Around the world, in every economy, whether emerging or advanced, SMEs are widely accepted as a significant driver of GDP and the primary job creator. In South Africa SMEs account for around 40% of GDP<a href="file:///C:/Users/JillD/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.Outlook/VH4ORJG3/South%20Africa's%20SME%20conundrum%20by%20Evan%20Jones%20CEO%20of%20Inyosi%20Empowerment.docx#_ftn1" title="">[1]</a> and, according to the Finscope (2006) survey, 90% of jobs created between 1998 and 2005 were in small, medium and micro enterprises<a href="file:///C:/Users/JillD/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.Outlook/VH4ORJG3/South%20Africa's%20SME%20conundrum%20by%20Evan%20Jones%20CEO%20of%20Inyosi%20Empowerment.docx#_ftn2" title="">[2]</a>. Interestingly Brazil’s SMEs are estimated to produce 96% of jobs<a href="file:///C:/Users/JillD/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.Outlook/VH4ORJG3/South%20Africa's%20SME%20conundrum%20by%20Evan%20Jones%20CEO%20of%20Inyosi%20Empowerment.docx#_ftn3" title="">[3]</a>. Based off this the South African Institute of Chartered Accountants suggests that according to the National Development Plan, SMEs are expected to provide a staggering 90% of new jobs by 2030<a href="file:///C:/Users/JillD/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.Outlook/VH4ORJG3/South%20Africa's%20SME%20conundrum%20by%20Evan%20Jones%20CEO%20of%20Inyosi%20Empowerment.docx#_ftn4" title="">[4]</a>. Given South Africa’s divided past and our current population demographics, the importance of stimulating black owned SMEs must therefore take centre stage.
To quote Shakespeare (Hamlet Act III, Scene 1) [with some enhancements for South Africa]:
ToBEE, or not toBEE- that is the question:
Whether &#8217;tis nobler in the mind to suffer
The slings and arrows of outrageous fortune
Or to take arms against a sea of troubles,
And by opposing end them.
Given the current unemployment rate in South Africa, and the expectation for SMEs to create significant jobs by 2030, it is important to understand the stumbling blocks for SMEs in South Africa. We as a country need to understand the crucial role that SMEs will play in creating employment and driving growth in our economy. As Shakespeare suggests we cannot passively sit; we must rather actively engage and thereby ensure that every effort is made to encourage and promote SMEs.
A number of South African studies including the National Development Plan<a href="file:///C:/Users/JillD/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.Outlook/VH4ORJG3/South%20Africa's%20SME%20conundrum%20by%20Evan%20Jones%20CEO%20of%20Inyosi%20Empowerment.docx#_ftn5" title="">[5]</a> have identified factors which undermine a strong SME growth vector including:
<ol>
<li>Excessive red tape,</li>
<li>Rigid labour regulations,</li>
<li>Inability to access finance,</li>
<li>Skills development and business support, and</li>
<li>Access to markets (procurement).</li>
</ol>
Contrasting South Africa with other economies which have vibrant SME participation provides us with some potential suggestions as to what participants in the South African economy could do, to stimulate the SME sector. An interesting policy study undertaken in 2004 by the OECD (Organisation for Economic Co-operation and Development)<a href="file:///C:/Users/JillD/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.Outlook/VH4ORJG3/South%20Africa's%20SME%20conundrum%20by%20Evan%20Jones%20CEO%20of%20Inyosi%20Empowerment.docx#_ftn6" title="">[6]</a> found “SMEs play a key role in transition and developing economies. These firms typically account for more than 90% of all firms outside the agricultural sector, constituting a major source of employment and generate significant domestic and export earnings.As such SME development emerges as a key instrument in poverty reduction efforts.” (my emphasis)
Furthermore the OECD study made the following key recommendations:
<ol>
<li>Embed strategies toward the private sector and SMEs in countries’ broader national development and poverty reduction programmes</li>
<li>Strengthen SME capacity to improve their competitiveness in domestic, regional and global markets,</li>
<li>Promote policy coherence at regional, national and international level, and</li>
<li>Maximise the spill over of management skills and knowledge from multi-national enterprises to local SMEs.</li>
</ol>
Not surprisingly these two pictures (South Africa and OECD), from vastly differing sources, enjoy significant overlap. This confirms the overwhelming finding that South Africa’s SME perspective has similarities to those found around the globe.
How then do we collectively address the stumbling blocks facing South African SMEs? Looking at the list of 5 shortcomings identified in the South African studies which SMEs face, the following high level perspective is worth noting:
<ol>
<li>Excessive red tape and rigid labour regulations are firmly within the regulatory framework. It is important that government takes note of these issues and addresses them. These remain firmly within government policy. Realistically, apart from consistently raising the issue for debate and challenging our elected officials in this regard, private enterprise will have limited ability to change these two issues in the absence of policy change. However, with regards the three remaining issues there is much that the private sector can do.</li>
<li>The inability for SMEs to access finance, the need for skills development and business support and access to markets are all significant stumbling blocks. In addition, due to South Africa’s skewed economic development under apartheid, it is realistic that policy intervention is necessary to remedy the imbalance. Capitalism, in the absence of this policy intervention, would most likely see the strong becoming stronger and the weak becoming weaker. The drafters of the B-BBEE Act and Codes of Good Practice appear to have taken these factors into account in the following way:</li>
</ol>
<ul>
<li>The Amended Codes of Good Practice have made Skills Development a mandatory aspect of the codes which required a sub-minimum of 40% compliance,</li>
<li>Supplier Development, a component of the mandatory element of Enterprise and Supplier Development, has been added to improve the opportunity for black SMEs to secure procurement opportunity from companies (access to markets),</li>
<li>The definition of an empowering supplier includes an element of skills transfer, and</li>
<li>Enterprise and Supplier Development encourage the provision of finance by companies to black SMEs.</li>
</ul>
 Notwithstanding a number of shortcomings within the Amended Codes of Good Practice [most notably around the 51% black owned measure which, by almost any global measure of control, should have been 50% plus 1], the Codes give voice to the reality that SMEs are a vital sector of the market. If we are genuinely to address job creation all stakeholders need to embrace the pivotal role SMEs will play in that regard.
Ultimately chief executives will play the most important role in implementing the BEE Codes within their companies. If implemented well the Codes will bolster the growth of black SMEs in our economy, and in so doing we will start to make inroads into South Africa’s massive unemployment burden.
To chief executives then the challenge offered is to “…take arms against a sea of troubles, and by opposing end them”. The Amended Codes are difficult and imperfect. However they include tangible elements which will support the growth of black SMEs; and by extension job creation. There is no better time for action than now.
 
