus told media.

Marcus was speaking at her final three-day Monetary Policy Committee (MPC) meeting, where she announced that she would not renew her term as Governor of the Sarb when it comes to an end on November 8.

Concerns over “excessive wage settlements” related to settlements at all levels, including executive pay, she said.

The Sarb elected to leave the repo rate unchanged at 5.75%. The decision was not unanimous, with one person asking for a 25 basis point increase and six others saying “no change”, Marcus confirmed.

Inflation peak behind us

The Sarb has revised downward its forecast for growth in South Africa’s gross domestic product (GDP) for 2014 to 1.5% from 1.7% previously. Risks are assessed to be on the downside.

This is down from the predicted 2.8% growth forecast for 2014 that the Sarb made in November last year. Brian Kahn, advisor to the Governor, said that weak growth was compounded by long work stoppages in mining and manufacturing.

“Inflation forecasts have been fairly stable. The main adjustment we had this time around was that we see the [inflation] peak as behind us and not still to come in the fourth quarter. We also expect to move back into the target range in the first quarter of next year rather than the second quarter,” Kahn noted.

Inflation was expected to peak at 6.6% in the fourth quarter but now appears to have peaked at 6.5% in the second quarter. It is expected to average 6.2% in 2014, compared with 6.3% previously and 5.7% in 2015 (5.8% previously).

"The inflation forecast for 2016 increased to 5.8% from 5.6%, mainly as a result of the revised electricity price assumption following the review of Eskom tariffs by Nersa. The revised assumption makes provision for electricity price increases of 11.6% from July 2015 and again from July 2016," Marcus said.

Marcus said the inflation trajectory although slightly improved remained “uncomfortably close to the upper end of the target range” and was “skewed to the upside with possible renewed pressure coming from the exchange rate”.

Sarb deputy governor, Daniel Mminele said it remained to be seen whether the rand’s recent weakness against the dollar after a period of relative stability would be sustained in order to deduct how this informed policy.

“The rand is expected to remain sensitive to changes in sentiment regarding possible changes in US policy, which will affect the appetite for emerging market assets generally, as well as to possible impacts form geopolitical risks and domestic factors,” Marcus said.

She pointed out that despite recent weakness against the dollar, on a trade-weighted basis the rand had depreciated 0.4% to the dollar, having appreciated against the euro and pound sterling.

Challenges financing current account

Marcus said that financing of the current account through portfolio inflows was likely to become increasingly challenging, as year to date there had been net outflows of bonds and equities to the value of R6.3 billion.

“Export growth in the third quarter is expected to remain constrained by the slow return to full capacity production by the platinum mines and the strike in the steel and engineering sector in July, which had significant spillover effects on the manufacturing sector in general,” Marcus said. She added that platinum production was not expected to return to full capacity before the end of the year.

“The current account is anticipated to narrow gradually over time,” she said.

The domestic economy was “anemic”, Marcus said. Monetary policy remained accommodative and would continue to be subject to the domestic economy. Marcus said South Africa remained in an interest rate hiking cycle but this would be very much data dependent and also rely on the pace of monetary policy normalisation in advanced economies, which the Sarb “watched closely”.

The Bank’s forecasts for GDP growth in 2015 and 2016 have been revised down by 0.1 percentage points to 2.8% and 3.1%, respectively.

[Mud Dog]

'Walk faster' Gordhan tells municipal leaders
(By Antoinette Slabbert)

Local government leaders who decided to dismiss last week’s local government summit as just another talk shop, are in for a big surprise - and not a nice one at that.

For those reluctant to change their ways, the five years with Pravin Gordhan at the helm of the Local Government and Traditional Affairs portfolio may be very long.

A lot was said during the one-day summit where Gordhan, with the clear support of President Jacob Zuma, called on local government to improve service delivery by getting “Back to Basics”. It was during the last hour that Gordhan clearly showed his impatience with the lack of energy and commitment in municipalities and his willingness to get his own hands dirty.

As is often the case during such events, a substantial portion of the audience vanished after lunch. The programme allowed for separate commissions, after which the whole group had to gather for the closing, which included confirmation of a joint commitment agreed upon during the commissions.

The group was slow to return to the main gathering and there was nobody to be seen on the stage to direct proceedings. Gordhan summarily took the microphone and started calling delegates. He even encouraged a group of delegates at the back to move forward, saying: “You look younger, you can walk faster!”

When the proceedings commenced he did not mince words. He reported that from 278 municipalities in the country 236 mayors attended the summit. “That means 42 were absent today. We will track them down and they will have to give their reasons,” Gordhan said.

He continued to report on the attendance of 102 speakers, 165 chief whips, 233 municipal managers and a dismal 151 chief financial officers. At the last number he paused: “Mayors must take note. Is this defiance, saying: We will do our own thing?”

Gordhan also bemoaned the fact that only 96 technical directors attended the summit. “It is a pity, because we particularly wanted a good discussion on infrastructure.”

During his address Gordhan also warned that “in the next few months we will take a very harsh view” on improperly appointed staff and staff who do not meet the prescribed skills requirements for the positions they occupy. He said letters will be going out to the relevant municipalities and provincial departments to deal with such instances.

Gordhan also published a list of monthly reporting activities “for immediate implementation” required at council level, including reports from individual councillors, speakers, mayors, chief whips, municipal managers and chief financial officers.

These reports also have to be distributed at ward level and include how many hours mayors spent in the previous month in council or committee meetings and launches, political caucus meetings and community engagements, all instances of fraud and corruption and action taken, on-going monitoring of senior management’s performance agreements and shortfalls in their competence standards as well as steps taken to address it, number and value of tenders awarded and value of contracts awarded without going to tender, infrastructure delivery and number and duration of electricity outages and sewage spillages and a number of financial reports.

It is clear that communication with communities through ward committees and other structures is at the forefront of Gordhan’s plan for local government. He also clearly plans to activate provincial departments to improve their oversight and support of municipalities.

Can he succeed?

It is also clear that Gordhan means business, but he has a mammoth task and chances are good that there will be considerable push-back from those with vested interests in retaining the status quo.

His success will most probably be determined by the degree of political support he gets.

Werner Zybrands, municipal consultant, says in 2009 Zuma also called a municipal summit and then Minister, the late Sicelo Shiceka, also led a local government turn-around strategy, including the campaign towards 100% clean audits in 2014.

Zuma in fact told cabinet ministers on stage that arrear debtors from state institutions should be paid up to date by the end of that year. That didn’t happen and little changed in municipalities.

Gordhan has certain advantages over Shiceka that may put him in a better position to succeed, Zybrands says. He carries a huge amount of authority and in his previous portfolio, as political head of National Treasury, he developed a good understanding of municipal processes and systems.

The political landscape has also changed since 2009.

The ANC is under pressure to improve its performance after it lost considerable support in various areas in the recent general elections. It has a short window before the municipal elections in 2016 to prevent a further slide, Zybrands says.

Whether this realisation at party level will transfer into political support for the lifestyle audits and civil claims against municipal leaders and their mates involved in fraud and corruption in municipalities and the removal of comrades resisting Gordhan’s discipline, remains to be seen.

Zybrands says [government] should refrain from trying to micro-manage municipalities and tie them up in writing reports to the extent that they don’t have time to install pipes and build roads. “They will lie in those reports”, he says.

The best way for Gordhan to improve local government would be to see to it that incompetent politicians and officials are removed and replaced by competent ones that are kept on the straight and narrow not only by legislations, but also by their own internal party discipline

[Mud Dog]

Did we just buy R111bn worth of nuclear reactors from Russia?
(By Antoinette Slabbert MoneyWeb)

Much confusion has followed an announcement on Monday afternoon by Russian state nuclear agency Rosatom of an “agreement on strategic partnership in nuclear energy” signed between the Russian and South African governments.

The same statement was later published on the department of energy website.

Many South Africans understood the statement to say that South Africa has bought nuclear reactors capable of generating 9 600MW from the Russians without any proper procurement process. The number R111 billion was mentioned ....

It did not help that Department of Energy spokespeople were missing in action.

A local representative of Rosatom who asked not to be named, confirmed to Moneyweb on Tuesday that the agreement is merely a framework agreement that may or may not lead to the procurement of the reactors from Rosatom.

He confirmed that South Africa is not bound to buy it from Russia and will be free to buy it from competitors, should it decide to do so.

In a formal response to media enquiries Rosatom also confirmed that further agreements will have to be signed (surely after further negotiations) in each field of cooperation stipulating all the details.

Russia has undertaken to make its technology “from uranium mining to decommissioning” available to develop a local nuclear industry, the Rosatom representative told Moneyweb.

Rosatom director-general Sergey Kirienko is quoted saying, “ROSATOM seeks to create in South Africa a full-scale nuclear cluster of a world leader’s level – from the front-end of nuclear fuel cycle up to engineering and power equipment manufacturing.”

It is envisaged that Russia and South Africa will, once the local industry is established, “implement joint nuclear power projects in Africa and third countries”. At that stage Kirienko talks about “placing of a considerable order to local industrial enterprises worth at least 10 bln. dollars”.

So that is where the R111 billion comes from.

Dr Kelvin Kemm, CEO of Nuclear Africa, a nuclear project management company in Pretoria, says the agreement provides for the two countries to work together to develop a local nuclear industry.

He says Nelisiwe Magubane, Director-General of the Department of Energy stated last year already that South Africa should aim for 50% localisation in its nuclear programme. Unlike its competitors, the Russians fully bought into this idea and actually proposed up to 60% localisation.

This may give the Russians a competitive advantage in the actual procurement. He says the Russian VVER reactor is a very good reactor that is not overly complicated.

Kemm explains that there are currently 440 operational nuclear reactors globally and another 75 under construction. He says the idea is that South Africa should develop the capacity to manufacture components for its own use, but also to export to other countries.

That will of course be done to the design and specifications of the original developers, be it the Russians or another party, in the same way that we may manufacture gearboxes for Mercedes of radiators for Toyota, for example.

Kemm says South Africa has a very proud history in the nuclear industry and is currently the second biggest exporter of nuclear medicine in the world. He says South Africans are more than capable of producing 50% of the components needed for its own nuclear plants.

“We have been running Koeberg very well for 30 years and that plant produces the cheapest electricity in Eskom’s whole fleet of power stations.”

While it is no secret that building a nuclear plant comes with a huge price ticket, Kemm says researchers at the North West University have in fact found that nuclear power is cheaper than coal over the lifetime of the plant, if all the costs related to coal is taken into account.

[ChrisF]

en SO begin die sports:

Bridge implicated in garnishee pandemic

Relationship with Coombe questioned.


The Stellenbosch Law Clinic has blamed major unsecured lender Bridge Loans for a severe increase in garnishee abuse in the Western Cape.

This is in conjunction with the clinic’s public condemnation of what it views as widespread garnishee malpractice in the areas around Stellenbosch and its call for a commission to investigate the problem.

The clinic believes garnishee abuse has a devastating effect on poor workers in the area, notably farm workers, and has cited cases where the entire paycheque of workers is erased as a result of the malpractice.

Bridge, which has been granting credit in the area through, amongst others, the brand name SA Multi-Loans, is known to be a major client of debt collections firm Coombe & Associates.

Sister company Bridge Wealth has also featured on Moneyweb in connection with its 19%-a-year business opportunity.

Coombe & Associates is also closely associated with Cambist, a platform on which investors can buy garnishee-based debt contracts that pay 19.5% a year (see: Suspect debt law firm linked to 19.5% investment scheme).

According to Mathilda Rosslee, coordinator of the Financial Literacy Project at the clinic, most, if not all, of SA Muti-Loan garnishee orders seen by her office are obtained through Coombe.

The clinic handles hundreds of rescission applications for irregular garnishee orders affected against poor workers, the majority of which are said to be Coombe orders.

Coombe in turn faces allegations of widespread and institutionalised garnishee abuse (see Major debt law firm implicated in garnishee abuse) as reported by Moneyweb.

Documents in Moneyweb’s possession show SA Multi-Loan has used Coombe in three separate cases of alleged garnishee abuse, two of which have been highlighted as extremely severe cases in a Moneyweb report (see Consumers who suffered first hand from garnishee abuse).

In the third case, not previously reported on, an SA Multi-Loan client has thus far repaid R14 400 to Coombe against his SA Multi-Loan of R6 500 and still owes R11 982.

These cases point towards a range of collections irregularities at the hands of Coombe, which serve to drastically inflate the amounts defaulters are being required to pay in order to clear their debt with Bridge.

In discussions held at Moneyweb, Coombe representatives rejected allegations of wrongdoing and commented that they merely act on the instruction of their clients.

Documents pertaining to these cases may be reviewed here (‘Ashwen,’ ‘Busi’.)

In a emailed response to questions posed by Moneyweb and in comments made after receiving a draft copy of this article, Bridge CEO Emile Aldum has shrugged-off culpability for the alleged malpractice by Coombe.

He confirms that Coombe is used as one of seven Bridge external debt collectors, but he has refused to reveal the other six or the extent of business handed over to Coombe.

When asked to comment on the allegations faced by Coombe and on the ethics and legality of entering into business with the firm, he responded saying that Bridge external debt collectors (EDCs) have “been selected over a number of years based on performance, speed, value and employing relevant and legal processes in the effective recovery of debt.”

“Bridge has a standard service level agreement with all its EDCs and manages all of them based on amongst others, feedback from clients and experiences,” he said.

However, Aldum has pointed towards investigations now being carried out on Coombe and has stated that, after the results of these are publicised, “Bridge will reconsider its future relationship with all service providers in the debt collecting environment.

“We can further confirm that Bridge is obtaining its own legal advice on the matter.”

Following Moneyweb’s investigation, the Law Society of the Northern Provinces has confirmed that it too has opened an investigation into Coombe.

With respect to the cases of documented abuse uncovered by Moneyweb, Aldum states that “I have ordered an internal investigation into these matters as well as a random sample of cases handed over for legal recoveries."

According to Peter Allwright, the senior attorney at law firm Edward Nathan Sonnenbergs who has headed landmark audits into garnishee abuse, unsecured lenders which continue to use collections attorneys implicated in garnishee abuse “may be subjecting themselves to substantial legal risk caused by the irregular and illegal conduct of their contracted attorneys.”

Coombe has responded to a draft of this article by defending the necessity of garnishee orders in the debt collections industry. It has not contested the accuracy of any facts or allegations in this article.

It believes that in excess of R700m is collected monthly through garnishee orders.

The Law Clinic’s accusations

The Stellenbosch Law Clinic has described a situation of widespread garnishee abuse in the Western Cape which has been greatly exacerbated by the Bridge/Coombe relationship.

The clinic has extensive hands-on experience dealing with poor defaulters affected by garnishee abuse.

“Since SA Multi-Loan opened their doors in Stellenbosch, the number of garnishees increased tremendously,” says Rosslee.

“African Bank used to be our main culprit, but after SA Multi-Loan opened their doors, African Bank seem(s) like an angel.”

She adds that “Coombe wouldn’t be on the scene if it weren’t for SA Multi-Loan. It is actually the creditor which causes the client to be over indebted.”

Based on accounts described by her clients and on documents reviewed by her office, Rosslee has suggested that Bridge is lending recklessly, is failing to conduct proper affordability assessments and that its agents are misleading clients at the point of loan origination.

She believes further that Coombe, acting on behalf of Bridge, has been misleading and intimidating defaulters while obtaining garnishee orders.

Bridge responds

Aldum has responded to these allegations stating that they are “unfounded and factually incorrect.”

Bridge has forwarded documents to Moneyweb which pertain to its “paperless contract solution,” “credit vetting policy and procedures” and its “digital signature service.”

“Our credit scoring model ensures that a consumer can only spend 20% of his free cash-flow on repaying a small loan from Bridge,” says Aldum.

“It should be clear from the documentation in your possession that Bridge has invested substantially in developing a highly sophisticated and scientific credit scoring system in conjunction with external service providers who are considered experts in this industry.

“I therefore reiterate that Bridge is not and cannot be a reckless lender.

“We categorically state that Bridge is not a reckless lender as contended by Me. Rosslee.”

Misinformed borrowers

Based on client testimonials, Rosslee believes that borrowers are misled when signing documents such as consent to judgments and admissions of default when approached by Coombe agents prior to having the garnishee orders imposed onto their salaries.

“It’s misrepresentation … the documents are in English (whereas many of the borrowers speak Afrikaans) and they don’t understand anything … I don’t understand why people sign them, they get told it’s something other than what it is.

“Or they get promised that before legal steps are taken the situation will be resolved… it doesn’t happen that way so by the time the client gets their salary she sees that a garnishee deduction has been made.”

“From the start the client is over-indebted … Bridge definitely lend recklessly … they know that as soon as the client is 20 days in default they can put Coombe onto them.”

“It’s easy business.”

[ChrisF]

en nog so bietjie petrol op die vuur :

It goes far beyond Abil; Cambist also morally suspicious.


Over the last week and a half, African Bank (Abil) has been the target of some of the sharpest criticism that has perhaps ever been levelled against a public company in South Africa. Its decline has been met with fierce comment.

Perhaps any business that fails its shareholders the way that Abil has should expect some measure of outrage. But it seems that there has been an even deeper level of sentiment in the way that Abil has been attacked.

It may well be that this is because there is more to its story than just a business that has made some truly awful decisions. There is a very real moral and ethical problem here too that many people find distasteful.

Unsecured lending in South Africa has always had its detractors. Since 1992 when an exemption to the Usury Act was first granted to allow microlenders to operate legally, there have been people who are uncomfortable with the practice.

