There are fundamental issues that are currently plaguing South Africa’s economy, its position on the African continent and its potential to grow. We are a well developed country on a continent that is just now being ignited by the potential of growth – nations are driving development, they are desperate for investment. And South Africa, the most developed nation, with arguably the most potential to stay ahead of the curve and attract and retain foreign direct investment seems to be on the path to alienating all forms of positive perception. Brigid Taylor from Dreadnought Capital takes an in-depth look at all of the complex factors, the MPC, perpetual strikes and an arguably over-regulated trading environment. – LF
ALEC HOGG: Let’s pick up with that Tsogo Sun story. Brigid Taylor is with us in the studio. Look, the unions are going to make their opinions but in reality, it is a loan. If the management don’t perform, they’re going to have to repay.
BRIGID TAYLOR: Well, exactly and I think that’s the point. At the end of the day, it’s a business. We’ve spoken about this on the show before and the sad thing for me is that pointing fingers at executives that are doing a great job and potentially, are really able to generate opportunities within organisations should be something that we want to promote. Obviously, when it’s a situation… Where it’s a parastatal that’s losing money, it’s a whole different story. However, when a company that potentially can grow and can offer great value in the South African market, why not invest in the upper echelons of management who are making a difference?
ALEC HOGG: Let’s all fall to the reversion of the mean. Let’s cut off all poppies. Let’s not celebrate success. Let’s make everyone mediocre. That’s what trade unions are about. What did you say earlier? An injury to one is an injury to all.
GUGULETHU MFUPHI: Yes, but in this case, I think maybe one should be injured.
ALEC HOGG: You just want to injure me. Okay. I get that. I understand that. That’s good because it’s a meritocracy and I don’t mind being injured on my own, but I’d like to be rewarded on my own, if I’m prepared to work until late at night and somebody else goes home at 4:00pm in the afternoon. There’s just a disconnect here between reality, rationality, and what the unions think.
BRIGID TAYLOR: In addition, how do you incentivise increased production? Ultimately, at the end of the day, if you were going to increase somebody’s pay package, you’d expect bang for buck. You need to sweat your assets. Ultimately, if that increase does not equate to the productivity increase, how does that make viable business sense? That’s a question that needs to come through back to the mining sector and to the manufacturing sector. How much value are we going to get out of people if we give them this 10/12 percent increase? Are we going to see our assets sweat in terms of returning those kinds of values? That’s ultimately, what people are concerned about. If you look at what happened in Australia and what’s potentially going to happen in South Africa, they’re going to mechanise. Why? They can guarantee production. There’s not a huge risk of sitting and not producing for five months etcetera, and that’s very dire in the economy.
If you look at the current NUMSA strikes, that’s 550,000 people versus the 70,000 in the mining sector, which is significantly more in terms of its longevity. It could impact our GDP a lot more directly than even the mining sector did, and that was quite a significant impact anyway.
GUGULETHU MFUPHI: Brigid, at the top of the show, Alec did mention that BRICS – and South Africa’s involvement there – is actually quite miniscule. You travel the continent quite often and a lot of the time, the discussion of the inclusion of another African nation there has been brought up. Do you think the feel on the ground that you experience when you go to places like Zambia, is proving such – that maybe South Africa doesn’t have the merits to be part of a BRICS grouping of countries.
BRIGID TAYLOR: Well, the thing is if you look at business in Africa, even if we look at the likes of Ghana, Kenya, Zambia, or Mauritius, these are economies, which are growing strongly. Yes, they have a lot of infrastructure spend that needs to be made. There needs to be upgrade in terms of training and skills development etcetera, but they’re robustly embracing that. There aren’t these barriers to entry or barriers to doing business that we’re creating in this market where we’re already ahead of the curve. In South Africa, we have the skills. We have the business. We have the banking sector. We have a great reputation. We’re starting to erode that. Why? There are these unknown factors that keep raising their heads, which place businesses under significant amounts of strain. Unfortunately, in the South African economy, we’ve already seen the knock-on effects from the mining strike action.
I think the concern is how much more is still to come. We’re still going to feel the follow through of that. We looked at MPC yesterday. Inflation’s likely to increase. This is not consumer inflation. This is cost push pressure because of petrol price hikes and because of electricity hikes etcetera. These are infrastructure spend issues. They’re not consumers. Consumers are under a lot of pressure. They can’t save money. They can’t spend money. On top of that, you have growth deteriorating, so it’s a tough position. The MPC…I tell you, I take my hat off to them because it’s not up to them to create growth in South Africa. It’s about government, National Treasury, and the private sector making the South African economy something that people will invest in.
ALEC HOGG: Gill Marcus keeps telling us what’s wrong. She keeps articulating. She has courage, and she’s not being listened to.
BRIGID TAYLOR: Her biggest thing yesterday was saying we have an inflation target. Our issue is that we have upside inflation now. Why? It’s because of this second round wage negotiations, which is becoming a massive issue. That ultimately does impact our inflationary projections. You talked about it earlier. Twenty-five basis points is the bare minimum of what they could do. They literally did the bare minimum. Sitting at six-point-six percent…that’s well above the inflation band. They had to do something. However, they’re in a situation where growth is negated. Now, what do you do? You’re caught between a rock and hard place. Then, we look at the U.S. The U.S. is likely to start hiking rates in the first quarter of next year. How do we continue to attract investments?