Evan Jones is CEO of Inyosi Empowerment. Inyosi Empowerment, a black owned company, was created in a partnership between Mineworkers Investment Company and Stellar Credit. Inyosi Empowerment offers Enterprise and Supplier Development investment based solutions to companies who are looking to enhance their scorecard whilst ensuring that the ideals of the Codes are fully met.
 
<div>
<hr />
<div>
<a href="file:///C:/Users/JillD/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.Outlook/VH4ORJG3/South%20Africa's%20SME%20conundrum%20by%20Evan%20Jones%20CEO%20of%20Inyosi%20Empowerment.docx#_ftnref1" title="">[1]</a> Bureau of Economic Research (2016). The small, medium and micro enterprise sector of South Africa.
</div>
<div>
<a href="file:///C:/Users/JillD/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.Outlook/VH4ORJG3/South%20Africa's%20SME%20conundrum%20by%20Evan%20Jones%20CEO%20of%20Inyosi%20Empowerment.docx#_ftnref2" title="">[2]</a> National Development Plan (page 140)
</div>
<div>
<a href="file:///C:/Users/JillD/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.Outlook/VH4ORJG3/South%20Africa's%20SME%20conundrum%20by%20Evan%20Jones%20CEO%20of%20Inyosi%20Empowerment.docx#_ftnref3" title="">[3]</a> Business Environment Specialists (2012). SMEs and Employment in South Africa.
</div>
<div>
<a href="file:///C:/Users/JillD/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.Outlook/VH4ORJG3/South%20Africa's%20SME%20conundrum%20by%20Evan%20Jones%20CEO%20of%20Inyosi%20Empowerment.docx#_ftnref4" title="">[4]</a> SAICA (2015). SME Insights Report
</div>
<div>
<a href="file:///C:/Users/JillD/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.Outlook/VH4ORJG3/South%20Africa's%20SME%20conundrum%20by%20Evan%20Jones%20CEO%20of%20Inyosi%20Empowerment.docx#_ftnref5" title="">[5]</a> National Development Plan (page 141); Business Environment Specialists (2012). SMEs and Employment in South Africa.
</div>
<div>
<a href="file:///C:/Users/JillD/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content.Outlook/VH4ORJG3/South%20Africa's%20SME%20conundrum%20by%20Evan%20Jones%20CEO%20of%20Inyosi%20Empowerment.docx#_ftnref6" title="">[6]</a> OECD (2004). Promoting SMEs for Development﻿
</div>
</div>