Quite simply, the whole thing is too easily corruptible. It doesn't take much to argue that, ultimately, the business models practiced by microlenders in South Africa are exploitative, degrading and profoundly negative in their impact on the economy.

This is a sentiment that is not limited only to lenders like Abil either. The unsecured lending industry also feeds another that is perhaps even more morally suspicious – one that is most prominently represented by Cambist.

Here is a company that promises South Africans incredible returns of 19.5% per year. How do they do that? By facilitating the sale of debt of unfortunate individuals who have failed to repay unsecured loans and have suffered the indignity of having garnishee orders granted against them.

Essentially, these are court orders that allow creditors to attach a portion of someone's salary for the repayment of a debt. The employer is obliged to pay the creditor directly to ensure that the funds are received.

So anyone with money on the Cambist platform is effectively collecting on the misfortunes of the poor. They are earning their 19.5% from individuals who are going home every week or every month with only a portion of the money they have worked for.

There is nothing economically uplifting about this. It is only making poor people even poorer.

It's not enough to argue that such people made their own bad decisions and shouldn't have taken on debt that they couldn't repay. Because the whole system is geared against them from the start.

By its own admission, Abil has not been strict enough in its lending criteria. It has lent too much money to people who had little hope of ever paying it back. What reason would it have for doing that other than greed? Why else would it push more and more credit onto a population that everybody knew was already struggling under a huge debt burden?

And there is a clear link between this reckless lending and what Cambist is doing, because the more risk lenders take in their writing of loans, the more likely borrowers are to default. And with garnishee orders being granted with far too much alacrity, that means more business on the Cambist and other similar platforms.

It may be stretching it to say that the likes of Abil deliberately write poor loans to create a market for Cambist. But whichever way you spin it, it is an appalling exploitation of the poor.

It's made even more unpalatable when you consider the way that Cambist markets itself. It promotes its business as something that will make its users rich.

A recent twitter post from Cambist reads: “They say it’s better to cry in an expensive car than on a bicycle… what do you think?”

Maybe I am naïve. Maybe I think too much of human nature. But what solace is there an expensive car bought with the 19.5% per annum earned off someone who can hardly afford a bicycle?

This sort of thing only highlights the ethical failure in the entire microlending cycle. It is not, and has never been, about uplifting the poor. It has been about how much money can be made off them.

As South Africans, we need to ask ourselves whether a business like Cambist belongs in a civilised, rights-based society? Can we be proud of a country whether the exploitation of the poor is sold as a means to buy yourself a nice car?

Cambist will argue that it is not doing anything illegal. It will argue that it is only facilitating the transfer of assets between willing buyers and willing sellers. The assets in question, it will say, are debt contracts. Isn't that what is traded on the bond market every day?

But that ignores what we are actually dealing with, because behind those debt contracts are human lives. There are people trying to make an honest living, feed their families and improve their lot in the world.

And we will never better our society if we continue to callously trade on their aspirations

[ChrisF]

en n kaart-huis kan maar net inmekaar stort ...


Bridge enters business rescue, cuts lending by 75%

Transcript: 'We'll keep paying 6% return, for now' - executive director Cliff Coombe.


HANNA BARRY: Short-term unsecured lender, Bridge, has applied for business rescue due, it says, to a lack of institutional funding caused by some risk aversion around the unsecured lending sector in South Africa after the failure of African Bank. Now ordinary people could invest in Bridge and essentially fund its lending activities, these 1200 investors or so will see their returns slashed from as high as 19% in many cases or 12% in others to just 6% so that the company can generate sufficient internal funding to remain a going concern.

On the line now to discuss what the business rescue process means for investors is Cliff Coombe, executive director at Bridge. Cliff, thanks for your time this evening, why the decision to place Bridge into business rescue and not simply restructure the company to better deal with the challenges it’s facing?

CLIFF COOMBE: Hanna, yes, thanks for the question, I think the first thing that we need to understand is that this is not simply your run of the mill restructure, we are asking our investors to participate in this process and it’s fairly…it touches them where it hurts most. It’s their pockets and we need a buy-in from all the investors in Bridge.

So this is where we take the mechanism of business rescue, which we believe has been developed specifically for a position like this where we can have a collective bargaining process, where everybody who’s got a vested interest can come in, have their say, participate in the process and then ultimately vote on the business rescue plan, so that it’s not something that’s just forced upon the investor, all stakeholders must play a role in this process.

HANNA BARRY: Cliff, what kind of a timeline are we looking at in terms of voting for the business rescue plan and then seeing it completed, can you give us some dates.

CLIFF COOMBE: Look, it’s difficult, Hanna, the plan that we ultimately decide on could be a longer-term plan, could be as long as three, four years but the business rescue process could be finalised as quickly as six months, seven, eight months. That will all depend on the participation of all the role players one, and two obviously the business rescue practitioner, Mr George Nel, is really now in control of that process. There are timeframes prescribed in law but due to the size of the business it will take a month, maybe two to get everyone together, get all the input and then hopefully vote on the plan. What we are hoping for and what we are going to be pushing for as the directors is to get this thing turned around as quickly as possible, we do not want a protracted process, we’d like to get the guys in, get their input, turn it around and finish the process so that we can get on with business as usual.

HANNA BARRY: Cliff, can you give an indication as to how much money Bridge needs to raise or perhaps cut back on in order to remain a going concern, you mentioned that it spends around R17m a month to facilitate lending transactions, which enables it to then put out around R100m a month into the market in the form of loans, how are those figures going to change?

CLIFF COOMBE: Yes, Hanna, we’ve got two sides to the business, obviously the investor side where we’re paying out investor return and then on the operating expenses side, which is what you’re referring to now. Now simply put, Bridge has built a business that has the capacity to put R100m a month into the market, which is not massive in terms of the size of the market but it’s a healthy business and that was what our planning was built and structured around. So what we now need to do is bring it down because we are essentially going to be self-funding in the next foreseeable future because we don’t believe that institutions at this point will be funding this sector any further, not in the short term in any event.

So we believe that we can put R20m to R25m a month into the market from a self-funding perspective and that would then mean that we would have to adjust our infrastructure to accommodate a quarter of what it was built for.

HANNA BARRY: Would that entail potential job losses or scaling down on certain operations?

CLIFF COOMBE: Hanna, the unfortunate reality is that is a fact, it is an unfortunate thing that we will have to do but there will be job losses, there will be some of the branches. The size of the effect of it I can’t speak to because we will have to decide as a group, all stakeholders have to participate in the process and then come up with a business rescue plan. So ultimately I can’t give you the figures right now but the realities are that for the time that we are in, the economic cycle that we’re operating in, we would need to restructure the business and that would need some harsh reality issues like cutbacks on jobs.

HANNA BARRY: Let’s talk about the impact on investors now, I mentioned earlier that obviously they’re going to see their interest payments cut quite significantly, could I as an investor then be seeing a return of 6% for the next five years, foreseeably?

CLIFF COOMBE: Hanna, again, it will depend on the final plan, at this point we’ve agreed with the business rescue practitioner that we will keep on paying a 6% return, which is to our minds related to what the banks in general would be offering. This would be the case for the next two to three months or two months while we’re finalising the plan, hopefully by then we’ll have the plan and that will then ultimately determine what the final figure is and for how long that will be repaid.

In terms of the debentures that were issued 18 months ago, those debentures have a five-year term, it’s a legal requirement, so there’s three and a half years left in terms of the running period on those and that’s why we’re saying you’re looking at probably three and a half years in terms of whatever the plan would have to entail.

HANNA BARRY: Just in terms of the loans that Bridge has issued, Bridge I think is quite confident that it’s lent money to people who can afford it, although it has come under fire in recent years for emolument attachment orders, which are often called garnishee orders, although incorrectly but essentially where creditors attach a part of your salary in order to be paid…they attach that salary directly from your employer. You said in your business rescue statement that defaults are at a five-year low, how does Bridge define a default or a non-performing loan and what percentage of your book would you say is non-performing?

CLIFF COOMBE: Hanna, yes, again, the business rescue plan and the reason why we went into business rescue is to ensure a sustainable future. This touches on capital preservation for all those investors, we want to make sure that even though the guys are taking less of an interest rate they can sleep sound in the fact that their capital will be preserved for the remaining period.

Now being a strong business and having a sustainable future obviously depends on the fundamentals and Bridge has never had any issues on the fundamentals, we believe that it is a good business that’s got a good positioning in the market, we have a strong client base, we have an 18% bad debt average, which we are quite happy with, it’s coming down and it’s the simple fact that there are that many clients in the market looking for loans that the quality of loans are certainly improving. So we’re confident that the business model is as strong as it was 18 months ago when this process was kicked off.

The only issue that we are dealing with is a funding issue, so we’re looking at the economic climate and the cycle around this and we’re saying if we’re not going to get funding in the short to medium term immediately now we have to become self-funded, we need to reinvest, the operating expenses need to cut down, reinvest that and also reinvest a portion of our investors’ returns into our own assets to make sure that we are a sustainable business in the future.

HANNA BARRY: Cliff Coombe is an executive director at Bridge.

[Mud Dog]

Banks, insurers, retailers hit by Post Office strike
(By Antoinette Slabbert)

Direct marketing relies heavily on the Post Office for deliveries of letters, catalogues and parcels to targeted end-users and it is seriously impacted by the on-going Post Office strike, says Alastair Tempest, Chief Operating Officer of the Direct Marketing Association of South Africa.

This affects especially campaigns by banks, insurance companies and retailers, says Rafiq Sallie, managing director of Tunleys Mail and Print, one of four major bulk mailing houses that print, label and sort such material on behalf of clients and to Post Office specifications.

Sallie says at the moment the Post Office cannot accept all envelopes and packages - which results in delays in sending out the material and in the responses from the target market. That disrupts the marketing campaigns of Tunley’s clients and creates problems with storage space.

Tunleys dispatches more than three million letters per month on behalf of clients. The Post Office has representation at the Tunleys premises to ensure compliance with its specifications and smooth integration of the mailing process.

“At the moment the Post Office has asked us to bring our post as early as possible, before their staff members arrive, because that is when the problems start,” he says. As a result the company delivers as much as it can around 6am, but even so up to 90% of the material cannot be dispatched, Sally says.

“It is a double whammy for us as a mailing house and for our clients. Most clients cancel their campaigns until the problems have been sorted out,” he says. That is an opportunity lost and the revenue cannot be recovered later.

“One of our clients sends out 200 000 envelopes per week. He does weekly campaigns and these are his bread and butter. He has now asked us to split the envelopes he usually sends out from Johannesburg (where postal workers are striking), between KwaZulu-Natal and Cape Town where there is no strike action. That means extra cost to transport the mail to those regions.” Sally estimates the cost increase at up to 20% and says that can wipe out the client’s margin.

He says there is no viable alternative to the Post Office. “They have the monopoly. Using couriers would be too expensive.”

He says the end-result is that the Post Office forces clients to stop mailing and convert to electronic communication.

Tempest says many e-commerce companies are also reliant on the Post Office for deliveries of purchased products. This is evident from the following notice on the Kalahari.com website:

“Post Office Strike

We've been informed that there could be some delays on post office deliveries at the moment.”

One client complained on the Post Office facebook page about the delay in the delivery of her prescription medication from a pharmacy.

A source within the Post Office told Moneyweb that many small businesses, including e-commerce enterprises, are complaining bitterly about the effect of the strike on them, including an e-commerce site distributing seed to clients.

Tempest says people move to other carriers, but none have the same reach as the Post Office in rural areas. “One can plug the hole temporarily, but not in the long run.”

He says the Post Office has a very strong brand and has strong support from direct mailers. Strike action however raises doubt about the reliability of its service and damages the brand.

He says in other countries postal services have been able to buck the trend of dwindling mail by moving into the delivery of e-commerce products. “If the South African Post Office is unreliable due to losses and strikes, it won’t be able to do the same.”

The Post Office said on its facebook page on Friday afternoon operations were back to normal at the Durban mail centre. “Witspos mail centre is operating at roughly 40% capacity. Germiston mail centre was also operational, but again not at full capacity. Tshwane Mail is unfortunately not accessible and remains closed. Operations in Cape Town have resumed but again, the mail centre is not yet working at full capacity.”

It also posted a long list of post offices closed in the Johannesburg area for the safety of customers and employees after threats of violence. They are Alrode, Bergvlei, Boipatong, Boitumelo, Booysens, Crown Mines, Delarey, Doornfontein, Dowerglen, Ebonypark, Edenpark, Eldoradopark, Evaton, Florida, Fordsburg, Germiston, Halfway House, Ironside, Johannesburg, Joubert Park, Kaalfontein, Kelvin, Kemptonpark, Khumalo, KwaXuma, Kwenzekile, Kyalami, Mafatsana, Masoheng, Morningside, Moroka, Phomolong, Pimville, Ridgeway, Robertsham, Southdale, Southgate, Tarlton, Tembisa North, Tembisa South, Vorna Valley, Witspos and Zuurfontein.

[Mud Dog]

Sanral execs ride the gravy train
(Antoinette Slabbert)

South African National Roads Agency (Sanral) executives pocketed on average 17% more in the year ended March 31, compared with the previous financial year.

This was disclosed in Sanral’s annual report, released on Wednesday.

The increases came during a period when the agency suspended its bond auctions, as investors lost confidence due to uncertainty about the implementation of Gauteng’s e-tolls. The suspension seriously hampered Sanral’s cash flow.

Sanral showed a R2.7 billion loss for the period, compared with a R1 billion profit in the previous financial year. Sanral CFO Inge Mulder blamed the loss on delays in the implementation of the e-toll project.

The increases were way above inflation and the average increase for civil servants and the economy in general, economist Mike Schϋssler commented.

Sanral executive director and CEO Nazir Alli earned R3.6 million in total, including a salary of R2 million, performance payments and long service awards of R1 million, travel allowance and medical benefits of R106 000 and pension contributions of R381 000 (figures rounded off).

His total remuneration increased by 17.9% compared with the previous financial year.

The other executive members’ total remuneration increased by between 10.1% and 30.4% compared with the previous year. The biggest earner after Alli, was engineering executive Koos Smit with total earnings of R2.477 million - an increase of 13.2%.

L. Sewnarain, Sanral Eastern regional manager, received the biggest percentage increase (30.4%) - taking home R1.241 million in total.

The executive pay category that saw the biggest average increase was performance payments and long service awards (38%). Executive salaries (excluding Alli) increased by 11.9%, travel allowance and medical benefits by 13.5% and pension contributions by 11.5%.

Schϋssler said Sanral is not alone in granting big increases. Other state-owned companies, state agencies and large private companies do the same. He said the average increase for civil servants and the economy in general was around 8% in the same period. “All public institutions should limit their increases to below 10%,” he added.

He said Sanral is good at building and maintaining the country’s roads and frankly anybody would think twice about bearing with the amount of stress the Sanral executives had to deal with in the recent past for the kind of money they are earning.

[ChrisF]

Andy dis om van SIEK te raak ....

[Mud Dog]

Kan nie meer met jou saamstem nie, ons word stelselmatig verkrag. Dis 'n skandaal!

[Mud Dog]

Hard choices for Nene as slow growth crimps South Africa budget
(Rene Vollgraaff and Mike Cohen, Bloomberg)

South African Finance Minister Nhlanhla Nene may use his first mid-term budget to announce something the government has been loathe to try for years: selling assets.

Nene will present revised economic-growth and fiscal targets and probably announce plans to sell government investments that may include mobile-phone operator Vodacom Group Ltd. to shore up the budget when he speaks from 2 p.m. today in Parliament in Cape Town. Strikes at platinum mines and metals and engineering companies dimmed hopes of meeting February’s 2.7 percent growth target for this year and a 4 percent budget gap in the year through March 2015.

“Nene could announce the complete or partial privatization of some assets, which would mean a smaller liability for government,” Maarten Ackerman, an investment strategist at Citadel Asset Management, said by phone from Cape Town on Oct. 16. “Then, on paper, he would be able to put down numbers which will keep the rating agencies happy.”

The slowest growth since the 2009 recession has put tax revenue under pressure, complicating Nene’s task of narrowing the fiscal shortfall, even as he has vowed to stick to the expenditure ceiling set by his predecessor, Pravin Gordhan.

Standard & Poor’s lowered the sovereign rating to one level above junk in June, citing concerns about rising debt levels and slow economic growth, and put electricity utility Eskom Holdings SOC Ltd. on watch for a cut to non-investment grade a week later. Fitch Ratings Ltd. downgraded the outlook on the nation’s debt to negative.

The yield on benchmark government securities due December 2026 has fallen 24 basis points this year to 8.02 percent.

Funding Gap

Nene will give more details on plans to help plug a 225- billion rand ($20 billion) funding gap at Eskom, which could include selling some “non-strategic assets,” according to the National Treasury.

The government is considering selling its 13.9 percent stake in Vodacom, which is worth about 26 billion rand, four people with knowledge of the matter told Bloomberg. The government has also set up a task team to look at the future of the loss-making South African Airways.

South Africa’s last major asset sale was in March 2003, when it sold 25 percent of telecommunications company Telkom South Africa Ltd. for 3.9 billion rand. The government still owns 39.7 percent of Telkom.

Gordhan said in February that while the government isn’t opposed to using marginal assets to generate income, privatization is “not a philosophy we believe in.”

Debt Reduction

“A simple clean-up of the peripheral assets could yield quite a bit and it’s one way of bolstering the numbers,” Kevin Lings, an economist at Stanlib Asset Management, said by phone from Johannesburg on Oct. 20. “I don’t think it would be enough to change the entire feel around the fiscal and debt position, but it would allow us to keep government debt below the critical 50 percent of gross domestic product.”

