The Editor’s Desk: What does the Budget really tell us?

DUBLIN – In this episode, Alec Hogg and I dig into the Budget, asking what message Cyril Ramaphosa and Tito Mboweni are sending investors and what that means for South Africa. With all the bad news so clearly and honestly laid out, how will Ramaphosa entice investors? And what will happen if he fails to do so? We also look at the latest news on Tesla – it's a mixed bag, with a strong quarter undermined by news of a criminal investigation into the company's production figures. We also chat about South African entrepreneur Brian Joffe and his take on BEE. – Felicity Duncan.Hello, and welcome to this week's episode of The Editor's Desk. This is BizNews Radio and I'm Felicity Duncan. With me on the line is our Editor in Chief, Alec Hogg, and we're going to get his perspective on some of the most important stories of the week. .___STEADY_PAYWALL___.Now, Alec, since we're talking about some of the most important of the week, we're definitely going to have to start with the budget. So, Tito Mboweni presenting his maiden budget this week, not an easy job. Certainly not a job that I would want and I think he was brave to take it. We had what, I think, was widely perceived as a 'bad news budget' – I think that's fair to say. At the same time, we have Ramaphosa, who put an editorial into The Financial Times this week, talking about the investment case for South Africa, and really trying to drum-up excitement and investment. We've got this kind of two prongs of the economic policy of the Ramaphosa administration playing out this week. What is your interpretation of where're we at? How close is Cyril Ramaphosa to getting some traction going on his plan for the economy?.I think sometimes its really good to have the distance, which we do have, being based in London, because when you're in the middle of South Africa there's so much noise. There's so much confusion that goes on, that's created by the noise, that people don't actually see the reality of what's going on here and the reality to me is extremely clear. When we had the NDP – the National Development Plan – the overriding theme of that was the brutal honesty. When you read through that document – and sadly very few South Africans, including those who're running big companies, have bothered to do that – but when you read through that document it lays out all the issue in absolute, brutal honestly. .We are seeing this from the Ramaphosa administration now in spades. When you had Tito share his budget there was no turning anything or any sow's ears into silk purses. He just laid it all out as it is. The thing that struck me was the R30bn hole that's been created by an under-collection of revenue, and then another R30bn on the other side, which has to be found somewhere as well. So, you've got, essentially, billions and billions of Rands that has been wasted by the old administration, that is now being surfaced and being identified, and as a consequence of that, the real picture for South Africa looks incredibly difficult. .But you have the honesty. .So, you had the honesty in the NDP. You have the brutal honestly now being laid out by Tito Mboweni, warts and all, in the budget and that is what Ramaphosa was saying, at his investment conference. He was talking straight, he was talking honestly and the thing that really jumped out at me was a very small clip that somebody sent me of part of his speech, where he spoke about entrepreneurs. Ramaphosa said we need to make entrepreneurs the heroes of SA. We must attract entrepreneurs. We have to put them on pedestals. We have to encourage them, and this rubbish about white monopoly capital should be forgotten forever. These are the people who will create the jobs. These are the people who will get the economy going..These are the people who will transform South Africa, from where it is at the moment – the land of great difficulty, we can see all the truth and the honesty that has been portrayed for us – into the country that everybody wants it to be. It's not going to get there by fancy words or waving wands. It's going to get there through the creation of jobs. And who creates jobs? Entrepreneurs. I am so excited when I see this, when I hear this, when I read this – when I see another wart that's been exposed. .When you see an Mboweni telling the truth for the first time – you have to say to yourself, this is a country that understands where it needs to go to. As a consequence of that, it will be able to take the difficult decisions and there are difficult decisions. .I wonder whether Ramaphosa is now realising that he's running out of time. He can't want for an election next year, when he gets the mandate before he starts fixing things. Things have got to be fixed now. But the first thing is to admit you've got a problem, the second thing is to share the problem with everybody else, and I believe that those two steps have been taken..It was interesting, there was a piece in The Wall Street Journal this week, an investment manager talking about where the opportunity is in emerging markets, after we've had all this upheaval. She identified South Africa as a place that still offers a good risk/reward balance. Her argument was, yes, it's troubled, and yes, the interest rates on South African government debt, and other forms of debt, have been rising because of this trouble. But the institutions are sound, the political system is working, the country's immune system reaction to corruption is in play, it's working, it's trying to flush out the toxins, as it were. So, she thinks that on balance it's actually worth it for global investors. It's actually worth investing in South African debt because the risk/reward argument, the case for the investment is there. And that's kind of what you're saying – saying look, honestly, yes, there are problem but there's also opportunity and the balance between those things is correct..The uncertainty has been removed..Yes..Under Zuma's administration – effectively what he did was he said, 'I will appoint who I want to into senior positions, and once they're in those positions they will do the job.' Well, we know that that is absolute bunk. You can't take a person who hasn't got a high school education and make them a brain surgeon, and in many cases