OPINION: SMEs struggle for survival in South Africa

South Africa remains in the grip of a drought that is not expected to ease soon, a government task team said on Thursday, putting pressure on inflation as the cost of staple foods soars.
The long-range forecast showed below normal rainfall expected and &#8220;therefore little relief is anticipated in the coming months,&#8221; local government minister Des van Rooyen, chairman of an inter-ministerial task team on drought, told a media briefing in Cape Town.
Van Rooyen, flanked by Water and Sanitation Minister Nomvula Mokonyane and Agriculture Minister Senzeni Zokwana, said there was no need to declare a national disaster even as the national planting area for maize declined by 30 percent.
The drought has also reduced the national cattle herd by 15 percent with no relief in sight.
&#8220;About 370 large commercial farmers around the country&#8230; were at risk of going under due to them not being able to service their debts as a result of the drought,&#8221; he said.
The cost of staple foods, such as maize, has sky rocketed and had a knock-on effect on inflation, the central bank has said. Inflation is running at 6 percent.
Dam levels have fallen to 53 percent as an El Nino weather pattern, which ended in May, triggered drought conditions across southern Africa and placing millions at risk of food shortages.
Large swathes of scorched land decimated the maize crop, with current forecasts pointing to a 26.6 percent lower harvest this year. Temperatures soared to historic peaks in 2015, the driest year since records started in 1904.
Van Rooyen said water restrictions had been imposed in some provinces. Residents and businesses in the economic hub of Johannesburg are being urged to conserve water usage.
 
(Reporting by Wendell Roelf; Editing by James Macharia)﻿

South Africa remains in grip of drought

The chief executive of South African&#8217;s biggest lender by market value FirstRand Ltd said the chances of a sovereign downgrade for Africa&#8217;s most industrialised country this year had risen due to a stagnant economy and political uncertainty.
Johan Burger said on Thursday after reporting the bank&#8217;s annual results that a downgrade would negatively impact lending and lead to banks tightening credit extension. The central bank has forecast growth at zero percent this year.
FirstRand reported a 5 percent rise in full-year headline earnings per share (EPS), slower than the previous year which it blamed largely on a sluggish economy, sending its shares down nearly 3 percent in early trade.
&#8220;The probability has actually increased for a downgrade,&#8221; he told Reuters. &#8220;That would have a negative impact on lending.&#8221;
Burger said a downgrade could hurt clients&#8217; ability to afford credit as the currency weakens and interest rates rise.
&#8220;Low growth combined with weaker balance sheets of some state-owned enterprises (SOEs) has added fiscal risk which is likely to result in a sovereign downgrade by the end of 2016,&#8221; FirstRand said in a statement.
Moody&#8217;s rates South Africa two notches above junk, while both S&amp;P and Fitch left ratings at BBB- in June, one notch above junk, however both agencies warned about the weakness of growth and heightened political risks.
A police investigation into Finance Minister Pravin Gordhan over a surveillance unit set up years ago at the tax agency when he headed the department has rocked local markets and led to concerns that ratings agencies could downgrade the country in their reviews expected by December.
State-owned enterprises, such as national carrier South African Airlines and power utility Eskom have struggled financially and relied heavily on government guarantees.
FirstRand, which owns First National Bank and vehicle finance unit Wesbank, said headline EPS rose to 399.3 cents in the year to June 30 from 381.4 cents a year earlier.
Earnings were lifted by a 13 percent increase in net interest income and a 7 percent rise in non-interest revenue. Headline EPS is the main profit measure in South Africa; it strips out certain one-off items.
Shares in FirstRand fell 2.4 percent to 46 rand by 0837 GMT, compared to a 0.4 percent decline in the benchmark Top-40 index.﻿