Gordhan set up a committee last year to review the nation’s tax system. Nene said on Oct. 14 there are areas where the government hasn’t “closed the tax gap completely.”

The Treasury announces tax changes in its main annual budget. Higher tax rates may add to the strain on consumers who face rising interest rates as the central bank battles to contain inflation spurred by a weaker currency. The rand has fallen 24 percent against the dollar since the start of last year, the most of 16 major currencies tracked by Bloomberg.

‘Broader Tax’

“The idea of seeing higher and broader tax has been around for a while,” Christie Viljoen, an economist at NKC Independent Economists, said by phone from Paarl outside Cape Town. “It would be best if they give a signal that they are announcing something specific in February.”

Adding to the pressure on Nene is a demand from civil servants for a 15 percent pay increase, more than double the inflation rate. That outstrips the budgeted average 6.4 percent advance in the government’s wage bill for the next three years. Nene has said the government will delay some spending to help curb the deficit.

Cutting back on infrastructure spending would be unwise, Jac Laubscher, chief economist at Sanlam Ltd., said by phone from Cape Town.

“What they have to do is cut current expenditure, that’s where the problem lies,” he said. “It is politically difficult. If you are caught between a rock and a hard place, the options are not the same as when you have complete freedom.”

©2014 Bloomberg News

[Mud Dog]

Is Tim Noakes running a Ponzi scheme?
(Magnus Heystek)

I have many times over the past 30 years experienced first-hand the birth, growth and eventual demise of collective delusions, be it in investments, religion or diets.

It seems to me that these three areas of the human condition lend themselves to such a phenomenon. It appears that we all want to be rich, thin and go to heaven, maybe even in that order.

As an investment journalist at The Star in the early 1990s I witnessed first-hand this collective delusion when I attended some meetings of two notorious pyramid schemes, the one called the Rainbow Investment Club and the other the Newport Multi-Level marketing scheme.

If memory serves me correctly the one meeting took place at an upmarket hotel in Sandton, Johannesburg, and was attended by hundreds of people, all arriving with wads of cash to hand-over to these fast-talking salespeople.

It was all lights, music and glaring testimonials from the “first-movers” in these schemes. Greed was dripping from the chandeliers and I saw, first-hand, how suitcases of cash were driven away in swanky cars by the perpetrators of the scheme.

My articles on these schemes did not, as I naively thought, bring forth thanks and gratitude but rather opprobrium, it was met with vicious attacks, threats of lawsuits and even threats of a personal nature.

In the end, tens of millions of rands were whisked out of the country by the operators in suitcases.

The same happened when I wrote a column on the Krion Investment scheme in 2001, originally called the MP Finance, named after Marietjie Prinsloo, the master-brain behind the scheme. Virtually the whole of Vanderbijlpark was sucked up into this collective delusion; people were resigning from their jobs to get hold of some money to stick into the scheme, with disastrous results.

On the Monday morning after I wrote my report on MP Finance I arrived at my office to be confronted with a bewildered secretary. The phone was ringing off the hook. Once again, the callers were not thanking me for the exposure, but rather I was accused of ruining the scheme, a man of the devil and all other kinds of accusations flung my way.

It once again, allowed me an insight into the workings of collective delusions. I spoke to several of the callers, explaining my problems with the scheme, but it was as if was talking to someone in a trance, drugged by their firm belief of reality.

The same scenario played out about ten years later when the Sharemax, Leaderguard and Picvest investment schemes were in full swing. Mass meetings were organized around the country which, I was reliably told, were opened by scripture and prayers. We all know how that is going to end: billions will be lost.

When the late Deon Basson, initially, and later forensic auditor Andre Prakke and myself started warning investors about these schemes, we encountered the same kind of reaction: denials, delusion and the ever-present threats of legal action.

Collective delusions

Collective delusions are typified as the spontaneous, rapid spread of false or exaggerated beliefs within a population at large, temporarily affecting a particular region, culture or country.

With money people want to become rich overnight, with religion people want a guarantee of heaven and with diets people want to lose weight effortlessly and without sacrificing too much.

The world is full of examples of Ponzi schemes, religious fanaticism as well as

We are now, once again, witness to another example of collective delusion: the Banting diet popularized, once again, by Dr Tim Noakes and his fellow LCHF-priests.

CHF stands for low carbohydrate high fat, the acronym now commonly used to refer to the Noakes or Banting diet. According to the folklore being propagated William Banting was an 18th century undertaker who, on the advice of his doctor, went on a LCHF diet, lost several stones and stayed slim for the rest of his life. Or that is what we are led to believe.

Carbs are OUT, are the enemy and will send you to an early grave, is the war-cry of the Banters. IN is fat, the former forbidden fruit of anyone concerned with weight-loss.

Tell this to almost three billion people in India, China and most of the far east who rely on cheap rice and noodles to get them through the day.

Halleluja, says our meat- and fat-loving nation, piling on the lamb chops, boerewors and grass-fed sirloin steaks.

Meanwhile Noakes and his band of fellow worshippers are spreading the word, heartily endorsed by certain editors and media personalities. Think wildfire, then you know what I mean.

Any attempt at moderation by other experts in the field of nutrition are shot down in flames.

Long-standing three-hour lunch companions recoil in horror when you stuff your face with some of the piping hot Italian loaf put in the table, or even worse, you order pasta. Pasta! You are going to die, they almost shriek, as they gulp away at their cauliflower bread at R85 a loaf.

Banting restaurants are popping up everywhere. Menus are being rewritten all over the country. Testimonials about weight loss appear in You Magazine and the diet has even made it onto Sunday night television show Carte Blanche.

Pasta and bread sales have collapsed while the sale of organic and free range meat, at 40% more than the normal price, is soaring.

At some point, perhaps in less than a year, some sense of normalcy will re-appear.

It’s like some madness has gripped the nation’s meat eaters, or at least those who can afford it. I’ll bet it’s the same crowd, who until recently were worried about climate change and the ozone layer.

Does the Banting diet work? I’m perhaps not the right guy to ask, but I think people put on weight when they eat too much and exercise too little. Kilojoules in versus Kilojoules out. But that does not make for a best-selling book does it?

[Mud Dog]

Enough progress made for etoll enforcement – Sanral CFO
(By Antoinette Slabbert)

Prosecution is one step closer for e-toll defaulters after the South African National Roads Agency (Sanral) and the National Prosecuting Authority (NPA) have come to an agreement about the NPA’s requirements to present cases in court.

Sanral CFO Inge Mulder told Moneyweb that the agency got clarity from the NPA about the “evidential matter” it has to provide to enable prosecution. NPA spokesperson Nathi Mncube could not confirm this.

Mncube said on Friday that the South African National Roads Agency (Sanral) has not yet referred any cases of failure to pay e-tolls alone to the NPA.

However, Dr Stoyan Hristov Stoychev, a researcher at the Council for Scientific and Industrial Research, has appeared in court on charges of fraud, driving a vehicle with false registration number plates and failing to pay e-tolls. He has been released on bail and will appear in the Pretoria Magistrate Court again on December 4, Mncube said.

Another person was arrested for driving with a defaced number plate and will appear in the same court, but Mncube had no further details on this case.

Mulder says Sanral will provide the NPA with a bundle of documents needed in every case to prove that a specific vehicle passed under the relevant gantries at a specific time and date, attracting toll fees and that the fees have not been paid.

There is a legal presumption that unless proven otherwise, the owner of a vehicle would be the one driving it.

Mulder is confident that enough progress has been made to effect enforcement.

The NPA will proceed with the two cases of number plate tampering with the intent to avoid paying e-tolls. She says each time the accused passed under a gantry with the suspect number plates, it constituted a separate charge, amounting to more than 1 000 charges over the relevant period.

“This has to happen more now. It is not as if one has to charge 500 000 people. You just have to see that something is happening. Nobody wants a criminal record,” she says.

Weighed down

Mulder says the Gauteng e-toll system is weighing down Sanral’s finances.

In the year ended March 31, with only four months of e-tolls included, Sanral showed a loss of R2.7 billion in its toll potfolio, after R3.5 billion of finance charges.

This was attributed largely to delays in the implementation of the e-toll system which resulted in an increase in finance charges and loss in revenue, Mulder said.

The Gauteng freeways (where e-tolls apply) represent less than 10% of the total toll portfolio in total kilometres, but are responsible for about half of Sanral’s current R47 billion debt. About half the total toll revenue will also be from e-tolls.

About half of Sanral’s toll portfolio is managed by concessionaires in terms of public-private partnerships, which means that the private partner provides the financing for the project. The debt related to such projects therefore does not sit on Sanral’s balance sheet, but on that of the private partner.

Mulder says any toll project takes between 16 to 22 years to break even. Due to the delays on Sanral’s e-toll project and reduction in initial tariffs, the period has been extended by about four years.

In fact, the Gauteng project will now take 22 years - and the total portfolio due to the weight of the e-toll project - 19 years before it will be out of the red. This is assuming no further projects are embarked on and traffic volumes and interest rate assumptions do not change.

Sanral is bound by law to increase toll tariffs annually by CPI only, and can therefore not increase tariffs further to recover lost opportunities due to e-toll delays.

The toll portfolio showed a R827 million profit before finance costs in the past year and Mulder says serious questions should be asked if that line turns negative.

Working out revenue

To understand Sanral’s accounting on the e-toll system it is important to know how revenue was recognised.

In its annual report Sanral states that it charged a total of R2.27 billion in e-toll revenue for the reporting period. R1.12 billion was however not recognised.

Basically revenue would be all income invoiced, but in terms of accounting standards Sanral has to take a view on the probability of successfully collecting the revenue and only recognise the amount that will probably be collected successfully, Mulder says.

In this regard Sanral looked at historic payment patterns. Most of its e-toll clients are repeat road users and therefore some patterns have developed even in the four months of operations.

In the case of registered and tagged users, it recognised only the discounted tariffs.

In the case of non-registered users, it recognised only standard tariffs (roughly double the discounted traiffs) and did not take into account other potential revenue from persons who pay later, when the extremely punitive alternative tariffs apply (about three times the standard tariff).

Mulder explains that the postponement of the post-grace period discount for e-toll users granted by the Minister of Transport and gazetted in May gave customers the option to register before June 30 and still qualify for the standard rate for transactions between December 3 2013 when tolling started and February 28 2014.

At year-end Sanral did not know how many customers would make use of that offer and therefore refrained from recognising any revenue beyond the standard tariff.

By the time the Auditor-General reviewed Sanral’s financial statements, there was more clarity on the number of customers who took up the minister’s offer and he was able to determine that a further R1.1 billion of addittional revenue may be due from the alternative tariffs, that would apply to those road users.

In the new financial year revenue from alternative tariffs will be recognised for the whole period where applicable. That may increase Sanral’s revenue considerably.

Sanral recorded R1.1 billion in trade receivables or debtors.

It was very difficult to take a view on the amount that will probably be successfully collected, Mulder says. There is no system locally or internationally that can be compared with the South African system and give guidance on expected payment trends.

In the end Sanral had to develop its own methodology that was eventually accepted by the Auditor-General.

The collection of debtors is however dependent on effective collection and eventually enforcement, especially in the current environment of resistance to the e-toll system.

Postal delays

Mulder says the Post Office strike affects collections, especially with regard to unregistered users. She says in legal terms the liability is established when a user passes under the gantry and Sanral is not obliged to deliver the invoice to the user. It is available and users can obtain it through the call centre or customer service desks.

The impact of the strike on collections has not been material, because unregistered customers generally don’t pay because they don’t want to, whether they receive their invoices or not, Mulder says.

[Mud Dog]

Three ways to stretch your retirement pot
(Ingé Lamprecht)

JOHANNESBURG – Planning for retirement is an integral part of any individual’s long-term investment strategy, but this does not mean that planning and managing a portfolio should stop at 65.

While there are a considerable number of issues retirees should take into account to ensure that they don’t outlive their capital, this article will focus on three that were raised at a retirement seminar this week.

Keep in mind that the list is not exhaustive and that individual circumstances should be taken into account when making investment decisions.

1. Manage volatility risk

Peter Nieuwoudt, executive director of The Wealth Corporation and former chairperson of the Financial Planning Institute, emphasised the importance of managing volatility risk in retirement, by outlining three different scenarios where an investor achieved an average compound return of 7% per annum over a 20-year period.

In the first scenario, the return was identical each year ie, 7% per year. In the second, the average return was still 7% per annum, but higher returns were predominantly achieved in the early part of the investment period. In the third scenario, the returns were relatively poor in the first part of the investment period, but recovered later on. Yet, the average was still 7%.

Nieuwoudt said if an amount of R1 million was invested at the beginning of the period, the investor would have about four times his initial capital at the end of the investment period in all the scenarios, as long as he did not draw capital from the portfolio at any point.

But if the same scenarios were repeated with a drawdown of 5% per annum (a typical retirement scenario), the result is completely different. In the first scenario, the investor would have R1.68 million at the end of the 20-year period, in the second R2.47 million, but would have nothing left in the final scenario.

This simple analogy highlights how vastly different planning in retirement is to planning for retirement.

“Your financial advisor has to manage volatility risk when you retire.”

Nieuwoudt said it is important to monitor how much capital the retiree has left on an annual basis, how the investment performed in relation to the planning assumptions and to vary the drawdown rate against this background.

If the investment exceeded the planning assumptions the drawdown can be increased, but if it hasn’t it has to be reduced.

2. Don’t be ‘recklessly conservative’

Nieuwoudt said many investors have been advised to use a “life stages” approach to financial planning.

This means that their investments should become increasingly cautious as they get closer to retirement, with all of the retirement savings in cash shortly before they retire.

He said the fallacy in this logic is that for many people there is a lot of life left after retirement. Some people may live another 40 years after they retire and when compound interest, the so-called eighth wonder of the world, was working at its greatest, and investors had the largest amount of capital at their disposal, they switched to a more cautious investment.

The figure below highlights the potential impact of the life stages model (the red line).

graph.gif (20.77 KiB) Viewed 4592 times

Investors should consider that inflation is the enemy.

“If you are investing for the long-term you have to have growth assets. You cannot have cautious assets or fixed deposits or money under your mattress if you are in it for the long haul,” he said.

For those who retire at 60 or 65 there generally is a very long period ahead. Traditionally they plan for clients to reach 95 years, he said.

Nieuwoudt said any advisor worth his salt will structure a retirement portfolio in such a way that the investor draws an income from a low risk fund and secure the capital growth from a higher risk or a higher return fund.

3. Exercise financial discipline

It is important to consider that passive income does not provide windfalls, Nieuwoudt said.

Prior to retirement many investors aren’t disciplined in their budgeting and incur debt, but settle it when they get a bonus or windfall.

“When you are living off capital it is not possible to do that.”

Retirees therefore have to be extraordinarily disciplined.

Nieuwoudt said the assumptions used to draw up a financial plan are vital. If the retiree wants to go overseas every two years, the cash flow implications have to be incorporated in the budget.

While a number of retirees are also looking after their parents financially and/or supporting children, it is important for investors to ensure that they have enough for their own needs before they start supporting others.

Investors should also consider the difference between wealth and affluence. Wealth is the ability to live within one’s means. A show of affluence – spending more than you have – is not true wealth.

Nieuwoudt said the Scottish produce more millionaires than others because they are by nature very frugal people.

Retirees should also refrain from investing in lifestyle assets (second homes, renovations, holiday cottages etc.) unnecessarily.

These assets come back to bite you, he said.

“Unlike an investment asset, a lifestyle asset is a consumer of cash, not a generator of cash.”

[Mud Dog]

Harder than ever to move up eBucks tiers
(Hilton Tarrant)

FNB’s October overhaul of its eBucks loyalty programme has seen it replace a complicated points system, which used a trailing 12-month period, with a month-to-month one. That makes figuring out your reward level (upon which discounts are based) far easier, but the rule tweak makes it harder than ever to ‘earn’ meaningful discounts. The change will reflect from early November, based on activity during October.

In removing ‘booster’ products, where you were automatically moved up a reward level for having a ‘high-ticket’ product, say, a home loan, it’s become practically impossible to get to level 4 (not to mention level 5).

In fact, it’s arguably easier to earn points on the Gold account than on Platinum – for one, you actually earn points for your average spend (across your cheque and credit) card across the past year.

Let’s imagine an average Platinum account holder who manages their debt carefully, and attempt to figure out their reward potential…

They’re registered with inContact – 500 points
They receive e-mail statements for all their accounts – 500 points
They’ve had an active account for a while (> 3 years) – 1 000 points
They haven’t done a branch transaction in the last six months – 1 500 points
Six debit orders go off their account monthly – 1 000 points
They keep a balance of over R15 000 in their cheque account – 1 000 points
There’s a homeloan (with an outstanding balance of more than R250 000) – 3000 points
They bought their iPad via FNB’s smart device deals – 1 500 points
They swipe their credit card for between R10 000 and R19 999 per month – 2 000 points
They’re good with credit and haven’t exceeded their card limit or gone into arrears for the past 18 months – 1 500 points
Their card swipes exceed their ATM or branch withdrawals by a factor of 9 (its blindingly obvious what FNB is trying to do here) – 1 000 points



That’s 14 500 points, which means level three (12 000 to 15 999 points).

Lose the home loan and you’re at 11 500 – reward level two.

