Providing an articulate overview of, and prognosis on, the now Fragile Five-rated SA economy is clearly neither an easy nor a cheerful task at this stage. In this interview with Alec Hogg, Dreadnought Capital’s Brigid Taylor provides a compass reading that points to both the where-from and the where-to of our economic circumstances. It culminates with a call on Government to get involved in the solution. GK
ALEC HOGG: To get a view of how the market’s trading today, we’re joined by Brigid Taylor from Dreadnought Capital. Brigid, let’s get into that currency story. The Rand really has been bouncing all over the place – R10.62 today, as we just heard from Gugu. The Fragile Five argument is coming back into discussion. Is that starting to weigh on us?
BRIGID TAYLOR: Well, I think we must keep in mind that we have had the ratings agency downgrade, so that initially saw the market have a little bit of a knee-jerk reaction.
ALEC HOGG: You heard Anastasia saying earlier that the ratings agency downgrade was controversial.
BRIGID TAYLOR: I do, and I think that the market had expected it. If anything, the market was expecting to see a downgrade if not a negative watch, which is exactly what ended up happening. However, I think those structural issues that are still at play in South Africa, haven’t really gone away. We’ve spoken about that earlier with regard to the strike action etcetera. I think that the key driver at the moment – and you’re going to see this come out more and more as we approach MPC – is ‘how do we combat rising inflation that’s above our target band, in an environment where growth is really, really low and where the global growth scenario is ‘’? We’re trading within that band. We’re still between 10.50/10.80. Nothing significant has happened and whilst that’s the situation, you really need to take advantage of that because the upside trajectory remains in place because it just takes some small incident. We have Iraq. We have these Ukraine issues.
ALEC HOGG: The weakening…
BRIGID TAYLOR: Weakness in the Rand, and we must keep in mind that we remain in range because there’s very little happening in terms of the global…there’s no global change, so the Fed’s going to continue to taper. The U.S. Dollar and certainly, the data that’s coming out of the U.S. is relatively positive. We’re going to wait for non-Pharm payrolls today and see what they have to say, but those speak to a stronger U.S. Dollar, which impacts us negatively.
ALEC HOGG: If we can, let’s dwell a little bit. Yesterday we had Nerina Visser here who didn’t bother too much about the Iraq situation. You mentioned that. Certainly, as a news junkie, I’m very worried as anyone would be whose paying attention to what’s going on there. Is it affecting currencies yet?
BRIGID TAYLOR: Not yet, but it’s something that I think we must keep our eye on because it’s something that’s teetering in the background. We have potential for the Ukraine to ignite again, so there are those two issues with regard to political tensions, which are quite key in terms of your global outlook. If you look at the Central Banks, nothing’s really changed in that scenario, but we are relooking at what our MPC is going to do around our interest rate because of the fact that we, as the Fragile Five that you mentioned earlier – we’re pretty much behind the curve when it comes to interest rates. From an ‘attractive investment’ perspective scenario that it has, it continues to attract investment. However, we have to be able to continually attract that, and the only way to do that is to say ‘are we still a valuable asset and how do we increase our interest rates?’ Not to impact negatively on the local economy, but however we need to attract those foreign investor flows because we need to fund our current accounts.
GUGULETHU MFUPHI: It’s interesting that you mention the local economy as well because that has had a significant impact on the Rand’s currencies. Where are we standing at the moment? The strikes are just coming to an end in the platinum sphere, but now NUMSA is jumping onto the bandwagon. Is the outlook for the Rand slightly more negative?
BRIGID TAYLOR: It’s so unfortunate, because I think that a large reason we’re seeing the Rand pull back and we certainly see a lot of strength come through that, at that sub-R10.60 level again is because of the negotiations that were successful – finally, after five months. However, if we look at what happened with the GDP number – and we’re going to see a feed through of that in the next couple of months – is the negative impact that that has on the growth scenario. You mentioned it earlier with regard to ‘what is the actual outcome that you’re looking for when you have these types of strike actions that are negatively impacting the underlying economy? What does that mean in terms of your back pocket? Are you being adequately advised in terms of what the upside is for you as the striker? What is the upside for the industry and what is the upside for the economy?’ All of those, in my mind, are negative.
ALEC HOGG: The worry about that – and I’m exactly on your page – is that we think about it in economic terms. The strikers are thinking about it in political terms/class struggle terms. If that’s the case…if you say ‘well, okay. I don’t mind losing money’ because clearly, unless you are completely mathematically challenged, you have to work out that you lost money on this one.