FirstRand bank warns South Africa faces downgrade this year

Online travel agency kiwi.com has ranked countries of the world to determine which offer the most and least expensive flights. South Africa was ranked seventh among the countries with the least expensive flights.﻿
South Africa came in with an average flight cost of 7.33 US dollars per 100 kilometres of travel.
With a low cost airline, Algeria came in at 5.17 dollars per 100 kilometres in international flights and a total average of 7.67 dollars per 100 kilometres, ranking at position eight.
Malaysia took second place as one of the least expensive countries with an average of 3.78 dollars followed by Russia at third place with 5.88 dollars, Portugal at fourth place with an average of 6.71 dollars, then Indonesia with 6.84 dollars and Azerbaijan at sixth place with an average of 6.93 dollars per 100 kilometres.
On the other side of the coin, among the countries with expensive flights, Canada was ranked at seventy with an average of 38.71 dollars, followed by Japan with 41.48 dollars total average, the Netherlands at seventy two with 42.35 dollars average, Qatar with an average of 50.37 dollars and Finland at seventy four at 50.89 dollars per 100 kilometres.
The least expensive country was India with an average flight cost of 3.25 dollars per 100 kilometres while the United Arab Emirates had the most expensive flight with a low cost airline of 11.28 dollars and a total average cost of 105.71 dollars per 100 kilometres. ﻿

Report: How global flights rank

South Africa&#8217;s rand strengthened early on Tuesday, extending gains to a fourth consecutive session in thin trade after a holiday in the United States and ahead of local GDP data expected to show the economy avoided recession.
 
* Rand 0.6 percent firmer at 14.2950 per dollar at 0650 GMT versus overnight close of 14.3800.
* Government bonds also firmer. Yield on benchmark 2026 paper down 4 basis points to 8.81 percent.
* Q2 GDP release at 0930 GMT. Positive numbers would lift sentiment following 1.2 percent contraction in Q1.
* Political unease lingering with police position still unclear on possible arrest of Finance Minster Pravin Gordhan.
* Blue chip futures index up 0.2 percent, indicating bourse opening firmer at 0700 GMT.﻿

South Africa's rand rallies ahead of expected GDP boost

South Africa&#8217;s biggest platinum mine-workers&#8217; union and the industry have failed to reach a deal on workers&#8217; pay, the union said on Monday, raising the prospect of industrial action in the world&#8217;s biggest producer of the white metal.
The Association of Mineworkers and Construction Union (AMCU), which led a crippling five-month strike in 2014, has been in talks with Anglo American Platinum, Impala Platinum and Lonmin since July this year.﻿

South Africa's AMCU, platinum mines fail to reach wage deal

Activity in South Africa&#8217;s private sector inched lower in August, with overall business conditions remaining subdued despite a halt to a year-long contraction in output levels, a survey showed on Monday.
South Africa&#8217;s Standard Bank Purchasing Managers&#8217; Index (PMI) slipped to 49.8 in August from 49.9 in July, with output levels and new orders increasing marginally while the decline in export orders accelerated.
Readings above 50 signal an improvement in business conditions on the previous month, while readings below the mark indicate a deterioration. South Africa has failed to breach the 50 mark since June.
&#8220;The stabilisation in August PMI to 49.8 from 49.9 comes as output in the private sector rose to 50 points following 15 consecutive contractionary monthly prints,&#8221; said economist at Standard Bank Kuvasha Naidoo.
Companies that noted higher activity said this was due to new clients and project wins, while those reporting a decline commented on challenging economic conditions.
South Africa&#8217;s economy is the brink of recession after contracting in the first quarter, while the possible arrest of the finance minister has rocked investor confidence and triggered a sharp fall in local assets.
<div class="linebreak"></div>
<div class="pageNavigation"></div>
© Thomson Reuters 2016 All rights reserved﻿

S.A private sector activity subdued in August

South Africa&#8217;s rand stretched gains to a third consecutive session on Monday, helped by lower chances of a rate hike in the United States and an easing of the political concerns that pushed the currency to a one-month low last week.
 
* Rand 0.95 percent firmer at 14.3825 per dollar at 0640 GMT versus close of 14.5200 in New York on Friday.
* Government bonds also firmer, yield on benchmark 2026 paper down 4 basis points to 8.9 percent.
* Local assets buoyed alongside emerging market peers by weak U.S. employment data on Friday that trimmed bets of Federal Reserve interest rate hike this month.
* Political risk remains elevated, with civil society groups planning to march on ANC headquarters demanding President Jacob Zuma resign.
* Blue chip futures index up 0.74 percent, indicating bourse to open higher at 0700 GMT.﻿