Wade through the ways to collect points on page 6 and 7 of the bank’s Platinum rewards guide, and whichever permutations you use, its impossible to break through the 16 000-point mark unless you make use of a fair amount of credit (already our mythical Platinum account holder above does a fair amount of swiping with their credit card and has an overdraft (effectively what a smart device contract is)). See the rewards tier below:

fnb.jpg (52.43 KiB) Viewed 4592 times

Source: FNB

These new rules incentivise you to use credit… if you use your (pricey) budget facility on your credit card along with the normal straight one, you suddenly earn 3 000 points. Do you have (and use) an overdraft of more than R5 000? That’s 2 000 points. Do you use and pay back one of those temporary loans offered at the ATM (where the initiation fee is up to 13% of the value, and interest runs to 2% a month)? That’ll net you 2 000 points. So too a revolving loan. A personal loan gets you 1 500 points.

Conversely, your reward for having more than R50 000 in an FNB investment (basically a fixed or term deposit many of which pay laughably low interest rates) will net you 2 500 points. You could also earn 1 000 points with a share investor (or builder) account, as long as your cumulative trade exceeds R15 000 over the past six months.

The bottom line is you’re far more incetivised to use credit than you are to save or invest. Run an overdraft, a personal loan, a home loan and use the budget facility on your credit card and you’re at 9 500 points! Add a smart device contract to that (by this point you’re wallowing in all the debt), and you’re at 11 000 points. Add a couple of points from the “way you do your day-to-day banking” and you’re easily through 16 000 and onto level four.

Quite how you get to level five (over 18 000) is a mystery…

Oh, and FNB has (again) cut the number of Slow Lounge visits you’re entitled to per month as rewards on its Platinum account. Only have the credit card? You’re now entitled to two visits a month, from six previously (two peak and four off-peak)! Have both the credit and cheque accounts (and meet the hurdles!), and you’ll get four visits. A few years ago, the number of visits was unlimited. Any bets that it’ll be cut down to two per month in the next 24 months?

Of course, if you have an FNB Private Clients account, no limits on Slow Lounge visits apply (and you get to bring a guest along on each visit for free).

Incidentally, FNB has been quietly waiving the R1.1 million a year earning criteria on these accounts and incentivising Platinum customers to upgrade. Its sitting with a rather peculiar problem as there’s an entire segment of relatively well-off customers in no-mans land, earning around R600,000 a year and above – a massive jump from the R350,000 entry-level for Platinum.

It seems the take up on this under-the-radar offer has been relatively good, especially with the Slow Lounge carrot. But, earning eBucks as a Private Clients customer is even harder, especially for those who technically shouldn’t have that account to begin with. You’ll need more than 12 000 points to get to level three (midway) on eBucks for Private Clients. Doing the basics (and having a home loan) will get you about halfway there. Of course, you could spend R50000 a month on your credit card and net 3000 points, or trade over R20000 with FNB Securities in a month and get 2000 points. Have more than R3m lying around? Give FNB Wealth a discretionary mandate and you’ll score 6000 points.

Unless you’re actually earning more than R1.1 million a year, you really shouldn’t be on this account. And the Private Clients account costs R349 a month. Quite an upgrade on the R199 bundled (cheque and credit card) option for Platinum.

Then again, maybe that’s been FNB’s plan all along?

[Mud Dog]

Four key trends from Sars’ tax statistics


JOHANNESBURG – Almost 95% of income tax returns were processed within three seconds of submission in the 2013/2014 fiscal year.

The South African Revenue Service (Sars) has come a long way since 2007 when only 2.6% of returns were processed within 48 hours of submission. The improvement in the turnaround times of assessments comes largely on the back of the modernisation of its processes, notably eFiling.

Each year Sars and the National Treasury release a joint publication called Tax Statistics. The booklet aims to inform the public and other interested parties of revenue collection figures, offers insight into economic indicators and is also an effort to assist policy makers.

While the publication itself and the data spread across its 200-plus pages can be somewhat overwhelming, a number of interesting trends emerge:

1. SA’s tax base still small, but broadening

While the number of people who pay personal income tax is still relatively small, the tax statistics do show a base broadening over time. Whether this growth will be enough to sustainably support political and socio-economic development targets remains to be seen.

Deon Breytenbach, Sars executive for revenue planning, says in 2004 roughly 2.9 million taxpayers were liable for tax. This number grew to 4.5 million in 2013, an increase of 53.9%.

In addition, in 2013 a further 2.2 million individuals paid PAYE (Pay As You Earn) but did not submit any tax returns as the majority of these taxpayers were below the R250 000 income submission threshold, he says.

The broadening is also evident in the number of assessed taxpayers (irrespective of whether they were liable for tax or not), which have grown from 3.5 million in 2004 to 5.2 million in 2013, an increase of 46.1%.

Breytenbach says that this is considerably higher than the 9.7% increase in the population register.

2. Average increase in taxable income higher than inflation

The 2014 Tax Statistics also tracked the financial health of taxpayers over a ten-year period.

Breytenbach says 3.5 million taxpayers were assessed in 2004.

Roughly 1.7 million of these taxpayers were 54 and younger at the time and were assessed during all ten subsequent tax years. (Quite a number of the remaining 1.8 million taxpayers earn less than R250 000 a year and are not required to submit a tax return anymore, while some have passed away.)

Many of these taxpayers (around 760 000) were in the R60 000 to R120 000 bracket during 2004 with an average taxable income of about
R89 000. Their average taxable income increased to around R265 000 by 2013, Breytenbach says.

“That gives you an annual average increase of 11.7% over the period.”

Breytenbach says there were about 311 000 taxpayers in the 30 to 34 year age bracket in 2004 with an average taxable income of about R120 000. Their taxable income increased at an average rate of 13.8% over the period to 2013, while their effective tax rate spiked from 20.5% to 23.8%.

If a taxpayer can be employed for a consecutive ten-year period, the chances of outperforming the market are very good, he says.

3. Young and old vulnerable

Dr Randall Carolissen, head of revenue analysis and tax planning at Sars, says the tax statistics reveal “extreme volatility” in employment in the age group 18 to 35.

More than a third of those employed in this cohort have intermittent jobs throughout any given year.

But it is not only young taxpayers who are vulnerable.

Carolissen says an analysis of jobs trends among pensioners in the age group 65 and older shows that about half a million people in this grouping, mostly professionals in high income categories, are still employed or have returned from retirement.

“So it could be a question of pensioners having to return to the job market to perhaps support their unemployed children,” he notes.

4. Cost of revenue collection lower, ‘but where’s the service?’

The cost-to-tax-revenue ratio (the cost of revenue collection) dropped slightly from 1.07% in 2012/13 to 0.97% in 2013/14. The international benchmark is 1%.

Stiaan Klue, chief executive of the South African Institute of Tax Professionsals (Sait), says this is laudable and speaks to the modernisation of Sars’ processes.

However, instead of focusing on containing costs, he believes the revenue authority should rather focus on improving service delivery, especially to small businesses. Small businesses make a significant contribution to the country’s gross domestic product and are at the centre of government’s job creation initiatives, yet Sars’ efforts are still largely aimed at improving service delivery to large corporates, for example by operating a large business centre, he says.

“Where is the small business centre?” he asks.

Klue calls on Sars Commissioner, Thomas Moyane, to establish a small businesses centre with dedicated service leaders to assist entrepreneurs.

[Mud Dog]

SA is heading to its Tunisia Day
(Max du Preez)

South Africa’s ‘Tunisia Day’ will arrive in 2020, analyst Moeletsi Mbeki famously warned in February 2011.

The year 2020 is when China estimates that its current minerals-intensive industrialisation phase will be concluded, a process that forced up the prices of South African minerals, said Mbeki. When that happens, the ANC government will have to cut back on social grants “which it uses to placate the black poor and to get their votes”, he wrote. That is the day “when the masses rise against the powers that be”.

Tunisia Day refers to the start, in 2010, of what became the violent Arab Spring. It led to the overthrow of the Tunisian government a month later, and was followed by turmoil – and in some cases, civil war – in Egypt, Syria, Oman, Morocco, Libya and Yemen.

Sooner than expected

It seems as if Mbeki was wrong. Well, at least about the date - and the cause of our own turmoil.

If nothing drastic changes soon, South Africa could face instability well before 2020 - and we won’t be able to blame the Chinese or anyone else. The crisis is almost completely homemade.

The term ‘perfect storm’ has become a bit over-used, but it’s certainly applicable now. This meteorological term is used to describe a combination of events or circumstances creating an unusually bad situation.

That is what’s on South Africa’s horizon right now – in fact, the first clouds are already darkening our skies and the winds are picking up.

It’s a storm that could lead to a fundamental reorganisation of political forces and indeed the end of ANC rule. But it could also lead to instability, which could further compound the destructive impact of the storm.

Zuma: The turning point

I think we will one day look back and say December 2007 was the turning point from where our national affairs started a spiraling decline. That was when one Jacob Gedleyihlekisa Zuma was elected president of the ANC at its Polokwane congress. The new-look post-Polokwane ANC fired then president Thabo Mbeki unceremoniously – and some say unconstitutionally – nine months later and in May 2009 Zuma became president of the country.

Over the last six years the Zuma government has wasted many billions of rands through corruption, vanity projects and maladministration. Huge infrastructure and other expensive projects were spectacularly mismanaged. National policies became increasingly confusing and contradictory. The disastrous education system and faltering local government did not improve. The president crudely manipulated the criminal justice system to stay out of jail.

But South Africa was a resilient country and it didn’t appear to be badly affected by the body blows.

Until now, that is.

South Africa in 2014 is like a boxer in the eleventh round who had taken too many punches to the head in the previous rounds and his knees are buckling. We are beginning to feel the cumulative effect of all our failures and follies.

To use another cliché: the chickens have come home to roost.

South Africans have lost their patience and stopped believing in promises. The anger and frustration among the poor and working class is boiling over because their lives haven’t improved according to their expectations.

The middle class is pessimistic and resentful because they see their tax money being wasted and that the state is malfunctioning.

The absolutely disastrous school education for black youngsters has not improved significantly over the last decade. The number of youth in townships and squatter camps who have fallen out of the system has grown to several million – people with no realistic prospect of ever getting a good job or a decent life; thus people with no hope.

Aided by an economic growth rate of just over 1% and a massive civil servant salary bill, the state’s coffers have now run dry and we actually face a fiscal cliff. Our national debt is fast approaching half of our GDP. The rating agencies are undoubtedly going to downgrade us early next year, which will have a further knock-on effect. Our energy problems are not going away soon.

So, just as the government needs more means to pacify the angry citizenry, it’s run out of money.

Deputy president Cyril Ramaphosa remarked euphemistically this week that as the economy comes under stress, so do the key economic actors, causing a worrying trend of "social bonds becoming increasingly frayed”.

If a ship has a good captain, it can weather even a severe storm. Ship South Africa doesn’t have that luxury.

It has a president who is more of a traditional chief than the head of a modern democracy and economy. His main focus is on enriching himself, his clan and his cronies and staying out of jail, instead of providing leadership.

Split

Before Zuma became leader, the ANC only had one major split: in 1959, when the Pan Africanist Congress was formed. Since he became leader, three factions broke away: first Cope, then the Economic Freedom Fighters and now the faction under Numsa’s leadership. Joseph Mathunjwa’s Amcu can also be added to this, although it isn’t a purely political movement.

The break-up of Cosatu will undoubtedly lead to more militancy among trade unions, at least in the short term, as the different actors try to woo workers. The recent platinum and Numsa strikes were important contributors to the slowing down of economic growth, and now we face more of the same.

The public discourse is now dominated with demands for socialism, nationalisation and so-called radical economic transformation, but the ANC government, while using those phrases itself, knows that reality demands the opposite.

The government knows it should sell SAA and stop dumping billions into that black hole, but privatisation has become a taboo word. The decision to keep on bailing it out is a strategic, political one rather than an ideological or financial one.

In Zuma’s first four years in power, the salary bill for civil servants rose 76%. For every R100 generated by our economy, R14 goes to paying bureaucrats. This makes our civil service the most expensive in the world. In Russia this figure is R3.70, in Brazil R4.60 and in Nigeria R4.

Some 17 million people now get social grants from the state, costing us more than R390 billion. Combined, welfare payments and public service salaries consume 56.4% of all state revenue, leaving just 43.6% for everything else that has to be done in this country. That is madness.

Two weeks ago, Minister of Finance Nhlanhla Nene promised to curb state spending. But as he was speaking, moves went ahead to employ some 700 more people in the Presidency. Zuma is pushing for a 300% increase in his own budget, from R366 million to R1 billion. A few days after Nene’s speech the president spent R330 000 to fly to Nkandla and back.

I’m sure Nene is sincere. But I’m equally certain that state expenditure will not be significantly cut while Zuma is president. Government will not stop bailing out parastatals like Eskom and SAA. The Medupis and other infrastructure programmes will continue to overrun and their costs will continue to increase five, tenfold. The government and the ANC don’t have the political guts to limit civil service pay hikes to the inflation rate, because they don’t want to annoy the trade unions.

What now?

The ANC needs to be transformed fundamentally if it is to take us to calmer waters.

I know for sure that Zuma will not do this. He doesn’t want to and he doesn’t have the capacity.

The question then is: can it be done? Can the ANC be saved? Who will save it? How long will Zuma be at the helm? Has the rot not gone too deep? Perhaps it has.

It is in this climate that Julius Malema’s EFF is flourishing. My guess is that it has already doubled the support it received in the May elections.

Now Numsa is planning to launch a Democratic Front, and later a proper socialist party to be a part of that. This evokes the memories of the United Democratic Front (UDF) of the 1980s, the popular movement that did more to force the apartheid government to the negotiating table than the ANC itself.

If this front materialises and turns into a broad movement of all aggrieved parties and people, as the UDF did, the ANC will struggle to stay in power after 2019, especially if the DA maintains its steady growth of the last decade.

So Ship South Africa is going into this storm without an able skipper. At least it’s still a resilient ship with good engines.

We will need all hands on deck – business and industry and civil society – if the ship is to survive and South Africa is to avoid its own Tunisia Day.

[Mud Dog]

Moody’s downgrades SA
(Antoinette Slabbert and Ryk van Niekerk)

Moody’s Investors Services on Thursday announced that it has downgraded the South African government’s debt rating by one notch to Baa2 due to poor growth prospects and rising public debt.

The ratings cut puts Moody’s investment rating two notches above junk status, and on par with the ratings of Standard and Poor’s and Fitch. South Africa’s Baa2 rating is also on par with Moody’s ratings of Brazil and Russia.

National Treasury was quick to react and said in a statement that the state is committed to reduce the budget deficit and that poor prospects for economic growth remain a concern.

"Government will continue to make the tough decisions that are necessary to address our challenges so we can build on the gains we have made over the past 20 years to improve the lives of our people," the statement read.

The ratings agency said the downgrade was primarily due to the poor medium term growth outlook due to structural weaknesses, electricity shortages and a further deterioration of the investor climate. The influential agency also said government’s debt-to-GDP ratio and the budget deficit would continue to rise.

The outlook on the sovereign rating was changed to stable from negative.

Moody's also downgraded to Baa2 from Baa1 the rating assigned to the debt issued by ZAR Sovereign Capital Fund Propriety Limited.

The downgrade will also lead to a range of downgrades of state owned companies closely linked to the sovereign rating.

Eskom finance director Tsholofele Molefe earlier said a further downgrade of the utility’s debt rating will increase finance costs by between 30% and 40%.

Sanral CFO Inge Mulder on Thursday told the Gauteng e-toll review panel that a further downgrade of the agency’s debt rating will see it at junk status, increasing borrowing cost and chasing away investors.

Sanral’s Moody’s ratings review is scheduled for next week.

[Mud Dog]

The national minimum wage conundrum
(Sungula Nkabinde)

Deputy President Cyril Ramaphosa announced at the recent Labour Relations Indaba that he would lead a committee of constituents within the National Economic Development and Labour Council (Nedlac) to establish the best approach for introducing a national minimum wage (NMW) in South Africa.

The committee, which includes six cabinet ministers and will present its findings in July next year, faces the difficult task of finding the path of least resistance on an extremely polarising journey to a NMW.

South Africa is far behind most of its counterparts in terms of the proportion of minimum wages to the national average wage.

“The international benchmark used by the International Labour Organisation (ILO) and the Organisation for Economic Cooperation and Development (OECD) for a NMW, is a proposed ratio of 40%-50% of the average national wage… But according to an OECD report, SA is considerably below that OECD average at around 20%,” said Neil Coleman, strategies coordinator at the Congress of South African Trade Unions (Cosatu) secretariat.

Sharp says, however, that this OECD number only includes data from large business enterprises.

If you include small- and medium-sized businesses, the informal sector, farmworkers and domestic workers the average wage is less than half of the OECD figure at R6 916 per month. Using this number, the minimum wage in South Africa is about 44% of the average wage,” Sharp explains.

The monthly earnings figures released by Statistics SA for the quarter ending May 2014, show that the average national earnings in the formal non-agricultural sector (including bonuses and overtime) is R15 169.

Ratio of minimum wages to average wages (%)

ratio.jpg (31.83 KiB) Viewed 4570 times

Ratio of minimum to average wage in 2006 for BCIS; Ratio of minimum to average wage of full-time workers in 2008 for OECD countries

Source: ILO Global Wage database and OECD database on minimum wages

Currently, minimum wages can be set by bargaining councils and sectoral determinations and some additional company level agreements, but many of these groups set a minimum wage below a ‘minimum living level’ for a family of five, which is considered by Cosatu to be around R4 500 to R5 500.