that's what you're trying to do when you're running a sophisticated, complex, economy. We saw that appalling display from the Head of IT at SARS, where she was interviewed by the SABC, and it was of the most read stories on BizNews last week, the video and the transcript thereof..That is what we were going through. That is what the county was doing. The country had this idea that, like a socialist state, it doesn't matter who you put there. You can put you most loyal deployed cadre and things are going to be okay. Well, in fact, that's not the truth in a sophisticated or even a half-sophisticated economy, and those are the realities that South Africans are now appreciating because they've got a leader who knows that's the way thing work. You get the sense, as a global investor, you've got to look at South Africa and say, okay, there's no more uncertainty. Now, we know where we are. Now, we can price for the risk that we know I not gong to be contaminated by surprises that come from different places. If you start off that base, there are not too many developing markets in the world, where you can begin from that kind of understanding. .Just look at what's going on in China, and Russia, and Brazil, and Turkey, as other examples, but India seems to be doing okay but that is a strategy that Ramaphosa has employed. Remember, SA is a very small country relative to the rest of the world and less than 0.5% of GDP and population. It could be a shining example, the shining light again, which it was during the Mandela era. So, these are the things that Ramaphosa understands..You mentioned earlier there, entrepreneurs, and I wanted to pick up on one of South Africa's pre-eminent entrepreneurs, Brian Joffe. You had a very interesting chat with him this week. You were covering a really broad range of topics and for the people out there, what would you say were some of the most interesting take-aways?.Joffe is a man I've known for many years. He started Bidvest from scratch, literally, in 1988. He did a deal with Chickins as his first deal. He supported them by Standard Bank and Investec, primarily. Both Standard Bank and Investec. When Joffe left after finally unbundling the company, R160bn's worth of shareholder value that he'd created. He didn't take very long to start another company called Long4Life, which we've got in our SA Champions Portfolio. Now, Long4Life is a small business relative to Bidvest, Bidvest is R160bn and Long4Life was R3bn so, it gives you the idea of the scale. Joffe was, in our conversation this week, clearly frustrated by being so small. He wants to get big in a hurry. He wants to get it up to R10bn plus business and that's what he's going to be doing, as far as the investing is concerned. So, from an investor's perspective I really like the investment case..From a broader perspective though, and fortunately we spoke for nearly an hour and you can't run a podcast of an hour so, I cut it back to about 20-miutes and had some of the highlights in there. It really is a very interesting conversation. This is one of the great entrepreneurs of South Africa, but there were two things that really jumped out at me. The one was his relationship with Cyril Ramaphosa. Remember Joffe was the CEO and Ramaphosa was the chairman of Bidvest for seven years, so they worked very closely together. He understands Ramaphosa, as well as probably you might imagine – as the CEO of a big company, you have to work closely with your chairman – and he's a huge fan..I think anybody who has read, and I do urge people to read Anthony Butler's biography. It's 420-pages of Ramaphosa. It was written 10 years ago but it gives you an understanding of the man. Read that and then you'll understand who is this person – when he comes out and make statements, where's he coming from? What's his background coming from? Joffe is a big fan. One thing I did cut out, which I just felt didn't kind of flow with the podcast itself, was when I said to him, 'but Brian, what about BEE? Surely, South Africa is a great place to invest in but BEE mean that… I was about to continue and he came back so forcefully, and said, 'Anybody who doesn't believe in BEE must be out of the country. They must leave the country. They must go out.' .So, he is so strongly committed to the whole point. My argument was not on those bases. My argument to him was to say, what it must mean? Surely, is that you don't have foreign investors who would have to be that keen to buy South African businesses because they have to give away 26% of their equity before they start, and equity is the most expensive funding mechanism that you've got. But just his reaction to that point showed you that there's this almost antagonism within South Africa to the criticism that continually comes from abroad, and internally as well. That we can't or we're not going to make it happen. I'm sure Ramaphosa is sensing this and feeling this and he's got a vision and people like Joffe, who know the way his mind thinks, have got this long-term vision. But the frustration must be all the noise that goes on in between that others cannot align themselves with that vision as well. .Perhaps, it just means, like most things in life, it's just going to take time for the penny to drop. For me, my work is to read about these things and research these things, and understand these things. For me, the penny has dropped. I can see exactly where Cyril is trying to take the country and his work is to be honest, talk to the international people, and to then align, slowly but surely, to align people within his country to this vision that he has. It will help when the election comes next year because then I think he will be a position to make more-difficult decisions. But generally speaking, what the international, the smart international investors are seeing, is they're also seeing this. They're doing their research. They're seeing what has become evident when one does do your homework on this stuff. They're seeing that the noise should be avoided and forgotten because the turnaround is actually happening. It's in its early stages but it is – it's the right path. .Yes, very exciting and Joffe is certainly someone with a lot of insight into the South African economy so, really a credible voice in support there of Ramaphosa, and