South Africa's rand firmer, long-term risks linger

South Africa is currently experiencing a ‘’special period’’ as there is confluence of tragic and unfortunate realities. The economy will possibly enter a recession as economists have predicted that it would grow no more than 0% in 2016.
The South African Reserve Bank’s Annual Report 2015/16 noted that ‘’South Africa’s economy expanded 1.3% in 2015, the slowest rate of increase since the Great Recession’’. The pedestrian growth is too low to grow the economy and create the jobs needed to restore human dignity.
The drought severely affected agricultural production and increased the cost of food.  Mining has been experiencing a jobs bloodbath and commodities are in a bull market. The general reality is that when mining sneezes the economy catches a cold, due to the deep forward and backward linkages that mining has in the economy. China’s economic slowdown and cooling off of appetite for our commodities, have impacted negatively on the South African economy.
The biggest challenge in South Africa is the stubborn unemployment that creates poverty and lack. Today there are companies on the Johannesburg Stock Exchange that have record levels of cash sitting idle in bank accounts instead of being invested in the South African economy. With more than R403 billion in bank accounts, it’s clear that the social gap between government and big business is increasing instead of decreasing.
This is a national tragedy which reflects that big business and government are not finding common ground. This has already impacted on the ANC government’s poor election results during the local government elections, as South Africans demanded jobs.
Business confidence is at an all-time low. The Business Confidence Index (BCI) fell to 79,3  in June from 82,5. Until Brexit, the South African Reserve Bank had been battling inflation and raising interest rates.
The immediate aftermath of Brexit was an accrual of the South African Rand against major currencies. The rand has strengthened 4.9% against the dollar since Brexit. This currency accrual has been a blessing as the price of petrol has decreased and the Reserve Bank has not raised interest rates, benefiting households and business.
South Africa has dodged rating agency downgrades to junk status which would spell economic disaster as it would increase the cost of borrowing. The South African Rand depreciated sharply on the news that President Jacob Zuma had recalled Nhlanhla Nene as Minister of Finance, which shocked the markets and the Rand went into nose dive.
This resulted in the re-appointment of Pravin Gordhan as Minister of Finance, a measure that stabilised the markets and appeased big business and investors. Around February this year, it emerged that the Hawks were investigating the conduct of Pravin Gordhan when he was commissioner of the South African Revenue Service. The Hawks have again asked that the Minister of Finance present himself to answer some questions, which he refused to do.
These events have negatively impacted on the South African Rand, leading to its depreciation. The unintended consequence of currency depreciation is that it benefits tourism, making South Africa a more attractive destination for foreign tourists. Currency depreciation dampens outbound tourism, whilst promoting inbound tourism to South Africa.
The Guardian newspaper has reported that South Africa is the second cheapest destination for UK tourists. A further depreciation of the rand will continue to benefit tourism. Tourism will continue to drive the South African economy, as tourism is the new gold.
The National Tourism Sector Strategy (NTSS) creates a vision that South Africa must be in the top 20 tourism destinations by 2020, which is just around the corner. Tourism can only grow and reach an unstoppable growth trajectory if we remove the red tape that dampens the growth of tourism, such as low aviation connectivity, low levels of service excellence, poor safety and security and the requirement for visas, which is an inconvenience for tourists.
The Tourism Red Tape Initiative (TRTI) remains a worthy cause that would change the economic realities of South Africa. September is Tourism Month and this would be a time to reflect if whether as a country we have done all that we could to ensure that we drive economic growth. The huge mining hangover can only be nursed by using tourism consumption to create labour intensive jobs immediately.
Tourism’s ability to diversify the economy is more imperative considering that the Fourth Industrial Revolution is upon us, which means that machines would replace humans, increasing unemployment. Tourism must become a senior ministry such as Home Affairs, Intelligence and Defence. Let the conversation and discourse begin as we celebrate Tourism Month in September.
 
Unathi Sonwabile Henama teaches tourism at the Tshwane University of Technology and writes in his personal capacity. ﻿

OPINION: Impact of S.A politics and currency depreciation on tourism.