South Africa’s median wage in 2013 was R3 033 per month, meaning that 50% of SA workers earned below that amount.

The introduction of a national minimum wage, if Cosatu has its way, would therefore mean that all employees would ultimately receive a minimum living level wage, except in sectors where the minimum wage is higher.

Cosatu does accept that there may need to be a process of phasing in, to achieve this target.

A disaster for employment?

However, opponents of the national minimum wage argue that this will only lead to job losses.

And, looking at the current minimum wage for domestic workers (in metropolitan areas), for example, who earn a minimum of R1 877.70 a month for working a 45-hour week, it is difficult to argue that doubling this amount would not lead to job losses. How the minimum wage will coexist with prevailing determinations will, therefore, be a critical consideration for Ramaphosa’s committee.

Table of Sectoral Determination & EPWP minimums as at July 1 2014
Sector ------------------------------------ Min p/h ---------- Min pd (9hr day) ------- Min p/m ------ Review date
1. Domestic metro ------------------------- 9.63 ------------- 86.67 ----------------- 1877.70 ------ 30th Nov 2014
Domestic non metro ----------------------- 8.30 ------------ 74.70 ----------------- 1618.37
2. Security Officer Grades D& E Area 1 - 14.12 ---------------- * ------------------ 2938.00 -------31st August 2014
Security Officer Grades D& E Area 2 -- 12.92 ---------------- * ------------------ 2688.00
Security Officer Grades D& E Area 3 -- 11.74 ---------------- * ------------------ 2441.00
3. Forestry --------------------------------- 12.41 ----------- 111.69 ------------------ 2420.41 ------- 31st March 2015
4. Farm ------------------------------------- 12.41 ----------- 111.69 ------------------ 2420.41 ------- 28th Feb 2015
5. Contract Cleaning Area A metros ex KZN - 15.66 ----------140.94 --------------- 3051.35 ------- 30th Nov 2014
Contract Cleaning Area B all other ex KZN - 14.19 ---------- 127.71 ---------------- 2764.92
6. Hospitality 10 or < workers -------------- 13.34 ------------ 600.48 ----------------- 2601.88 ------- 30th June 2015
Hospitality > 10 workers ---------------- 14.87 ------------ 669.30 ----------------- 2900.08
7.Taxi drivers and admin workers -------- 13.68 ------------ 657.05 ----------------- 2847.01 ------- 30th June 2015
Taxi rank marshals ---------------------- 10.94 ------------ 525.23 ----------------- 2275.81
8.Wholesale & Retail shop ass. Area A --- 15.71 ----------- 141.39 ----------------- 3063.13 ------- 31st Jan 2015
Wholesale & Retail shop ass. Area B ---- 13.16 ----------- 118.44 ----------------- 2556.30
Wholesale & Retail sales person Area A -- 19.83 ----------- 178.47 ----------------- 3866.20
Wholesale & Retail sales person Area B -- 16.73 ----------- 150.57 ----------------- 3261.51
9.EPWP (Ministerial Determination) --------- 8.82 ------------- 70.59 ----------------------- ** --------31st October 2014

Source: Jane Barrett report to Cosatu



“Fifty-eight percent of workers (6.7 million workers) earn less than Cosatu’s proposed minimum wage of R4 500 per month. These workers would be vulnerable, in the short term, to retrenchment or, in the long term, to either replacement using capital equipment and technology or non-compliance with the minimum wage by small businesses which account for 65% of total employment,” says Loane Sharp, economist at the Free Market Foundation.

Only JSE-listed enterprises and the largest multinationals representing just 12% of total employment would definitely comply in the short term, says Sharp.

Employer bodies like the National Employer’s Association of South Africa (Neasa) are flabbergasted at the thought of a national minimum wage being considered, arguing that businesses, like individuals, would not be compelled into paying for commodities that they could not afford.

“It’s a noble idea. But if you cannot afford to pay (for labour), then you won’t… In South Africa there is an influx of immigrants from countries like Mozambique and Zimbabwe, who drive down wages. So companies will seek out these alternatives. Businesses will always make a plan. Even if that means going into the informal sector,” says CEO of Neasa Gerhard Papenfus, adding that the metals and engineering sector had experienced the biggest loss of jobs and the least amount of growth in recent years in spite of its workers being among the highest in the country in terms of minimum wages.

The Brazilian ‘bright-side’

But the conventional economic wisdom of there being a trade-off between minimum wages and employment is no longer widely accepted, as per this article in The Economist.

Coleman, who has done extensive research on the subject, is of the view that, a rising national minimum wage accompanied by the appropriate industrial and economic policies would lead to more people having more money to spend and would thus boost the economy, citing Brazil as a case study.

He argues that, while Brazil increased the minimum wage in real terms by 81% (between 2003 and 2010), 17 million formal jobs were created (from 2002 to 2011). Also, the increased incomes fuelled economic growth in Brazil, whereby the contribution of domestic consumption to Brazilian GDP rose from -0.5% in 2003, to 9.1% in 2010; and unemployment fell from 11.6% to 6.1% in the same period.

Although there are differences between South Africa and Brazil, Coleman argues there are enough similarities between the two societies to warrant comparisons in policy. They are similar in terms of GDP per capita, economic structure, the high levels of inequality and poverty, and the legacy of doctrinaire neo-liberal policies, all of which it make it a reliable example of how alternative growth strategies can be practically implemented, says Coleman.

But Sharp says Brazil’s case is an exception more than it is the rule because the country’s economy has been consistently expanding rapidly at levels far exceeding South Africa’s best.

“The only situation in which the proposed minimum wage would have a limited effect on employment is if economic growth increased to 6.5% per annum for a sustained period – this is the estimated level of economic growth that will be sufficiently labour-absorbing as to reduce formal sector unemployment.

It is irresponsible to draw lines of comparison between Brazil and South Africa when the only similarity between the two countries is that they are comparatively unequal,” says Sharp.

[Mud Dog]

Sanral likely to feel Moody’s bite
(Antoinette Slabbert)

Sanral will have its job cut out to explain why it should retain its credit ratings when Moody’s takes its finances under review this week.

The review follows after Moody’s downgraded the sovereign as well as Eskom last week.

Moody’s affirmed Sanral’s Baa3/A3.za ratings at the end of June and changed its outlook from negative to stable primarily due to “evidence of good electronic (e-toll) collections”.

At that stage e-toll collections were ahead of expectations and it looked as if uncertainty about the future of the project was something of the past. Sanral projected toll revenues to grow to R4.1 billion by the end of FY2015, R1.8 billion of which would be from e-tolls.

“The e-toll project will enable Sanral to realise the additional toll revenue necessary to both absorb cash-flow pressures emmanating from its operating costs (including debt servicing) and to gradually limit borrowing needs,” Moody’s said at the time.

It further stated that “any failure by Sanral to generate e-toll revenue –albeit unlikely - leading to deteriorating cash flows and growing borrowing needs” could lead to a further downgrade.

Hardly two weeks after this report by Moody’s Gauteng Premier David Makhura anounced the appointment of a panel to review the impact of e–tolls. While the provincial government does not have authority over Sanral, road-users jumped at the opportunity to stop paying and this immediately affected Sanral’s revenue as can be seen in the following graph:

ant2.jpg (42.81 KiB) Viewed 4561 times

Source: Sanral

Road users were not the only ones to react to the announcement. Investors also seemed to lose confidence in Sanral’s ability to collect e-toll revenue and at its last bond auction of the year last week the bids reflected a risk premium that Sanral considered unaffordable. As a result the agency only took up R415 million in bond offers, in stead of the R500 million it needed.

Another downgrade will see Sanral at sub-investment or so-called junk-rating.

The implications of this are huge.

Apart from the fact that many investors will lose their appetite for Sanral bonds, those who are prepared to risk it, will charge accordingly. “We cannot afford it,” Sanral CFO Inge Mulder said last week.

Sanral is dependent on its monthly bonds auctions to fund its toll portfolio and without it, cash flow and debt repayment will be jeopardised.

Even worse, current bond holders will be allowed the choice whether to stay invested or cash in their bonds.

Fund managers who are mandated to invest in only investment grade products will most probably take the opportunity to cash in or sell off Sanral bonds. Finding a buyer won’t be that easy as these bonds are not that liquid, so they will most probably rather cash in.

Sanral currently has R47 billion in debt, mostly in bonds. Only a portion carries a government guarentee, but the balance carries an implied guarentee in terms of the Sanral Act, Mulder said.

The chances are slim that Sanral will be able to pay up and in the end government will be the last port of call for investors who want their money back.

Government will have to oblidge, because the alternative will lead to unrepearable reputational harm not only to Sanral, but also to other state-owned companies and government itself.

The question is, can government afford that?

With Eskom, SAA and the Post Office also demanding bail-outs, one can imagine Finance Minister Nhlanhla Nene is burning the midnight oil

[Mud Dog]

Tips from one property investor to another
(Dean Gerber)

For many people investing in property seems to be the most obvious, safest way to grow wealth. However, many fingers have been burnt by diving in headfirst without doing enough homework. Here are a few tips about the financing of investment properties that may in the long run save the investor a lot of money.

Here are a few tips I’ve picked up along the way.

1. Pay as much interest as you can

This first tip may not be for everybody, but it’s the most important from my perspective. In this low interest rate environment, it makes sense to try and keep your loans lean on equity (your own money) for two reasons:

You want to pay more interest because debt is relatively cheap and interest is fully tax deductible.
The more equity you keep out of the loan, the more cash you will have available to fund new investment properties.

In the past, banks would allow you to apply for full Flexi Facilities on everyday home loans. This meant that you were able to draw back up to the full loan amount or in simple terms, to take out any capital that you had already repaid on the loan. This privilege is now mostly reserved for private bank clients with structured facilities.

However, you can still effectively manage and reduce the equity in the loan by not committing too much equity upfront or applying for a future-use-facility (See below).

These days many financial planners (sometimes very undeserving of that title) encourage buyers to pay off a loan as quickly as possible by making additional lump sum payments each month. According to them, this allows you to “save” interest.

If you are a savvy investor though, interest can be your friend and you might benefit by pushing the loan out as long as possible and paying more interest each month.

As long as your rental income is covering your interest payments, the capital you owe is constantly shrinking in real terms, thanks to inflation.

2. A large upfront deposit is unnecessary

The first step in keeping your property lean on equity, is avoiding placing a large upfront deposit when you initially purchase the property. As a buyer, estate agents will try to convince you to put down a large cash deposit with your offer to show the seller that you are “serious” and are committed to the transaction. This is nonsense.

The deposit does not make a major practical difference in terms of securing the deal. An offer is binding regardless of whether you have put down an upfront deposit. A small securing deposit is enough to show you’re interested.

Many agents actually prefer the buyer to pay a larger deposit because they have a clause in the agreement stating that they can deduct their commission from the deposit should one of the parties be in breach of the contract and the deal does not go through.

So if you are going to put down an upfront deposit, I recommend you avoid placing it in the agents trust account. It’s preferable to deposit it with an impartial transfer attorney who will hold the funds until a dispute is resolved.

In terms of the benefits of upfront deposits see below.

3: Appeal and negotiate your interest rate

It is very important to secure the best possible interest rate on your loan. This loan is potentially going to be in place for the next 20 years! Every part of a percent that you can cut out upfront will save you thousands going forward.

I’m always amazed at how many people will just accept the rate offered at face value. There is always room to negotiate with the bank. I have negotiated rates down by more than 3 percentage points in the past. If the bank is unwilling to budge, they will normally allow you to appeal your rate at some point in the near future if you have an improved financial situation.

By way of example, a 1 percentage point saving on the interest rate for a loan of R1 million, will save you around R150 000 in interest over the term of the loan (assuming a 20-year loan).

4. Keep it Flexi

If you are thinking of using any excess cash you may have as a large upfront deposit, you may consider rather asking your bank to set up a Flexi Facility. This way you can deposit your cash into the bond post-registration of the property. You will have access to draw down on the cash at a really good interest rate should you want to buy a new property, renovate or even buy a new car. If you put down an upfront deposit, that cash will not be accessible again until you sell the property or apply for a further loan (which is costly).

Note: When it comes to negotiating your interest rate with the bank, there is a benefit to paying an upfront deposit. The lower the loan-to-value ratio (size of the bond over the purchase price of the property), the more favourable the interest rate.

I often ask the bank to quote me three different interest rates based on three deposit sizes. I then get a feel for how to strike a good balance and achieve the best interest rate using the money I’m willing to commit upfront.

5: The future-use-facility

If you cannot avoid putting down a deposit or your bank promises you a really good interest rate in exchange for a deposit, then make sure to register a Future-Use-Facility.

This is known by different names at different banks. Essentially, if you were to buy a house for R1m and put down a R200k deposit, the bank will normally only register an R800k loan against the property at the deeds office. However, you can ask them, prior to registration, to register a Future-Use-Facility for the R200k. This means that should you need access to your cash up to the full purchase price, you only need to undergo a simple bank credit assessment. Without a Future-Use-Facility, you will be required to register a further loan and pay the associated legal costs.

6: Use your own attorney

Another myth is that the purchaser of a property is required to use a transferring attorney nominated by the seller.

I nominate my own conveyancer and always tell the seller that this is a deal breaker for me for two reasons:

If I can use the same conveyancer to register the bond and also to handle the transfer of the property, I can negotiate a better discount on the legal fees. Some banks don’t allow you to use the same conveyancer for both though.
You should try to establish a long-term relationship with a good, reputable attorney. The more business you bring the attorney, the larger the discount you can negotiate. This can sometimes be up to 40% off the legal costs.

7: Find a tenant on the seller’s time

It takes time to find a tenant for your investment property. But you can minimise the risk of having an empty apartment for the first month or two by doing the following:

Include a clause in the Offer to Purchase stating that the seller will allow you reasonable access to the unit for viewing purposes between the date of bond approval (i.e. when the offer becomes unconditional) and the date of transfer. This will give you anywhere between one and three months to find a tenant on the seller’s time.
Include another clause to allow yourself the option of taking early occupation should you find a tenant prior to the transfer date. This gives you options – should you find a suitable tenant prior to transfer, they can move in immediately (if the place is empty) and if you don’t find a tenant, you will have no obligations on the property until transfer.

8: Section 13sex tax allowance

Yes, you read right: Section 13sex - the sexiest tax deduction around. This is for the slightly more sophisticated investor with more than five investment properties. It’s a great incentive for buying off-plan properties and not many investors take advantage of this allowance.

Very basically, if you own five or more residential properties you can claim, as a capital allowance, an effective 2.75% (55% x 5%) of the value of any units that were acquired directly from a developer. If, for example, you owned five apartments and one was purchased directly from a developer for R1 million, you could claim a tax deduction of R27 500 per year. If you are taxed, for instance, at the highest marginal tax rate of 40%, this could save you up to R11 000 per year. As with all capital allowances, it should be recouped on sale of the asset.

9: Sell your properties yourself

Selling your properties yourself is not as complex as people imagine it to be. There is no need to pay an agent a large sum of money for services that you really don’t need. In a sellers’ market – like the one we are currently experiencing – it is easy enough to advertise your property online and sell it within a few days. Your conveyancing attorney will normally help you with the sale agreement at no extra cost.

10: The experts aren’t always experts

Try not to believe everything that estate agents and financial planners tell you. You’re better off deciding if something makes sense yourself. Remember: when it comes to buying a property, almost everything is flexible – so structure things in a way that makes sense to you and your financial situation.

[Mud Dog]

The death of the rainbow nation
(Magnus Heystek)

If anyone reading this column still had any lingering hopes that SA is not hurtling towards being a failed state, then I'm sure these hopes were finally dashed by what happened in Parliament on the evening of November 13 2014.

When the president of a country, according to some reports, starts sending in his jackbooted thugs into the most hallowed halls of democracy in order to silence dissenting voices, then you need to realise that the end is near for what is described as a constitutional democracy.

These are the kind of images you would expect from a tin-pot dictator in the middle of an African jungle, where some buffoon has proclaimed himself Leader for Life, wearing a full military uniform with rows and rows of gleaming medals, all awarded to himself by himself.

Not in a country where most concerned middle-class citizens were hoping against hope that South Africa would escape the now familiar cascading collapse of the economy, infrastructure and political tolerance in most post-colonial African countries. But it is happening, right before our eyes and we can see just how powerless we are.

Uhuru (Swahili: freedom) in Africa, the cynics often said, lasts for about twenty years before everything starts collapsing: the infra-structure, the economy, the collection of taxes. Does that look familiar to you?

Let there be no doubt: what happened on Thursday evening will have serious consequences, much as the nail-painting ANC-cohorts would like to laugh and jeer. The world is watching and from what I can gather they were alarmed by what was transpiring.

Within minutes of the unfolding events on Thursday evening, my inbox started beeping. Messages and questions started pouring in: from a brother in the Bahamas, a friend in Australia, foreign clients with money still locked up in this country. All the questions were same: what the hell is happening in South Africa?

And what can you say? “Everything is fine, Boet. When are you coming home?”

Such a suggestion will be met with scornful laughter:” Not in a million years,” would most probably be the reply.

Power-mad liberation movement

In one dramatic and shocking evening the ruling ANC party was unveiled for what it really is: a power-mad liberation movement prepared to follow a scorched-earth policy in order to achieve its political objectives.

The world is watching and the world is worried.

Every time one of the international credit ratings agencies such as Fitch, Standard and Poor’s and Moody’s downrate our country, as happened two weeks ago, it is laughed off by local politicians as not being important.

We will see how important it is when we get downrated to junk-bond status and our bond, property and currency markets suffer in the fall-out.

