Global investment bank Goldman Sachs has enjoyed a lengthy and doubtless profitable engagement with the South African Government. So it’s no surprise to see the bank produce a detailed report on the country’s progress as it heads towards the 20th anniversary of its first democratic election. The impressive document can be downloaded by clicking here. Local GS head Colin Coleman came over to the CNBC Africa studio today to discuss the report. We were hoping to quiz him about GS client Abil’s R5.5bn rights issue that on Friday was priced (R8) at a deep discount to the already depressed market price (R17). The cheap pricing of fresh equity raises the question of why Abil needed to pay such a handsome under-writing fee to Goldman Sachs. I was keen to get Coleman’s response. Before we went on air he made it clear he was not prepared to discuss it. Pity. But the insights he provided on the SA 20 years on research report made up for it. – AH
To watch this CNBC Power Lunch video click here
ALEC HOGG: Goldman Sachs has released a report entitled ‘Two Decades of Freedom’. It’s a comprehensive look at the last 20 years in South Africa. Joining us is the man for Goldman Sachs in South Africa, Colin Coleman, Managing Partner here and Head of the South African Office and Investment Banking Division for Sub-Saharan Africa.
GUGULETHU MFUPHI: What a title.
ALEC HOGG: My goodness Colin, I thought you were just like the boss of Goldman Sachs SA. How do you come by such a long title?
COLIN COLEMAN: You simplify it.
ALEC HOGG: And you won’t talk to me about Abil (African Bank), either. How’s that, Gugu? He comes here, sits down, and says ‘I’m not talking about Abil’.
GUGULETHU MFUPHI: Maybe you can try, Alec.
ALEC HOGG: Shall we swing it in at the end?
GUGULETHU MFUPHI: Yes.
ALEC HOGG: Maybe we will. This is a good report. It’s well done, in spending so much time analysing it…
COLIN COLEMAN: Thank you.
ALEC HOGG: It’s about time, I guess, that we looked at things in perspective.
COLIN COLEMAN: Yes, I think there’s a bit of hysterical emotional debate that’s happened in South Africa over the last…very short-term period. We felt it was a good moment particularly with 27th April 2014 coming to look back at the 20 years and ask: Nelson Mandela South Africa, ‘what has South Africa done with this freedom in the past 20 years?’ It is quite a remarkable picture that emerges.
ALEC HOGG: We had a report that Pravin Gordhan, who was with you this morning representing these results – said that South Africans lack hope. Where does he get that idea from, or was he quoted out of context?
COLIN COLEMAN: I think possibly, he was effectively saying that South Africans – when they look back at the history – have lots to draw on. The things that come out of the report are extremely strong and therefore, in looking back over a longer period of time perhaps there’s some perspective and that perspective gives you a lot of hope and inspiration for fixing the things that remain.
ALEC HOGG: Sure, but that’s not saying ‘we lack hope’.
COLIN COLEMAN: I think maybe it’s the way it was relayed to you – you journalists get it in a truncated headline form.
GUGULETHU MFUPHI: I think we need that 2010 fever back where everyone was quite excited. Looking at some of the positive stories that came out of this: GDP tripled from what your research revealed…not only that, but inflation fell from the average of 14 percent to around six percent and also the dramatic rise in the emerging middle-class. In a nutshell: how did we do this right in order for us to maybe learn certain lessons from there in order to fix what’s not right with the economy at the moment?
COLIN COLEMAN: Look, it’s quite remarkable when you look back at ’94. We had a bankrupt state. We had junk investment-grade status credit rating. We had a very small economy and we had some very worrying fiscal ratios. The fiscal/monetary authorities in the government as a whole have done a tremendous job in turning that around. Today we’ve recorded 3.3 percent growth rate through that 19-year period. We have a $400bn economy. We have a very deep financial market with the JSE, and we have significant rise – as you say – in the consumer environment. In the last decade: one million per year coming into the middle to high-income bracket over that ten-year period. I think it has been a combination of various things. Certainly, the support by the government at the lower levels, for the 16 million who live in poverty with cash grants… Social service delivery that’s taken place in that period has supported that constituency. The wage inflation has been a real three percent through the period. The combination of that and social grants has assisted the rise in the middle class and obviously the generation of empowerment plus the public sector transformation, which has seen effectively more black South Africans going into the public sector, and that being the salaried employment group, has supported the creation of this middle class.
You therefore have this lower income group being supported. You have this middle-income group emerging and being supported, and actually, white South Africans have done quite well. We’ve had about half a million (white) people emigrate in the period, but for those that have stayed there’s been a migration upwards as a post-Apartheid dividend for white South Africans, too, so many of the constituencies have benefited. That hasn’t been without indigestion being caused, particularly in the consumer credit world where you’ve seen – of the new ten million in the middle class and upper class – you’ve obviously seen people getting over-indebted. To some extent that has created this effect where there may be, of the nine and half million South Africans who have some kind of from consumer impairment, there may be roughly ten percent of those that will become permanently indebted in the future. Therefore, assisting those people is an important part. That is the sort of overall picture of the population.