South African Finance Minister Pravin Gordhan has complied fully with a police investigation into him, his lawyers said on Thursday, in the latest round of a public row that has hit local markets.
Gordhan said last week he had done nothing wrong and had no legal obligation to obey a police summons linked to the probe into whether he used the unit at the tax service to spy on politicians including President Jacob Zuma.
Zuma has said he backs Gordhan but cannot stop the investigation. The ruling party also said it had confidence in Gordhan but urged him to cooperate with police investigations.
Gordhan&#8217;s lawyers, Gildenhuys Malatji Inc., said the finance minister has offered to help police with their inquiries.
&#8220;The Minister responded fully to all the Hawks&#8217; enquiries, offered to provide any further assistance they might require and scrupulously acted in accordance with the law,&#8221; Gordhan&#8217;s legal firm said in a statement.
&#8220;The Hawks have not responded to his offer of further assistance.&#8221;
By 0932 GMT the rand was 0.43 percent firmer at 14.6700 against the dollar, but was still down more than 8 percent since Aug. 23 in response to news that the elite police unit Hawks had summoned Gordhan.
 
(Reporting by TJ Strydom; Editing by James Macharia)﻿

South Africa's Gordhan complied fully with police: lawyers

South Africa&#8217;s recovery from its worst drought in over century could be stalled as anticipated rain relief from a La Nina weather system remains uncertain, the South African Weather Service said on Monday.
An earlier prediction of a moderate La Nina, which is associated with higher rainfall, for the spring/summer season between September and February, had eased farmers&#8217; drought fears. But the South African Weather Service said it was uncertain how much rain there would be.
An El Nino weather pattern which ended in May triggered drought conditions across southern Africa. South African temperatures reached historic peaks and 2015 was the driest year since records began in 1904.
South Africa&#8217;s maize crop was decimated with current forecasts pointing to a 26.6 percent lower harvest this year due to the severe drought. White maize, the food staple, doubled in price last year, helping to fuel inflation. 
Indian Ocean conditions may not be conducive for rainfall during spring with most climate models indicating a marginal prospect of above normal rainfall conditions toward early summer, the Weather Service said.
&#8220;If we have got the current conditions prevailing we are most likely to have high temperatures going forward,&#8221; said Nhlonipho Nhlabatsi, a senior research manager with the Weather Service.
Most parts of South Africa are still experiencing drought conditions and water stress despite the strong El Nino dissipating, the Weather Service said.
&#8220;The recovery of South Africa from drought conditions may take some time, depending on rainfall and temperature conditions over the coming spring through summer 2016/17 season,&#8221; it added.
 