The ANC has only one political objective and that is to remain in power.

It will use every mechanism available to it. It will use legislation that was drawn up by the Nationalist Party in 1961 in order to control the flow of money, namely foreign exchange control.

It will use the legal system for as long as it can at the expense of the taxpayer. It will use the tax system to spy on taxpayers. And it's bound to get worse.

Where is our so-called “best constitution in the world”, as it is so often described?

When they come for you and your possessions the constitution will be of little comfort.

If you doubt me or think I’m talking through my hat my dear friends, then I suggest you spend some time reading the book “BEE: Helping or Hurting” by Dr Anthea Jeffery (Tafelberg), one of country’s most respected political analysts, published only weeks ago.

Like a proverbial sleuth has Dr Jeffery attempted to link the various, at first glance, unrelated and seemingly innocuous pieces of legislation already before Parliament or in the process of being drawn up. They deal with BEE, Affirmative Action and the right of the State to take possession of property if it deems it to be in the national interest.

“Behind the schemes, however, the ANC had other objectives in mind. In particular, it had long been committed to a national democratic revolution (NDR) aimed at eliminating property relations and ensuring demographic representivity in every sphere of society. In addition, its allies in Cosatu and the SA Communist Party—joint rulers with the ANC in the governing tripartite alliance—had long identified the NDR as providing the shortest and most direct to a socialist and then a communist society,” she writes.

Since coming to power the ANC has never deviated from its belief in the NDR, with the most recent reaffirmation coming at its national conference at Manguang in the Free State in 2012.

Read the book, all 500 pages, over the coming Christmas break and then tell me you are not worried.

Property rights under threat

And 'property' in this context, does not merely refer to your personal residential property, it refers to property in the broadest possible sense of the word, i.e. all your earthly possessions, be it a farm, business, factory, restaurant, café and even intellectual property rights which you might own. All mineral rights in SA were confiscated by the State in this manner some ten years or so ago.

My advice for some time has been to repatriate as much as your personal assets out of the country as you can.

This followed on, in particular, after my altercation with SA Reserve Bank, when I saw first-hand the enormous power this institution has over the individual and how it can be abused [by] individuals within the system.

Where is our wonderful constitution when the SA Reserve Bank can make rules and regulations in secrecy, attach your personal property at whim and then act as judge and executioner should you wish to dispute the rulings?

I took a vow at the time in 2010 that I will never allow myself to be in such a position again and I repatriated all my disposal assets at the time out of the reach of the local banking system and out of reach of the clutches of the SA Reserve Bank. This has, ironically turned out to be an outstanding investment as I bought US dollars at R6,7 and invested most of it in biotech and technology funds offshore where the returns have been in excess of 200% so far.

And with the way the rand and economy is performing I’m sure that these returns will get even better over time. My view is that the rand will be R20 in four year’s time. More on that in the next column.

Asset swaps not as safe as you think

And don’t for a moment think that your rand-hedge investments will protect you when the collapse in the rand really gets going. Few investors realise (and the fund management companies will try and keep this very quiet) that assets swaps exists at the mercy of SA’s exchange control regulations. If SARB - under direction from the government - orders all these asset management companies to unwind these asset swaps you will end up with local investments again, most probably at a time when your need for offshore investments is the greatest.

And don’t think it can’t happen. It can and most probably will happen in the next five years as the cumulative effect of weakening growth, weakening foreign exchange and a rise in direct offshore investing starts to manifest itself.

Government will one day, is my forecast, simply send in its jackbooted bankers from SARB to switch off the offshore investing tap. It will happen overnight, without warning and at precisely the time when the demand for foreign assets is at its peak.

It reminds me of the old joke that used to circulate in the offices of The Star in the mid 1990’s when I was employed there: there are only two types of ex-Rhodesians in the world. Those who took all their money out of the country and those who wished that they did.

[Mud Dog]

Sars flaunts power to preserve assets
(Ingé Lamprecht)

JOHANNESBURG – The South African Revenue Service (Sars) is flexing its muscles to preserve assets to ensure tax collection, a tax expert says.

Arguably the most widely reported preservation order handed down over the past year has been for the preservation of Mark Krok’s assets. Krok is a former South African businessman.

This followed a request from the Australian Tax Authority and effectively secured all Krok’s assets to the value of R297 million for the collection of unpaid tax debt of R249 million owed to the Australian Taxation Office.

Madelein Grobler, corporate tax consultant at KPMG, explains that a preservation order is an order of the court to prevent a taxpayer from disposing or removing assets.

A preservation order differs from an attachment order. An attachment order will allow Sars to sell the taxpayer’s assets, while a preservation order only allows Sars to safeguard the taxpayer’s assets.

Grobler says recent judgments to preserve assets could be the beginning of many more to come.

“The South African economy is struggling and Sars is under pressure to collect more revenues every year, so it has to consider how to collect debt,” she says.

“This [the preservation order] is a manner in which they can actually preserve the asset in order to collect the debt when an actual tax liability has arisen.”

Grobler says Sars has become increasingly robust as far as safeguarding tax debts are concerned.

“The introduction of the Tax Administration Act [TAA] on October 1 2012 has given Sars the upper hand with respect to preservation orders,” she says.

Prior to the introduction of the TAA, Sars brought an application for a preservation order in terms of the common law. Under the common law, Sars had to prove that the taxpayer was more likely than not to dispose of assets.

Following the introduction of the TAA, the situation changed and Sars may now bring an ex parte application (where there is no representation of the taxpayer) for a preservation order to the High Court.

“This can be done if a senior Sars official believes a taxpayer will remove assets and frustrate its efforts to collect tax,” she explains.

Lesley Isherwood, head of tax technical at KPMG, says whether such an order is granted will depend on the specific facts of each case.

In a recent judgment (CSars v eTradex) Sars told the court that the taxpayer’s affairs have been outstanding for a number of years. It also indicated that it had numerous discussions with the taxpayer about rectifying its tax position, she says.

The taxpayer on the other hand explained to the court why there had been such a long delay in the submission of its tax returns, showed the steps taken to rectify the situation and had offered to provide security for the outstanding tax debts, Isherwood says.

In this specific instance, the High Court did not grant the final order.

Grobler explains that assets may also be seized if a senior Sars official has reasonable grounds to believe that the assets will be dissipated.

“It provides Sars with the power to seize and remove assets in anticipation of an application for a preservation order.”

Such a preservation order must commence within 24 hours from the time of seizure of the assets, she says.

[Mud Dog]

Billionaire Rupert lashes out at SA's government
(Mike Cohen, Bloomberg)

Johann Rupert (pictured), the billionaire chairman of Cie. Financiere Richemont SA and Remgro, berated South Africa’s government for failing to address corruption and power shortages.

“The leadership of this country, quite frankly, is becoming very, very hard to defend abroad,” Rupert said today at Remgro’s annual general meeting in Somerset West, near Cape Town. “The people who are running the country now were not given proper education. Wherever you look we have got stagnation and really worrying signs.”

South Africa’s central bank expects the second-largest economy on the continent to grow 1.4% this year, the slowest pace since a 2009 recession, as a series of blackouts caused by a creaking power-station network and strikes crimp production. The negative sentiment has been compounded by corruption scandals implicating President Jacob Zuma and his administration.

An inspection of 450 state entities by the nation’s Auditor-General uncovered R30.8 billion in irregular, unauthorized or wasteful expenditure in the 12 months through March last year, up from R30 billion the year before.

Thuli Madonsela, the nation’s graft ombudsman, alleged in a March report that Zuma unduly benefited from a 215 million-rand state-funded makeover of his private home. Zuma denied ordering the renovations, which included a swimming pool, chicken run and cattle enclosure.

“I’m concerned that we are not prioritizing the right things,” Rupert said. “We picked low-hanging fruit for a very long time. Those trees are now starting to run empty. How can a person not have electricity? How can we create jobs? ”

Remgro is an investment holding company with interests including banking and financial services, packaging, wine and spirits, and construction.

Asked by a shareholder about the company’s prospects, Rupert said the global economic outlook “is not looking too rosy” and that leading fund managers were focused on capital preservation.

“It doesn’t really matter who you listen to, whether it’s the IMF or whosoever, they are petrified,” he said. “The only way to get out of this, is economic growth. I see nothing on the horizon to pull Europe out of its malaise. America will do better than Europe. Yes, India will grow, yes, China will grow.”

©2014 Bloomberg News

[Mud Dog]

How power outages will hit our pockets
(By Mike Schüssler)

To quantify the cost of the electricity crisis is not easy but, with major manufacturing role players stating that it’s cost the industry R6 billion so far, it’s clear that the power shortage is causing trauma in the economy.

South Africa is very likely to have electricity shortages for the next three to five years and possibly longer for big projects. The costs are enormous: in money, direct economic growth and perceptions too. Technology innovations will also be affected.

The negative economic effects

1: While the whole economy will be affected, the two major industries where growth will decline are energy-hungry manufacturing and mining.

For example, the whole local heavy industry and especially the smelters or refineries of chrome, gold, platinum, steel and aluminium will no longer be a viable option for new or supplementary investment without energy saving. This industry was a great earner and part and parcel of the government beneficiation policy which is now no longer possible - probably for the next decade.

Electricity and manufacturing both going nowhere fast

graph+1.jpg (53.57 KiB) Viewed 4522 times

Source: Economists.co.za

Lost sales in retail, restaurants and motor trade will probably mean that retailers have to work harder for similar sales, although there may be opportunities when customers have to replace electronic items. Constant outages are a double-edged sword for the electronic sector: more items break, but the consumer will likely hold back on buying newer durable electronic consumer items - such as TVs, game consoles and entertainment systems - for fear of losses.

Even services such as advertising will suffer as viewer and listener numbers will decline on many popular programmes.

Some economists have calculated that SA has already lost 10% of GDP. The problem is that the future also loses more and more. Already growth prospects have declined from just over 4% potential to 2.5%. Every year the GDP loses another 1.5% of value added to the economy and it builds up over time. So within five years South Africa will probably lose at least 7.5% of GDP or more and likely another 10% or more of potential GDP.

2: Fewer investors, local and foreign, will invest in a country which already has high effective corporate taxes and huge administrative requirements without the added costs around power shortages, such as generators or lost time and customers.

Investors compare risk and returns with weak growth, which indicates that returns will be under pressure. Outages and intermittent supply increases the risk of doing business here. Along with strikes, [power supply] is the factor mentioned most by investors I’ve spoken to in the last few years.

Having a stable supply of both electricity and water is a necessity in every modern economy. One cannot invest millions or billions and not have proper power supply.

3: Productivity will be affected by time lost on factory and retail floors as well as in extra traffic congestion. There’s also likely to be more breakages and a longer reaction time to them.

Service industries such as banking, transport and communication will all have extra costs for no extra returns. Profit margin will be squeezed and investments in both machines and people will be realigned to account for productivity loss.

Productivity declines will make it harder for local firms to compete with foreign firms here and abroad. The rest of the world is increasing its productivity a little faster than South Africa already so the further slowdown in productivity will be hard on our competitiveness.

4: Employment opportunities will be depleted; the current 8.5 million people who would work if given the opportunity today will grow to over 10 million in the next decade. This is the human element of the tragedy that should not have happened. The lack of power has probably already cost over one million job opportunities over the last seven years. This will worsen as growth falters and some companies actually close sections or are just not able to produce and therefore pay employees.

5: Our current account with the rest of the world will remain far in the red as Eskom needs to import capital equipment and South African producers cannot make goods to take to the international market. The recent apricot production is a case in point where producers could not pulp their fruit and freeze it for export.

Furthermore the whole production process is getting more expensive as generators or stoppages add to costs, making South African producers more expensive relative to others, maintaining the market share difficult and production timelines more difficult to manage.

Exports haven’t risen in volume terms for some years already and are now more likely to decline, which will harm South African earnings. The situation is so serious that many exporters are actively looking to replace SA production with other countries’ production.

6: Inflation will rise quicker than would otherwise be the case. Firstly electricity prices will increase above the 6% inflation target for many years, as Eskom will struggle to keep the lights on without using expensive gas turbines which cost over R2.50 a kilowatt hour (kWh) to produce, while Eskom only gets about 65 cents for the average power price.
The graph below shows how electricity price increases have beat inflation thus far:

Inflation index vs electricity & water indices

graph+2a.jpg (48.48 KiB) Viewed 4522 times

*(2008 = 100)
Source: Economists.co.za

Selling less electricity makes the cost per kWh higher and Nersa is likely to boost the 8% increases per year by quite a fair margin every year. We expect about a 10-12% price increase in electricity on average per year for the next five years. There’s even a good chance that increases could average above 14% - which would mean a doubling in kWh prices in less than five years.

With intermittent electricity outages, costs of South African production and services rise and this too will feed into inflation. Inflation will now decline because energy prices are declining but we will remain about 100 to 200 basis points higher than we need to be: ie if inflation was to be 4% it’s more likely to be between 5% and 6%.

6: Government finances and its deficit are likely to remain larger than expected. With less retail sales VAT will decline and with higher industry costs corporate tax collections will be under pressure again (lower growth will impact the growth of employee tax growth and other taxes eg customs and excise).

The government debt-to-GDP ratio and the net debt situation will now worsen as government sells assets to help fund Eskom. Also, many government guarantees will have to be met by government as even other State-owned enterprises will now struggle to meet revenue targets.

Societal problems

But there are other problems for society as a whole.

1: Longer traffic delays – already noticeable – with economic and social effects. Many parents will have to leave earlier for work and arrive home later, making them more tired and angry at missing out on family events such as children playing sport.

The frustration will also lead to more road rage

People will use more fuel to get to their destinations which will hurt the pockets of the households (30%) who have a car. Commuters will be frustrated when they are stuck in a train with no power or busses stuck in traffic jams.

2: Insurance costs are likely to rise as more electronic goods fail and crime levels increase as electric fences and alarms cannot cope with long periods of outages. Crime and overall claims are likely to rise and many people will feel that security costs just have to rise.

3: South Africans will feel more helpless as traffic delays, crime and job security worsens. This will result in a confidence decline and durable good sales will also feel the impact.

4: The political shifts now probably underway will likely get quicker and the ruling party will have to work hard to win back voters’ trust. The longer power outages continue the bigger the effects on ordinary South Africans’ voting intentions.

But perhaps the biggest effect is that outages will form part of South Africans’ lives for at least the next two years. That in itself will be a very big talking point and something everyone has to plan for.

When the ANC blames Eskom it’s clear that the ruling party has learned from e-tolls and is trying to put distance between it and Eskom –although it is the ruler that allowed this situation to develop.

This crisis however has one simple silver lining. We will see a greater willingness to talk across our divides, whether it be colour/income or government/business/unions. That is the one thing that could bring us all together in getting things going. It could just lead to us talking about what really needs to happen and what business needs and even to the end of the state monopoly Eskom.

Let’s all hope that this crisis is not wasted.

Mike Schüssler’s original article was written for TreasuryOne and republished with permission.

[Mud Dog]

On another note .....


A tale of two loaves
(Jerry Schuitema)

Swellendam: - It was by chance recently that I came across the President’s parable. Many of you may know it, and many will most likely not want to know it. But it is an analogy that President Jacob Zuma seems to favour and has repeated a few times since offering it at the launch of his call centre in 2009. (Is it still functional?). That’s when he asked: “When you are given two loaves of bread and someone says to you one is from government and the other from the private sector, which one would you take?”

It is, of course, a no brainer, given the latest power cuts and research this year that showed South Africa as having the biggest gap between trust in government and trust in business. Only 17% of informed South Africans taking part in the Edelman poll said they trusted government to do the right thing, compared with 63% who said they trusted business to do so. But leaving the obvious and ironic aside, it could be one of the most insightful questions to ask in these times – albeit unwittingly.

This could be the era when conventional theories will be rewritten about government involvement in economies, free enterprise, private initiative, mixed economies, and developmental states; as well as the role of money and debt. We appear to be well into an extended period of deflation, adjustment and low economic growth; a time during which, in true Keynesian tradition, governments expand while private enterprise contracts. The behaviour of large corporate business especially in the financial sector, profit obsession and shareholder-value frenzy, as well as widening income disparities have encouraged popular clamour for government intervention.

It is to be hoped at least that the world will emerge with a renewed commitment to the two primary roles of government:

to establish optimum conditions for private initiative to create wealth and
to help those in genuine need of societal care.



The former is far more important than the latter because the latter is totally dependent upon the former. This was a hard fought lesson over centuries of policy experimentation.

Governments can and sometimes do run efficient commercial enterprises. If one added say a German or Swiss government baker into Zuma’s mix, it would be a moot point whether it would not be the preferred supplier.

Wealth is created when two things happen: doing or making something useful to others, and following the rules of free and legitimate transaction of supply, demand and price. This stands independent of and aloof to motive. So to argue that an absence of the profit motive is what makes government fail where private initiative succeeds with it, is shallow and disingenuous. Government commercial ventures fail mostly because of an absence of competition and failure to recognise the cost of capital. It is easy to cover inefficiencies simply by raising taxes. It is not so easy when you are using investors’ funds.

Before South Africa finds even the remotest consolation in the global trend towards bigger government it needs to seriously correct its government performance and accountability. It’s one thing having a big government; it’s another having a highly inefficient and ineffective one. A government that cannot deliver is a huge drag on society, and the bigger it is the bigger this drag. I remember many years ago, coming across a study that compared country fiscal efficiencies. In that study it was mooted that for every tax dollar a country like Denmark gathered, it returned some $0.90 to the populace in tangible value. In South Africa at that time it was only about $0.25.