ALEC HOGG: Why I went on about the BRICS before the program in the introduction is there’s almost this feeling government, of ‘oh, don’t worry about the West. Don’t worry about business. Don’t worry about capitalism because our friends in BRICS are going to bail us out’. Well, our friends in BRICS are not going to bail us out. They are coming here for their own purposes. They are not going to, all of a sudden, treat us as an equal. We are delusional if we think that way. If that penny could drop in Fortaleza, then it’s been a very good trip.
BRIGID TAYLOR: Well, this is the thing. As you mentioned earlier, if you look at the other African countries that are coming on line, one of their significant benefits is that they’re so keen to see their economies grow. How do they enable business? How do they attract business? How do they make their economy more tangible – just easier to operate within? They’re looking at tax incentives, looking at the labour force, and looking at opportunities to attract that type of investment. We’re doing the exact opposite of that. In that environment, what happens is that you just become a poor picking in a whole array of foods that are starting to develop. That’s the issue. We need to be careful in South Africa. At the moment, we’re still okay, but I think that as you said earlier, we’re starting to lose a little bit of hope.
ALEC HOGG: I am always optimistic. I think we have the best people in the world – shining eyes – everywhere I look, there’s a desire to do better, but we’ve been so poorly led in such important areas that is harder to be optimistic. Are you in a similar situation or do you remain a total optimist?
BRIGID TAYLOR: Look, I’m optimistic because I live here and I love South Africa. I’m a South African and I’m an African, for me the continent is home and I would probably never live overseas for that reason – because there’s opportunity here. I still think there’s huge opportunity, Alec. I think the sad thing though, is that there are a lot more hindrances that are starting to develop that aren’t being curtailed, and we have issues that need to be addressed to enable business to function better. Those are not being addressed…they’re not being handled in a professional manner – in a manner that’s containable. In addition, talking about real time lines, how long are we dealing with when we talk about the NDP? Is that going to be a three/five-year plan? Do we have three or five years? We should be looking at quickly containing these issues so that we get on board in terms of the African…
ALEC HOGG: We have the NDP. We have the Constitution. They’re there and they’re fantastic vehicles.
BRIGID TAYLOR: You need people to drive them.
ALEC HOGG: Then you look around you and they’re ignored all the time. The politicians are not saying ‘we will fight for the Constitution’. It’s almost ‘how can we get around the Constitution’.
BRIGID TAYLOR: Well, it’s like the old saying, ‘talk is cheap’. Actions speak louder than words every single time.
ALEC HOGG: I thought it was ‘made by the whiskey’.
GUGULETHU MFUPHI: Alec, Phuza Thursday was yesterday, by the way. Just on this, it does remind me of the concept that were introduced to by Russell Loubser – drift – where we move into a position of mediocrity. So often, Alec refers to the country’s currency as its share price and sitting at the levels where it’s currently at – R10.69 – , it’s done nothing after the international news from Yellen, as well as the local stimulation with regard to the MPC. Are you concerned, regarding S.A. as an investment destination?
BRIGID TAYLOR: I am and I’ll tell you why I think the Rand’s still looks more vulnerable to the upside, than it does in terms of opportunity to strengthen more. The reasons for that is that we’re starting to see the U.S. come online. We’re seeing job creation. We’re seeing better data. If they start to hike interest rates, it will have a negative effect, particularly on emerging markets with large current account deficits, and where we don’t have attractive interest rates to sustain that type of risk. From that perspective, we’re in a very vulnerable position. Then we have fundamental issues in South Africa, for example structural issues, that make us a little bit less attractive than other emerging markets. From those perspectives – and those are things that are unlikely to change in the short term. If we look at the global markets, we’ve got to be careful that they don’t come online and we’ve missed the boat.
At the moment, the Rand’s being priced in 25 basis points, purely because inflation was above the target band and we’d been speaking about the fact that the SARB had potentially been behind the curve. However, they hiked by the bare minimum that they possibly could afford to do. Given normal scenarios, they probably should have been a lot more aggressive, but they’re under pressure because of growth. It’s a really tough position to be in and I think that from those perspectives, – we have South Africa and we have the Woolworths deal – those types of things will keep the Rand supported around that R10.60 level. However, that upside does remain in place. We’ve been telling people on my show – on Currency Wars – buy the dips below R10.60 and look for that R10.85/R11.05. That’s the kind of play at the moment. The Rand’s just been very, very narrow. We’ve traded at R10.60/R10.85 for the last couple of weeks – fortunately so. However, as I said, the vulnerability remains.
GUGULETHU MFUPHI: Tough times ahead, no doubt. Brigid, it’s always a pleasure seeing and exchanging some fashion tips (courtesy of Alec). That was Brigid Taylor. She’s from Dreadnought Capital.