(Editing by Adrian Croft)﻿
<div></div>

South Africa's drought recovery could be stalled by uncertain rain prospects

South Africa and Brazil have much in common, including volatile politics, corruption scandals, economic decline and ratings downgrades. What sets these two countries apart?
South Africa marked a historic haul of 10 medals at the 2016 Rio Olympic Games, equalling its best performance ever. Host country Brazil secured 19 medals, but its much larger population means that the country won 0.01 medals per million people, compared to 0.5 medals per million people for South Africa. For Brazilians, the Games were also mired in controversy over fears that venues would not be ready in time and would end up as white elephants, while the overall cost of the games was indefensible at a time when Brazil is suffering its worst recession in decades (never mind that the cost came in way over the initial budget).
Brazil is probably the country that resembles South Africa the most, given its extreme income inequality, resource dependence,  tendency to attract hot money capital flows, as well as its relatively sophisticated private sector. At the time of winning the bid for the Olympics, many South Africans were green with envy at the country’s progress in achieving rapid economic growth and eradicating poverty. It seemed as if Brazil had changed substantially for the better, recovering from the global recession relatively quickly, and was acknowledged as one of the most promising emerging markets. However, over the past few years, much like South Africa, Brazil was hit hard by the commodity price collapse. This also exposed how much of the country’s growth rate was inflated by a credit boom and overvalued currency.
Messy politics
The economic crisis in Brazil is to a great extent a political crisis. Deadlock in a fragmented Congress (with some two dozen parties), worsened by an epic corruption scandal involving nearly $3 billion in bribes and many lawmakers, prominent business people and the country’s largest company, Petrobras, all contributed to Brazil not being able to tackle the economic decline. It could not pass budget legislation to restrict spending and close the deficit, leading to a sharp rise in borrowing costs. Brazil’s government debt jumped from 53% of GDP in 2013 to 68% and is expected to reach 80% (South Africa’s debt to GDP ratio is expected to stabilise at around 50%). Although President Rousseff oversaw most of the Olympic preparations, she could not attend the ceremony because of an impeachment process against her.
South Africa’s politics are also quite messy with the rand, bonds and bank shares selling off after news that Finance Minister Pravin Gordhan may face criminal charges that could lead to his removal. Although Gordhan carries a lot of credibility among local and global investors, South Africa’s institutional strength is not centred only around our Finance Minister. While unnerving, the events of the past week also point to South Africa’s institutional strengths, including a vocal civil society, free press, independent courts and a central bank willing to stick to its mandate.
While Brazil’s budgeting process is in shambles, South Africa has ranked in the top three in the world for the transparency of its budget system. The Finance Minister presents a three-year budget to parliament in February each year with an update in October. There is no reason to expect this to change, irrespective of who the Minister is. Since 2012, Treasury has put in place an ‘expenditure ceiling’ which limits the rand amount of spending that can take place in a fiscal year (hence the talk around ‘reprioritising’ budget items in the aftermath of the ruling party’s local government election losses – the overall spending amount is fixed).
Downgrade risk remains
The risk of a credit rating downgrade for South Africa remains. Ratings agencies are interested in economic growth. There are signs of improvement in the data as the impact of economic shocks fade: electricity supply has stabilised, the drought should ease, and commodity prices are no longer declining. However, sustained growth requires policy reforms that do not appear to be forthcoming. Top of the list are more flexible labour markets and improvements in the performance and governance of state-owned enterprises.
Downgrades are unwelcome but not the end of the world. S&amp;P stripped Brazil of its foreign currency investment grade rating in September 2015, and cut its rating by another notch in February this year. However, at around 11%, Brazil’s 10-year government bond yield is lower now that it is a “junk status” economy than for most of last year when it was still considered investment grade. The main reason is that global ‘risk free’ rates have tumbled. The simplest way to gauge market view of political and currency risk is the higher yield that the Brazilian government pays to borrow in its own currency compared to what the US government pays. This spread over the equivalent US 10-year government bond yields remains elevated, even though it has receded. In the case of South Africa, it remains even well above the long-term average. Unlike December’s ‘Nenegate’ episode, which happened against the backdrop of an emerging market rout (Brazil’s jumped to 16% and South Africa’s10-year yield to 10.6%), the global environment remains much more favourable.
Chart 1: Spread of local currency 10-year government bond yields over US equivalent
<img loading="lazy" decoding="async" src="/media/19198562/chart_1_spread_of_local_currencies.png" width="482" height="290" alt="Chart 1 Spread Of Local Currencies"/>﻿
Source: Datastream
 Credit default swaps (CDS), instruments to insure against default, also reflect the downgrade risk (the higher the CDS, the greater the expected risk of a bond default). Although South Africa’s credit rating is higher, our CDS trade is in the same territory as Brazil’s (and fellow junk status economies Russia and Turkey).
Chart 2:Credit default swaps for key emerging market US dollar bonds
<img loading="lazy" decoding="async" src="/media/19198569/chart_2_credit_default_swaps.png" width="569" height="356" alt="Chart 2 Credit Default Swaps"/>﻿
Source: Datastream
Inflation receding
One area where South Africa has performed differently to Brazil is in terms of inflation. Despite also suffering a currency collapse from 2011 onwards, South African inflation did not move outside the 3-6% target range on a sustained basis.
Brazil’s inflation target is also 3-6% , but its inflation rate soared, forcing the country’s central bank to aggressively hike interest rates, despite the worsening recession. Consumer inflation hovered around 6% between 2010 and 2014, but jumped to 10% by the end of 2015. It has receded only somewhat to 8.7% most recently. Brazil has a history of hyperinflation. Consumer prices increased by over 6 000% in 1990. A second bout of hyperinflation peaked at 4 922% in 1994. Therefore, its central bank has to work hard to maintain credibility, with policy rates at 14.15% (compared to the South African repo rate at 7%).
The most recent data show consumer inflation in South Africa falling to 6% in July, from 6.3% in June. This was slightly lower than expected. Food inflation accelerated to 11.5%, but we are probably close to the peak of the food inflation cycle. Given that food prices rose sharply late last year, the base effect will become much more favourable as we head into 2017. However, the currency remains the main risk factor to the inflation outlook.
Interest rates remain elevated
While rates have fallen in almost every other major economy in the world, they remain elevated in both Brazil and South Africa. However, the South African Reserve Bank (SARB) most likely wants to see inflation and inflation expectations head towards the midpoint of the range, rather than sticking around 6%. In a speech last week, Reserve Bank Governor Kganyago voiced his concern that inflation remained too high, fuelled in part by high wage increases. He also pushed for labour market reforms aimed at increasing employment, saying &#8220;We’ve built an economy that produces much more inflation than growth and spits out unemployment as a by-product.&#8221; Although the SARB won’t mention it, it is probably also worried about local political and policy uncertainty against the backdrop of potential US interest rate increases. Maintaining relatively high real interest rates acts as an insurance policy during times of economic uncertainty.
The ‘hawks’ that matter most
Central bankers are traditionally categorised as ‘hawks’ or ‘doves’ depending on their eagerness to hike rates. Ultimately, for South African (and Brazilian) financial markets, the hawks that matter are not a police unit, but the members of the US Federal Open Markets Committee who favour higher rates. However, the Fed chair Janet Yellen remains a dove for now. During the global central bankers’ annual meeting at Jackson Hole, she noted that the case for another US interest rate increase has strengthened, but she still expects rate rises over time to be very gradual.﻿