I would give no credence to such a study today. The variables are just too large and the research too complicated to make a finding valid. But it does pose the intriguing, albeit complex question of what kind of value we are effectively getting for our tax rand. Put differently: what could government cut from its current activities and how effective could it be in doing the rest?

To get some help I approached economist Mike Schussler who is an outspoken thought leader on fiscal affairs. The first point he brought home through a number of charts is the extent of government encroachment. The most telling is one that shows our relatively high tax to GDP rate of 27% -- higher than Sweden at 22%; and nearly treble that of Japan (9.8%) and United States, China, Switzerland and India all at about 10%.

00tax-to-gdp.jpg (114.1 KiB) Viewed 4517 times

An important consideration is that for their tax dollars, citizens of many countries receive important benefits such as pensions and health care which a large part of South African taxpayers don’t. According to Schussler, South African government salaries as a percentage of GDP were the 6th highest in the world in 2010 and probably higher today. They make up more than 30% of formal sector pay. So his conclusion to the overall question is that the South African taxpayer in the private sector particularly is getting a relatively minor proportion back in tangible value.

From my perspective it means simply that the South African government is overwhelmingly redistributive. This may be understandable and ideologically justifiable. But it is very counterproductive when the redistribution agency soaks up a large chunk of what there is and ultimately threatens what can be redistributed.

So what would Schussler do? Get out of involvement in electricity, air travel, airports, rail, telecommunications, road construction, prisons, and national parks; and streamline government financing institutions such as the Landbank, Development bank and IDC. He also suggests that education itself can reside more in private hands with government vouchers for needy learners – the principle of subsidising a person rather than an institution.

Schussler also has a beef with that other major government impediment to economic activity – rules and regulations. He would like to see far deeper and enlightened oversight on the extent to which they harm or impede private initiative.

Cutting the government is one thing. The real challenge is to ensure maximum efficiency in whatever it does. The government itself has conceded that much work has to be done. But it seems to be losing the battle when the Auditor General’s latest report reflects a more than two fold increase in irregular spending at R62bn. Schussler points out that by far the largest part of government inefficiency is incalculable. It is where the rubber hits the road, where teachers have to teach, police protect, nurses nurse, and municipalities deliver services.

The supreme example of an utterly cavalier view of taxpayer’s money is of course, the State President himself. This is not only in Nkandla. He has surrounded himself with a cabinet of 35 – one of the largest in the world – bigger by far than the United States (16) and China (25), and each costing about R4m a year. Cut that by half (both the number and their pay) and by sheer example alone you will suppress waste substantially.

00govt-payroll.jpg (75.77 KiB) Viewed 4517 times

00govt-pay-gdp.jpg (57 KiB) Viewed 4517 times

The economic effects of a big government are obvious: it shifts resources, including capital and skills, from where they are adding value and creating wealth to where they are merely redistributing that wealth. Add inefficiency into that mix and you compound the problem severely.

But the argument against big government is more profound: ultimately you restrict choice. Ultimately you erode freedom. Ultimately you end up with one loaf.

To end on a philosophical note at this time of reflection: I have been writing a lot recently about empathy and survival and a frequent response has been that empathy is simply enlightened self-interest.

Enlightenment is not about practising empathy for survival; it is about not seeing the difference.

[Mud Dog]

Motorists can expect a fuel bonanza in the new year
(Sapa)

International oil prices have dropped steeply and motorists are set for a fuel bonanza in the new year, the Automobile Association said on Wednesday.

"The fuel price drop predicted by the data could be among the largest on record. This is notwithstanding a gradual weakening of the Rand/US dollar exchange rate over the past fortnight," the AA said in a statement.

Petrol is set for a drop of 105 to 107 cents per litre while the price of diesel was likely to drop by around 85 cents based on current data, the AA said.

Illuminating paraffin was showing a potential reduction of about 90 cents per litre.

The AA was commenting on unaudited mid-December fuel price data released by the Central Energy Fund.

The likely month-end figure was difficult to predict, as international petroleum prices continued to decline while the Rand followed its weakening trend against the US dollar, the association said.

"To date, the weakening exchange rate has been outstripped by the reduction in petroleum prices and if this trend continues, the price motorists pay at the pumps could drop well below R12 per litre by month-end," the AA said.

"We will monitor this trend closely and update motorists as the new year approaches."

[Mud Dog]

2015 is going to be a tough year to make money
(Magnus Heystek)

Normally the first couple of weeks of a new year in investment markets represents a slow and gradual wake-up after the festive season. Trade volumes are low and volatility barely registers on the trading screen, all across the world.

This year it all changed. In a short space of time three global macro events have burst onto the global financial scene like the celebrations which normally herald in the new year.

In less than three weeks we’ve had:

A collapse in the oil price to below $45 per barrel. Six months ago it was above $100 a barrel.
The commodity index dropping to a 12-year low.
The copper price, normally an indicator of industrial demand, is collapsing.
Likewise the Baltic Dry Index. Transport ships are standing idle and shipping rates are down sharply.
The Swiss franc decoupling from its artificial link to the euro, rising by more than 40% at one stage against its former link. Switzerland has now become the ultimate safe haven for the uber-rich of the world.
Short-term European bonds dropping into negative territory. In Europe you now pay the bank 0.75% per annum to keep your money.
US long-term bonds dropping to its lowest levels on record.



At the rate at which financial bombs are exploding almost on a daily basis, it would appear as if investment markets are going to make investors giddy with vertigo for most of the year.

In almost 35 years of reporting on, and thereafter advising on investment markets, I cannot remember the first days of the new year being filled with more uncertainty and ‘Black Swan’ events as the present.

I think 2015 is going to be a tough one to make money. Preservation of assets is going to more important that shooting the lights out.

Any advisor or fund manager who promises a repeat of historically high returns should be politely shown the door.

Can equity markets be far behind?

In the last few days I made some calls to fund managers I know and respect for their views. One, a PhD who studied under a Noble-prize winner for many years and one of the smartest guys I know, admitted to me: “I don’t have a clue what is going on. I have never seen something like this in many years, even decades.”

Some top-rated analysts reckon its all part of the same global macro-them, namely deflation. Ambrose Evans-Pritchard, who writes for The Telegraph, has long been beating the drum on the wave of deflationary forces about to engulf the world. The problem is no longer rising prices (inflation) but deflation.

China is exporting its deflation to the rest of the world in the form of lower demand of commodities and by reducing the prices of the goods that it flogs all around the world.

In the US, massive monetary stimulation in the form of QE1 (quantitative easing), QE2 and QE3 since 2009 has barely made a blip on the inflationary scale. In fact, inflation has been dropping despite more than $4 trillion being pumped into the system.

The old academic books on the correlation between an increase in the money supply and consumer price inflation have all been torn up, abandoned. Now the monetarists say its not the growth in the money supply but the velocity of money flowing in the system that is the real cause of inflation.

All the money pumped into to system has not reached Main Street, but merely circulated around Wall Street. Even Dr Ben Bernanke, former chairman of the US Federal Reserve recently could not get a mortgage loan from his bank. Talk about irony.

Deflation is a much bigger problem, long term to investment markets than inflation. But how could that be, consumers would ask? Initially falling prices are great and dandy and consumers benefit, as we can already see in the form of falling petrol and diesel prices.

But at the same time the global oil companies are already scaling back on exploration and laying off staff. This puts company profits under pressure, investment is curtailed and unemployment creeps higher.

Japan has been in the grips of deflation for 25 years now. Its stock market, which peaked at 40 000 in 1989, now stands at around 17 000. Who says stock markets always recover, revert to mean? Beware of this expression: ‘revert to mean’. It’s a crutch often used by poor fund managers who misread the cycle.

Equity fund managers do not like contemplating long-term deflation. In such an environment equities trend lower and lower. Bond funds make money but that asset class is not that sexy or that profitable. Asset manager fees are lower on bond funds than equity funds. Investors in listed fund management companies take note.

That’s how the Japanese investors kept themselves afloat during deflation.

Boring government bonds: it pays little interest - but at least it does - and your capital is guaranteed.
Making use of the so-called carry trade: borrowing cheap money in order to invest in asset classes in other countries where yields are higher, i.e. South African bonds.



But this is a risky game; it takes on a currency risk. Get it wrong and the currency volatility could wipe you out. Just ask the multitude of European borrowers who in recent years made Swiss franc loans, on the basis of its ‘assured’ link to the euro, and who are now 30% down the hole as far their outstanding capital is concerned.

Within days the first reports of currency brokerage firms going under already starting appearing. There will be many more. A currency appreciation of 30% within minutes does more than leave scars - it amputates whole limbs and body parts.

Currencies can drop sharply at times, but to appreciate by 30% in one go, is unheard of. It’s a sign of panic by the central bankers of probably the most conservative country and financial institution in the world.

Shall I dare describe this event as a ‘chocolate swan’, coming from a country which makes its money exporting pharmaceutical products, luxury watches and the nicest chocolates in the world?

I have a son who just returned from a visit to his mother who lives in Basel, Switzerland. He regaled us with his tales of “steaks that cost R600 for 200gms.” Well, he should have had more as that steak will now cost about R750 and a single tot of Johnny Walker Blue about R500 as well.

How will deflation, if it takes hold for a long period of time, affect South African investors?

There is no clear-cut answer. In some instances we are benefitting in the form of lower oil, and therefore petrol and diesel prices, but this is countermined by the drop in commodity prices. As far as commodities are concerned we are price-takers, not price-makers.

What happens to the prices we receive for our other export goods? In a deflationary environment they also drop, therefore expect some further weakness in the rand.

Where to hide?

It could be a good time to brush up on your knowledge of bonds and bond funds. They guarantee capital and provide a nice steady income over the lifetime of the instrument. You don’t see or hear too many bond fund managers appearing on TV- or radio shows. Bonds are boring and difficult to understand for the layman. But bonds could be good place to hide and preserve your capital.

And then perhaps some physical gold. With US and European long bond yields at current low levels, and likely to stay that way for a long time, is it perhaps to time to buy some assurance in the form of gold? Even better if it’s in the form of a Rolex made in Switzerland.

*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached for ideas and suggestions at magnus@brenthurstwealth.co.za.

[Mud Dog]

The Zimbabwe lesson: don’t print money!
(Philip Haslam)

Could South Africa ever turn out like Zimbabwe? It’s a question I get a lot. While the hot-potato issue of land redistribution may appeal to those studying Zimbabwe, another key real interest story revolves around its money printing programmes, and how the country descended into hyperinflation.
In order to understand hyperinflation, I travelled to Zimbabwe to interview people from all walks of life – their stories are gripping. And so peculiar that it makes for interesting reading. One young Zimbabwean woman I interviewed said this: “You know, at school we studied the German hyperinflation of the 1920s. I remember thinking at the time: What a bizarre situation – who could possibly live like that? I would never have imagined that within a few short years we would be living life exactly as the Germans did, replete with wheelbarrows of money and empty stores. How wrong I was.”
Everyone in Zimbabwe during its hyperinflation were under severe pressure unlike anything they had ever experienced. The government had increasingly turned to rampant money printing as a funding alternative and as this newly printed money made its way into the markets prices began to rapidly rise.
As inflation skyrocketed, it placed unique pressures on businesses – revenue that companies made couldn’t compensate for the cost of restocking more expensive supplies later. This margin pressure is common in high inflation environments: the net result was that businesses began to close down. By 2006, all stores had emptied. Prices hurtled higher due to an even greater scarcity of goods and society morphed into a barter economy.
Transaction control
One of the foundations to any currency is that it must hold its value over time for it to continue to be traded. However, as the government voraciously printed money, the value of Zimbabwe dollars deteriorated and slowly people began to look for alternatives. This was obviously a problem for the government who needed pay for goods and services with newly printed cash.
As money printing escalated the government had to increase its control over the population to force everyone to use the new Zimbabwe dollars it had created, and to further keep prices low (in an attempt to shield the country from the resultant inflation). This state control grew to alarming levels culminating in state sponsored land-grabs, which only exacerbated the shortages.
Those in advantaged positions could still game the system, making a quick handling fee, buy assets or foreign currency. But as hyperinflation set in, trade began to cease. By this stage, there were shortages of all critical inputs. Fuel ran dry. There was no electricity. Water supplies were cut. Toilet paper and basic supplies were exceptionally difficult to find. Money printing made ordinary Zimbabweans very poor. By 2008, prices were rising on a daily basis with inflation eventually peaking at 89 700 000 000 000 000 000 000%. (89.7 sextillion per cent!). By the end of that year, the Zimbabwe dollar had collapsed and it crashed out of use, eleven years after the Black Friday of 1997.
Are there lessons for us?
So back to the question – “Could South Africa ever turn out like Zimbabwe?” The answer lies in the many hyperinflation episodes that have occured over the years.
In a recent analysis Professor Hanke and Kwok from John Hopkins University documented, 52
hyperinflations in the last 100 years. That’s an average of more than one hyperinflation every two years – it’s a little known statistic, but hyperinflation episodes are quite common. Most follow a fairly standard build up which my co-author Russell Lamberti and I discuss as follows in our book on Zimbabwe’s hyperinflation, When Money Destroys Nations:
“Typically, government spending increases to a point where it is a significant component of an
economy. It runs up large debts over a prolonged period and increasingly uses money printing as a source of funding. If debts keep mounting and are not paid off, a time comes when lenders lose confidence in the ability of the government to repay, and withdraw their financial support, resulting in financial panic and loss of value of the currency. At this stage, the government runs out of debt-funding alternatives, and the weaker currency causes the cost of imports to rise. The government then makes the political decision to use money printing as its primary form of financing after exploring all tax options available to it. This pushes the country down an inflation path that cascades into hyperinflation…”
Zimbabwe was a text book case study of this process. From the time of the country’s independence in 1980, debts within the country began to grow significantly. Then, at the end of 1997 the country experienced a debt crisis known as Black Friday, on the back of major expenses that the government had committed to. As funding alternatives evaporated, the government turned to money printing to pay for its excesses.
So where do we fit in with this path?
The South African Reserve Bank has not yet started printing large amounts of money to pay off the country’s debts. However the nation is growing its debts at a frightful pace, particularly as it consumes imports. In the last year alone, the country’s trade deficit was just under R84 billion. This deficit has had to be financed contributing to increasing levels of government debt. Currently, the total South African government and quasi-government debt excluding social security obligations is just over R2 trillion, add to that the R2.5 billion in corporate and individual debts, and the net sum is equivalent to every household in South Africa owing over R300 000 each!
In the next year, the South African government is expected to borrow a further R150 billion. The state sponsored entity Eskom is in the process of borrowing a further R250 billion. Our government is further planning major public works spending over the course of the next few years – all paid for using borrowed money. At every level the government is leaking money. Ominously, the credit rating of the country has deteriorated. In June, credit rating agency S&P downgraded South Africa’s rating to one level above junk-bond status. In September 2014, Moody’s downgraded its rating of the country. We haven’t yet had a debt crisis to activate large scale money printing programs. But South Africa’s debt options are running thin.
While this is all very concerning, South Africa’s debt problems pale in comparison to global debt issues. Most developed countries are using newly printed money to finance their expenses and pay off debts. Since 2008 the United States has printed over $3.5 trillion. In the last few weeks, Japan has amended its money programs – printing ¥80 trillion per year! Europe has recently announced a €1 trillion money printing scheme. All to pay off debts.
Watch this space. Zimbabwe’s lessons are plain and obvious. Debt and money printing have very real long term consequences. As these play out in South Africa and across the world, if money printing is the primary option used to repay obligations, things may look very much like they did in Zimbabwe during its hyperinflation.

Philip Haslam is the lead author of the book, When Money Destroys Nations, a book published by Penguin South Africa and co-authored by Russell Lamberti on how hyperinflation ruined Zimbabwe, how ordinary people survived and warnings for nations that print money.
He is a qualified chartered accountant and economic adviser, writer and speaker. As a speaker, he regularly presents to a variety of audiences on money, banking and the international financial system. Philip has lived in both Europe and America, and currently resides in his hometown of Johannesburg.

[Mud Dog]

ANC do you want private sector investment, or not?

Ryk van Niekerk

The remarks by Small Business Development Minister Lindiwe Zulu, in response to the looting of the shops of foreign nationals in Soweto and other townships, is symptomatic of government’s total lack of understanding of how the private sector works.

She said last week, in the context of foreign nationals running more efficient businesses than their South African peers, that government gives priority to local businesses and that foreigners must be prepared to assist local competitors to compete.

This is in stark contrast to government policies such as the National Development Plan. It is also unfortunate as she made the remarks shortly after Team South Africa, lead by Jacob Zuma and the ministers of the economic cluster, marketed the good story of South Africa at the World Economic Forum gathering in Davos.

Zuma and Co. proudly proclaimed that South Africa is “open to business” and met with any potential foreign investor who was prepared to listen.

We won’t know whether the message hit home, but at least the message is positive.

This makes the remarks by Zulu even more perturbing as she is definitely not on the same hymn sheet. She said to Khulekani Magubane of Business Day: "Foreigners need to understand that they are here as a courtesy and our priority is to the people of this country first and foremost. A platform is needed for business owners to communicate and share ideas. They cannot barricade themselves in and not share their practices with local business owners.”

She added that foreign entrepreneurs had an advantage over their South African competitors due to the legacy of poor education. She later tried to justify this point (as recorded here on EWN) as only being relevant to foreigners living in township communities. Even in this context it is absolute rubbish.

What is the role of the private sector?