Ramaphosa's long-term plan and outlook. .And you've got to do that. The thing in South Africa is, if there's one thing I've learnt from being in business in the UK and developing BizNews globally, and operating in this environment. People here plan. People really work hard and they do their research. I'm not saying nobody does it in South Africa, but there's a lack of it relative of what you see in a highly competitive first-world economy. You don't even get into the starting-gate if you haven't done your homework. .In South Africa, the opportunities are vast. You can start up today and have a business tomorrow, and away you go. You could find somebody in a developing society who'd maybe give you a chance. In this environment, in the global environment, people want to see things they can trust. They want to be able to be able to put that into their plans, and they don't like surprise. Capital is cowardly. Capital likes to go where it gets well rewarded, of course, but it also likes to go, first of all, where it gets protected. In South Africa this was not the case for the last 10 years. Investors looked at South Africa and they wondered whether their money would be safe. .Under the Ramaphosa regime, the first thing they'll know is, well, the money will be properly protected. This is a guy who actually has got a long-term plan and even if he gets halfway there, there will be growth into the future. That's really the difference that you look at. When international investors come with that completely different set of eyes to those that you would find within a very boisterous, noisy, excitable developing society. .One last thing I wanted to pick up on, before we are out of time, is quite a few interesting developments this week at one of our favourite companies to discuss, Tesla. They had a very good quarter – strong results, good cash generation. It's the first profitable quarter they've had since, I believe it was 2016, and in fact, only the third profitable quarter they've ever had. But a very strongly profitable quarter. Interestingly, you saw those cashflows really turn positive, almost $1bn in free cash flow. So, a really strong quarter, although there were a few question marks, I thought. Particularly, we saw the accounts payable – so, the money they owed suppliers – rose by almost as much as free cash flow. It's possible that they are increasing cash flow by simply not paying their suppliers, and that's not going to work out forever. Eventually, suppliers will want to be paid. .But in the same week, in fact on the same day I think it was, news leaked that the FBI is investigating Tesla for falsifying production records. So, for a long time Tesla has been promising to hit that 5,000 mark on Model-3 production. The FBI's investigation has subpoenaed a number of former employees and current employees to see whether or not Tesla was, essentially, make false statements about their production capacity and misleading investors about how quickly they would be able to ramp up production, and knowingly misleading investors. So, really doing it intentionally. Tesla has settled a bunch of civil charges around this, but this is now a criminal investigation which is, of course, slightly more serious because criminal charges are a bit more serious than civil charges..So, a kind of 'strikes' and 'gutters' week for Tesla there. A great quarter, albeit with a few question marks, and then this news about the criminal investigation. Really, the company seems to be real highs and lows – it's such an interesting one to watch..Felicity, we know that accounting is not an absolute or precise science. You've got to look at the cash flow and then when you interpret the cash flow, you have to look at what's behind it. The point you make there about suppliers not being paid. It's obvious, if I'm sitting with $100 in my bank account, and my monthly outflows are $100, at the end of the money after paying everybody, I'll have nil. But if I decide not to pay everybody, then suddenly I've $100 still in the bank account and it's a very basic, obvious thing. What is my cashflow looking out? How am I improving my cashflow? What are the sources of it? .If it means that I'm pushing out those people that I owe money to, and I'm actually, not settling with them – well then I'm only fooling myself and fooling the investing public. And the problem with this is that, for years and years, Elon Musk has gotten away with being able to say what he likes and not having been properly interrogated, excepting by those few investors, who he accuses of asking bone-head questions. So, those who do interrogate the numbers and don't like it, they become short sellers, they say that the share price will fall and they'll make more money on the decline in the share price, and these are the people he hates because they are criticising his story. .When it gets to the point that you're talking about now, when the criminal authorities or the FBI gets involved in it, there's no more beating around the bush. If you've made statements and claims, and you're in a business, you're in a field where you are telling people thing so that they will give you money. It's like, in a way, starting this VBS Bank, where they went to mayors and said, here's 2% commission – put your deposit into our company. That's a way of getting deposits into the company, but of, course, it's done in very illegal manner. I don't know how Elon Musk has managed his whole thing. I'm sure he hasn't been anything near as daft as that. But clearly, by making the kind of statements that he's done consistently over the years, by giving projections, which he might have known – and I suppose this is the big question mark – were really just there to generate a higher share price, so he could raise more money, so that he could continue to stay in business. .If they prove that case, they it's really bad times for Elon. On the other hand, a Tesla is a fantastic vehicle, I think that somebody is going to be very keen to pick it up, or when they do get it eventually, they might have to jack the price up significantly because you can't to produce and sell vehicles at a subsidy, which Elon has been doing now for years.

The Editor’s Desk: What does the Budget really tell us?

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