ALEC HOGG: It’s a lovely nutshell, but you did write a piece a couple of weeks ago about productivity, about labour legislation in South Africa. Was that drawn from results of this research?
COLIN COLEMAN: It was partly drawn… I gave a speech at the BMF conference. Effectively, the content of what was reported is a problem that we have at the moment, which is that although wage inflation is important and positive for the rising of particularly, the employed the fact is that it’s an unsustainable relationship to have three percent wage inflation and four percent productivity falls in the mining sector. That, in particular, has to be corrected so we have to have a productivity-linked wage environment where wages can increase, but productivity has to outpace wages in order for it to be sustainable otherwise we’re effectively destroying…
ALEC HOGG: We know that, but this morning you had Pravin Gordhan with you. Did you tackle him on the issue?
COLIN COLEMAN: Well we jointly discussed the issues surrounding productivity. There are two important components. The one is the public sector where there are two million employees and government is the employer, and 40 percent of COSATU’s membership is in the public sector, so they have their own ‘government labour relations as an employer’ issue to deal with as does corporate South Africa. Everyone needs to put his or her shoulder to the wheel, stop finger pointing, and rise to the challenge of getting that balance in South Africa. We also talked in the report about the importance of us addressing the current account deficit and raising foreign direct investment from an average $2bn to more like $7.5bn, in the range of five to ten. In order to do that, we need to have this signal sent around the environment, of which labour is one important thing, and that was certainly discussed this morning.
ALEC HOGG: It’s all related, isn’t it? You’re going to get foreign investors if they actually find it a good place to come and put their money, because they think that they’re going to get productivity, but we actually have the thing backwards.
COLIN COLEMAN: Exactly. I think one of the benefits of this report if I might say, is that it helps everyone – the corporate sector, the government, and labour – to get a total picture. I think we tend to be silo’d in our own little worlds. I think the problem for example in mining is if you’re thinking about it being not a set sort of wealth pie; rather than growing the pie you start talking about ‘how do we distribute what we have amongst each other’ rather than growing the pie. Therefore, the licensing regimes, the regulatory regimes, the taxation regimes, the royalties, and environmental issues are dealt with in that context. If you take a total picture and we say we have to grow this mining sector, the manufacturing sector, keep the financial services sector as it has doubled, growing into the future…that then becomes the question. How do we grow all these sectors? We want to be at one trillion dollar economy in the year 2030 and to be there we have to be more like a five percent growth rate, than a 3.3 percent growth rate in the next 20 years. In order to do that we need all of these partners to work together in making it happen.
ALEC HOGG: Just to close off with, the one point in this that really bothered me – and Gugu, you’re in this age group, so it must worry you too – of the people in your age group, only 30 percent are employed. If you have a look at those who went to school with you between the ages of 15 and 34: 70 percent unemployment – that’s extraordinary. How much attention is being paid to it?
COLIN COLEMAN: I think it’s a significant issue, which South Africa must own up to, seize, and deal with. There are two examples – and I think the government and the Minister of Finance, in particular, is right on top of this, is 1) this tax incentive that’s been announced to encourage employment of the youth in the corporate sector, which I think is a laudable initiative of the Finance Minister. 2) is a not well known about or understood experiment that is happening to get youth who are unemployed, and with no real hope of being employed, into the Defence Force to learn a skill, to get a stipend, to get a uniform and to have the dignity of serving the country and fixing the community at the same time. I think that we need to get those types of initiatives to scale.
ALEC HOGG: It’s almost like revisiting National Service.
COLIN COLEMAN: Well, I was an ‘end conscription campaign’ participant, so I’m not in favour of compulsory conscription.
ALEC HOGG: You were on the other side of the fence?
COLIN COLEMAN: I’m not a compulsory conscription person, but I think if you get these people in on a voluntary basis and we get it to scale, I think we could take many people off the streets. We can’t have three million unemployed youth with no hope of working and have a sustainable situation. We have to give those people – we’re coming back to hope – hope, and a real chance.
ALEC HOGG: Colin, I wish I’d had your brains when I was 16 years old, because I’ll tell you those two years in the National Service were just ridiculous and I guess if I’d known you back then you would have convinced me not to go. Thanks for coming.
GUGULETHU MFUPHI: Throw in Abil, Alec.
ALEC HOGG: We know he’s going to tell us to shut up. Yet, Abil’s Rights Issue at half the current price… Come on, Colin.
COLIN COLEMAN: I’m leaving now. Thank you very much.
ALEC HOGG: That was Colin Coleman, Partner, Managing Director, and Head of the South African Office and Investment Banking Division for Sub-Saharan Africa.