Zulu’s attitude is a reflection of a much broader challenge within the ruling party, and that is its inability to clearly define what it expects the private sector to do.

Entrepreneurs are inherently not in business to create jobs, empower the disempowered, push a social agenda and promote inclusive growth. Entrepreneurs are in business to make money. Job creation and empowerment is a happy by-product. Social responsibility strategies are secondary - especially among smaller businesses where life is often a battle for survival.

Government needs to accept this and rather provide incentives (as opposed to legislation) for businesses to support its social agenda.

The ANC’s economic policy aims to reorient the state as a developmental state in which government is intimately involved in macro- and micro- economic planning in order to grow the economy. This model has been successful in many countries in South East Asia. The model is however dependent on a very strong government with excellent strategic leadership. The government must also be well-run and efficient.

Unfortunately, the South African government has neither a strong leadership, nor efficient structures.

Zulu’s remarks are also contradictory to the objectives of the developmental state.

She seems to be propagating a type of socialistic capitalism whereby all entrepreneurs must do things the same way and be equally successful. This is of course not workable.

Her approach is akin to the minister of education trying to solve the problem of schools under trees by cutting down the trees. Zulu needs to focus on improving entrepreneurial skills amongst the struggling businesses, rather than reduce efficiencies of successful businesses.

The minister is in charge of a critical department within government. Small business development is key to meaningful job creation and the significant reduction of poverty levels. She may have to rethink her stance.

I hope she reevaluates her mandate because, as Minister of Small Business Development, her comments were certainly not helpful to any small businesses – least of all the small spaza shops run by South Africans.

Perpetual incompetence

On a slightly different topic, I was amazed to learn that the Department of Health in Gauteng wants to appeal one of the most scathing judgments I have ever read.

Judge Ronée Robinson in the South Gauteng High Court ordered several officials to pay half of the punitive cost order against the department from their own pockets.

The case relates to the story of Vuyusile Lushaba, who gave birth to her son Menzi at the Charlotte Maxeke Academic Hospital in 2002. Sadly, Lushaba was not attended to properly in the hospital and Menzi was born with spastic quadriplegic cerebral palsy.

The incompetence did not stop in the hospital, but flowed through to a very protracted legal process in which officials did not cover themselves in glory. It started with the department’s decision to defend the subsequent lawsuit for medical negligence. The relevant officials, according to Robinson - did not read, or worse, did not understand an incomplete one-page report from the state’s medical expert - took this decision. The incompetence continued in the office of the state attorney, as he did not adhere to virtually any of the prescribed deadlines to submit documents to the court.

In her judgment, Robinson ordered three officials to pay half of the punitive costs as she felt that it would be unfair for taxpayers to foot the full legal bill. In the judgment she used the words: “This is symbolic of the destruction wrought by the callous, incompetent indifference [that] public officials are inflicting [on] South Africa at the moment.”

It is difficult then, to comprehend on what basis the department, under the leadership of the MEC for Health, Qedani Mahlangu, is now asking for leave to appeal.

I hope that Mahlangu, and Gauteng Premier David Makhura actually read the judgment before giving the final stamp of approval for this appeal process.

It is time to take responsibility.

[Mud Dog]

Investment advice from Stalingrad
(Magnus Heystek)

There cannot be many households in the world that have a living link to one of the most brutal and savage battles of World War II between the Germans and Russian troops.

The Battle of Stalingrad (August 1942 - February 1943) ended when the freezing and starving German troops - those that survived the harsh Russian winter - either surrendered or escaped back to the motherland.

It is considered the single largest and bloodiest battle in the history of warfare and historians today consider the heavy losses of the Wehrmacht (German armed forces) to be a decisive turning point in World War II.

The German troops were issued only with summer uniforms and many of the 500 000 Germans who perished in the battle, died from hunger and cold, not from Russian bullets and bombs. In all, it is estimated that about 750 000 German, Hungarian and Romanian soldiers died while the Russian military losses are estimated at 1.3 million, with perhaps 100 000 civilians killed by German bombing, hunger and starvation.

It is hard to imagine this scale of human suffering more than 70 years later.

Living link to the past

For most people Stalingrad and the other major battles of World War II have become just a footnote of history. But in my living room on most Saturdays sits one Stephan Georg Dankesreiter, soon to be 94 and the father of my lovely wife Sue.

Drafted against his will into the German army at the age of 18 in 1939 he was one of the almost one million German troops sent to the Soviet front line in the Battle of Stalingrad. It was either be drafted or risk being shot on the spot if you refused to don a uniform. He is one of the handful of Germans who are still around today to tell, first-hand, the stories of this brutal battle.

He often says he was lucky to be shot in one of the early battles of Stalingrad before the onset of winter late in 1942. The Russian bullet missed his heart by millimetres but the damage was serious enough for him to be sent to a military hospital in Germany. He was the only one in his battalion to survive, he recounts, with ice-blue eyes that still moist up at the thought of the terrible losses.

From a mixture of broken English and a smattering of German I have managed to pierce together an incredible story of hardship, suffering and horror but also miraculous luck. Having escaped the trenches of Stalingrad he was nevertheless captured by the Russians almost two years later and put on a train which, unbeknown to him and the other troops, was heading towards a death camp in Siberia. An American soldier, who took pity on him, warned him and one of his fellow captured soldiers to jump off the train and abscond, which they did.

What followed was an eight-week journey covering 800 kilometres across the German countryside until they eventually reached his home-town of Munich. Much of the trip was travelled under cover of darkness while the daytime was often spent hiding in one of the many farms across Germany where the husband of the farm was either dead or captured. Apparently the lonely German ladies left to run the farms were all too pleased to host some male company. “We could have done the trip in four weeks, but sometimes we had to hide a little bit longer…..,” he recounts with more than a twinkle in the eye.

“There was nothing, nothing, nothing when we came back from the war,” he says. “Everything was bombed out by the Allies. There was no food and many Germans were kept alive by the food aid flown in by the Americans who were fearing that the Germans could become allies of the Russians.

“What did you eat?” I ask. “Potatoes, potatoes and more potatoes,” comes the answer.

Heading to Hillbrow

The years after the end of the war was a story of hunger, deprivation and literally scrounging for shelter, food and work opportunities. The family home was obliterated during an Allied-bombing raid.

Towards the end of the 1950s Georg and his new wife Lottie decided to head to South Africa where there was work and sunshine. SA was industrialising and tool-and-die-makers were in great demand.

After living in Hillbrow for some years, the Dankesreiters now with two daughters in tow, took the plunge and took on the only-ever debt they would ever have - a Volkskas mortgage loan to build a sturdy family home in what is today known as Northcliff.

Today, more than 50 years later, it still remains the family home of Georg, now sadly alone after the sudden passing of his wife of more than 60 years, some three years ago. Living a life of simplicity didn’t mean deprivation. The couple managed to save enough to travel back to the Bavarian mountains annually for many years after retirement at the age of 70, staying in the same room in the same hotel in Garmisch-Partenkirchen more than 20 times.

Now for the investment advice

They had no debt whatsoever, as I said, apart from the mortgage loan to build the house which was paid off as soon as possible. If there was no money to pay for something, you saved and skimped until you could afford it, or you did without. If you could make it yourself or get it second-hand even better. Some of the furniture in the Dankesreiter-home is more than 50 years old and just as sturdy as it was when bought or made half a century ago. Debt was a four-letter word.

Compare this with life today where people are drowning in debt. Somehow we have been brainwashed by very persuasive advertising and insidious peer pressure to get deeper into debt. We buy the latest model car, new gadgets and electronic goods and all the other bling just to keep up with the Jones’s, not realising that Jones’s are just as deeply in debt as we are.

Debt can never create wealth

Over 50% of credit-active South African consumers have had debt judgments against their names. This underlines a very simple truth, not always understood by everyone: the cost of your debt will ensure that you remain in serfdom to it until that debt is paid off, which is often never.

This is one of the major causes of the growing trend in inequality between the so-called 1%- and 99%-ers. It might not be the politically expedient cause for the growing disparity in wealth and income that certain people and organisations are looking for, but I am of the view that rising (individuals’) debt levels, which presupposes declining net wealth, is one of the major causes of the rising gap in wealth ownership.

A simple and uncomplicated life does not mean a deprived life. On the contrary, a life of apparent abundance, financed by expensive short-term debt, means greater deprivation later on in life.

Sticking to a Russian theme, I’ll end with a quote from one of Nobel laureate Aleksandr Solzhenitsyn’s lesser known works: ‘One Day in the Life of Ivan Denisovich.’ The plot centres on when, where and with whom Ivan will (once again) be eating a potato. “Thrift is better than wealth,” he says at one juncture in the book. I never really fully understood its meaning until now.

If there was no money to pay for something, you saved and skimped until you could afford it, or you did without. If you could make it yourself or get it second-hand even better.

I have lived by this principle and it has served me well. Other than having taken a bond to buy our home in '87 (paid off in 5 yrs) I have never had any credit accounts besides municipal utilities, Telkom landline and an emergency pharmacy account. I made or repaired all that I could, and yes, often bought second hand. To date, I still do not have a credit card (I cut them all up as they were sent to me), I do however have a couple of debit cards / cheque cards which can only be used if there are available funds.

Credit cards and credit accounts will lull you into a false sense of 'affordability' and it's easy to loose sight of obligations until the statements arrive at month end. I've seen it often enough in others, how easily one can become swamped in debt, and the cost of servicing that debt while you try crawl out of the hole is enormous.

In these electronic times cash might not be the king it once was, but if it's not king, it's certainly no less than the crown prince.

[Mud Dog]

ANC - do you want private sector investment, or not?
(Ryk van Niekerk)

The remarks by Small Business Development Minister Lindiwe Zulu, in response to the looting of the shops of foreign nationals in Soweto and other townships, is symptomatic of government’s total lack of understanding of how the private sector works.

She said last week, in the context of foreign nationals running more efficient businesses than their South African peers, that government gives priority to local businesses and that foreigners must be prepared to assist local competitors to compete.

This is in stark contrast to government policies such as the National Development Plan. It is also unfortunate as she made the remarks shortly after Team South Africa, lead by Jacob Zuma and the ministers of the economic cluster, marketed the good story of South Africa at the World Economic Forum gathering in Davos.

Zuma and Co. proudly proclaimed that South Africa is “open to business” and met with any potential foreign investor who was prepared to listen.

We won’t know whether the message hit home, but at least the message is positive.

This makes the remarks by Zulu even more perturbing as she is definitely not on the same hymn sheet. She said to Khulekani Magubane of Business Day: "Foreigners need to understand that they are here as a courtesy and our priority is to the people of this country first and foremost. A platform is needed for business owners to communicate and share ideas. They cannot barricade themselves in and not share their practices with local business owners.”

She added that foreign entrepreneurs had an advantage over their South African competitors due to the legacy of poor education. She later tried to justify this point (as recorded here on EWN) as only being relevant to foreigners living in township communities. Even in this context it is absolute rubbish.

What is the role of the private sector?

Zulu’s attitude is a reflection of a much broader challenge within the ruling party, and that is its inability to clearly define what it expects the private sector to do.

Entrepreneurs are inherently not in business to create jobs, empower the disempowered, push a social agenda and promote inclusive growth. Entrepreneurs are in business to make money. Job creation and empowerment is a happy by-product. Social responsibility strategies are secondary - especially among smaller businesses where life is often a battle for survival.

Government needs to accept this and rather provide incentives (as opposed to legislation) for businesses to support its social agenda.

The ANC’s economic policy aims to reorient the state as a developmental state in which government is intimately involved in macro- and micro- economic planning in order to grow the economy. This model has been successful in many countries in South East Asia. The model is however dependent on a very strong government with excellent strategic leadership. The government must also be well-run and efficient.

Unfortunately, the South African government has neither a strong leadership, nor efficient structures.

Zulu’s remarks are also contradictory to the objectives of the developmental state.

She seems to be propagating a type of socialistic capitalism whereby all entrepreneurs must do things the same way and be equally successful. This is of course not workable.

Her approach is akin to the minister of education trying to solve the problem of schools under trees by cutting down the trees. Zulu needs to focus on improving entrepreneurial skills amongst the struggling businesses, rather than reduce efficiencies of successful businesses.

The minister is in charge of a critical department within government. Small business development is key to meaningful job creation and the significant reduction of poverty levels. She may have to rethink her stance.

I hope she reevaluates her mandate because, as Minister of Small Business Development, her comments were certainly not helpful to any small businesses – least of all the small spaza shops run by South Africans.

Perpetual incompetence

On a slightly different topic, I was amazed to learn that the Department of Health in Gauteng wants to appeal one of the most scathing judgments I have ever read.

Judge Ronée Robinson in the South Gauteng High Court ordered several officials to pay half of the punitive cost order against the department from their own pockets.

The case relates to the story of Vuyusile Lushaba, who gave birth to her son Menzi at the Charlotte Maxeke Academic Hospital in 2002. Sadly, Lushaba was not attended to properly in the hospital and Menzi was born with spastic quadriplegic cerebral palsy.

The incompetence did not stop in the hospital, but flowed through to a very protracted legal process in which officials did not cover themselves in glory. It started with the department’s decision to defend the subsequent lawsuit for medical negligence. The relevant officials, according to Robinson - did not read, or worse, did not understand an incomplete one-page report from the state’s medical expert - took this decision. The incompetence continued in the office of the state attorney, as he did not adhere to virtually any of the prescribed deadlines to submit documents to the court.

In her judgment, Robinson ordered three officials to pay half of the punitive costs as she felt that it would be unfair for taxpayers to foot the full legal bill. In the judgment she used the words: “This is symbolic of the destruction wrought by the callous, incompetent indifference [that] public officials are inflicting [on] South Africa at the moment.”

It is difficult then, to comprehend on what basis the department, under the leadership of the MEC for Health, Qedani Mahlangu, is now asking for leave to appeal.

I hope that Mahlangu, and Gauteng Premier David Makhura actually read the judgment before giving the final stamp of approval for this appeal process.

It is time to take responsibility.

[Mud Dog]

SA's three Achilles heels
(Ingé Lamprecht)


JOHANNESBURG – The core of South Africa’s unemployment problem is “a lack of savings”.

Chris Hart, chief strategist at Investment Solutions, said this is not because South Africa lacks a savings culture, but because policy has made savings economically unviable through taxes and low interest rates.

Hart was speaking about key takeaways following a tour of Brics countries (Brazil, Russia, India, China and South Africa) over two-and-a-half years.

The only way to fund the millions of new small businesses needed to address South Africa’s unemployment problem is through household savings. Many small businesses start when entrepreneurs mortgage their house or use similar means to get capital, he said.

Small businesses are not “given” access to finance or access to a market – they have to establish a value proposition and create their own market.

Hart said the regulatory burden these businesses are facing has to be taken away as small businesses don’t have the economies of scale to incur costs and divert resources to a compliance office.

South Africa is making three mistakes in this regard, he said. These are dealt with below.

The mistakes

Regulation is the first one.

One example is the stringent visa requirements imposed by the Department of Home Affairs despite the fact that South Africa wants to grow its tourism sector.

“The message is ‘just don’t visit South Africa’,” he said.

The department argues that it needs to protect the borders, but the implications for tourism are significant, Hart argued.

Although it is not intentional, there are also various other regulatory requirements or bodies that prevent small businesses from entering the economy.

South Africa’s second mistake is labour unrest.

No investor wants to invest in labour unrest and small businesses are bearing the brunt of it because they have the least resources. Yet, they are the engines of job growth in any economy, he said.

The third mistake is some of the taxes that are levied

Specifically he mentions taxes that target capital formation like capital gains tax (CGT), transfer duty on housing and taxes on dividends and interest earned.

When you are taxing capital formation it’s like eating seeds but wondering why harvests don’t grow, Hart said.

He said instead the tax burden has to be shifted onto consumption. In such a scenario those who save and invest will avoid taxes, while those who consume will incur taxes.

The budget

Asked how he thought Finance Minister Nhlanhla Nene should incorporate this in his budget (due to be announced on February 25), Hart said it is important that expenditure should show results.

South Africa is investing in numerous projects that don’t produce returns, which is problematic as these returns provide the resources for the next investment.

Hart said Medupi is one such example where R40 billion was well spent on a power plant, but an additional R100 billion was needed because of an inefficiency overhang.

He does not believe that more money should be allocated to problem areas.

“Where you’ve got failure, budgets should be frozen and where you have got success – by all means – boost that success.”

But the budget should be considered as a way to generate upside in the economy, he argued.

While inequality is dealt with by increasing the tax burden of the wealthy, another way to reduce inequality is through productivity and competitiveness improvements, he said.

He would like to see the reduction of CGT, transfer duties on houses, death duties, dividend taxes and taxes on interest.

Underperformance

He said the underperformance of the South African economy is not “because of things out there”.

“We did it to ourselves.”

But it is entirely within South Africa’s power to turn it around, he said.

Glenn Silverman, chief investment officer, said apart from reducing unemployment, South Africa has to generate sustainable, inclusive and balanced growth; fix education; protect its institutions and property rights and focus on the private sector and reduce financial repression.


I would add to that:
• A top heavy and ineffective public sector that is way over funded.
• Poor planning and execution of general infrastructure maintenance.
• The Eskom debacle is so huge that it deserves a separate mention.
• A misplaced sense of entitlement amongst certain population groups that erodes the principles of productivity.

I could go on, but if the above (3+4 points) were adequately addressed, we could see a turn-around.

[4x4BEES]

I could go on, but if the above (3+4 points) were adequately addressed, we could see a turn-around.

Do you honestly think it will ever happen??

Just asking