BRIGID TAYLOR: That is the key. The question that I always ask is ‘if we’re running such a high unemployment rate in South Africa, why do we battle with these types of issues’. Surely, when you’re dealing with levels… I understand that, in an environment like ours where you need certain types of skills for which you have to pay, and we have to understand that because ultimately, business is run by people who have certain skills or experience. However, you need to create more skills in the other sectors so that people are empowered and realise that they have value to add, and it’s not just about the R300.00 extra. It’s about how you treat the person’s environment or that sector. I think that what happens is it becomes about Rands and cents and there’s so much more in terms of ‘what are you giving the broader picture’. When you have that discussion later, I’m going to be listening in to hear what the outcome is with regard to the bigger picture fallouts within those kinds of communities. Ultimately, at the end of the day it really does matter. It’s an extra R300.00 that you’re not getting on your plate etcetera.
ALEC HOGG: It’s like people who emigrate from South Africa, for instance. I met a lot of Australians who are ex-South Africans and they will justify to the nth degree why they left South Africa and how bad South Africa is. If you’ve been on a strike like this, you’ve lost hands down, but somehow you have to justify the fact that you spent those five months and certainly, part of the human condition is we don’t generally like to admit when we’re wrong.
BRIGID TAYLOR: Then you have to ask yourself what type of advice was given and what the impetus behind that advice was. Ultimately, as we’re saying it doesn’t benefit the people who are supposedly benefitting from this, and that’s the key for me. If we’re not in a position, as South Africans, to really empower those that have less, this is not empowering them. This is not allowing them to be better off. In fact, it’s worse for every single part of the economy. Then you have to ask yourself ‘how do we do this in a better way’. Yes, I agree that wages need to be negotiated and people that are not being paid fairly need to be reassessed etcetera, but let’s do this in a way that’s equitable and is a win-win scenario for all. Rather that, than where we have this massive fallout, we’re another year in the doldrums, and we’re on a worse footing where we can potentially be downgraded again, which is going to cost all of us as an economy.
GUGULETHU MFUPHI: For investors who are lost in all of this noise: how do they position themselves?
BRIGID TAYLOR: Well, we always talk about the fact that sentiment is the biggest driver of investment. Unfortunately, this type of sentiment is not great. It just sends the message that there’s a lot of uncertainty, that the industries in South Africa are concerning in terms of longevity, and in terms of actual production and opportunity. Where are the other opportunities? Therefore, people are looking outside the borders of South Africa and that’s what we have to be careful of. We have such an opportunity as the entry point into Africa that we must maximise on that because we’ve always been in that position. However, we mustn’t put up barriers to entry and one of them will be the potential that business is not as free or allowing of productivity, and that is what has been proved this year.
ALEC HOGG: Something that’s been forgotten in all of this is that nobody has to start a business. When you start a business, you take a risk and if you don’t start a business, there are no jobs. Where the dots are being joined or not being joined, is a problem. When you go forward…when you have a look at the NUMSA strike – and I hate to harp on the bad news – but if we have 250 000 people who’re going to do another AMCU (and let’s just say they carry on for five months), would it have three times the impact of 70 000 going out?
BRIGID TAYLOR: Well, we’ve had this discussion before on the show. I’m just saying that we’re in the situation right now where we should be maximising on opportunities to utilise the weaker Rand, curb the Current Account Deficit, and increase our exports. Unfortunately, we’re unable to do that and we’re still an importing economy. In an environment where we have such valuable assets, why are we not maximising on that? How do you attract investment into South Africa when business is so difficult to do? There is business opportunity. There is opportunity, but eliminate the barriers of entry and create opportunity for people to want to invest in South Africa so that there is that opportunity for job growth and job creation etcetera, which is what the government’s plan supposedly is. There should be some form of buy-in from the government in terms of saying ‘how do we get involved and how do we support the economy, to make South Africa the portal that it once was’.
GUGULETHU MFUPHI: It goes back to the fundamentals, no doubt. Brigid, it’s always a pleasure having you with us. For converting Alec to say the f-word…
ALEC HOGG: The f-word?
GUGULETHU MFUPHI: The Fragile Five.
ALEC HOGG: Gugulethu, I thought you were talking about… You’d have my old school teachers phoning me with ‘how dare you say the f-word on continental television’.
GUGULETHU MFUPHI: There we go – Fragile Five – just to make sure everyone’s clear on that one. That was Brigid Taylor from Dreadnought Capital.