OPINION: Medals, spreads & hawks – a tale of two countries

South Africa Finance Minister Pravin Gordhan may be charged this week for graft, the City Press newspaper reported on Sunday, citing senior sources in the police, the National Prosecuting Authority (NPA), and the tax service.
Thirty witnesses had been lined up to testify against Gordhan and three former officials from the South African Revenue Service (SARS), the paper said.
Officials at the NPA did not immediately respond to requests for comment.
Police summoned Gordhan this week in connection with an investigation into a &#8220;rogue spy unit&#8221; set up in the revenue service when he headed the organisation, rattling South African markets and sending the rand down 5 percent.
The investigation first came to light in February and political pundits have said Gordhan is being undermined by a faction in the government and ruling African National Congress (ANC) allied to President Jacob Zuma.
The newspaper said Gordhan faced a graft charge for granting early retirement to Ivan Pillay, a former commissioner of the South African Revenue Service who is also under investigation.
Zuma said on Thursday he backed Gordhan but was powerless to stop a police investigation into him, signalling a prolonged tussle that could add to market volatility.
South Africa&#8217;s credit rating is set to be cut to junk status this year, according to a Reuters poll this week, with economists surveyed citing the heightened political risk around the Gordhan saga.
Gordhan commands huge respect in the markets and his departure would be a serious blow to Africa&#8217;s most industrialised country, teetering as it is on the brink of recession.
The Sunday Times said Gordhan had told a meeting of Treasury staff on Friday that he and his deputy Mcebisi Jonas could be removed in a cabinet shuffle. Treasury officials did not immediately respond to requests for comment.﻿

South Africa's finance minister to be charged for graft -City Press

South African Finance Minister Pravin Gordhan said on Wednesday that the domestic growth outlook remained bleak, reiterating that economic expansion would be close to zero percent this year as forecast by the central bank.
Gordhan however said the economy was resilient, and Treasury would be sticking to its fiscal targets.
&#8220;I want to argue that we have been capable of making the tough decisions. We&#8217;ve shaved budget after budget, number after number to remain fiscally credible,&#8221; he told the chamber of commerce in Cape Town.
Africa&#8217;s most industrialised country narrowly avoided downgrades to subinvestment status in a round of reviews by the three major ratings agencies in the first half of the year, but is teetering on the brink of recession.
In additional remarks, Gordhan read a statement he had issued earlier, stating that he would not appear before police who had requested him to meet them over an investigation into a suspected rogue spy unit in the tax service.﻿

South Africa finmin says Treasury managing to remain "fiscally credible"

South Africa&#8217;s rand tumbled to its weakest in a month and yields on bonds spiked on Wednesday after a special investigations unit ordered Finance Minister Pravin Gordhan to report to police in relation to a surveillance unit in the state tax service.

South Africa's rand, bonds sink after police summon finance minister

Hotel and gaming group Sun International became the latest South African business to pull out of Nigeria because of weak economic growth and clashes with regulators in the west African country.
In January Nigeria&#8217;s Economic and Financial Crimes Commission (EFCC) launched a probe into Sun International&#8217;s initial investment in the Tourist Company of Nigeria, which owns and operates the 5-star Federal Palace hotel in Lagos.
Sun International, which reported a 20 percent fall in diluted adjusted headline earnings per share (AHEPS) to 628 cents for the year to June, said the Federal Palace had been hit by slow economic growth, the low oil price, the threat from Boko Haram and a weakening naira.
&#8220;The board has decided to exit Nigeria and steps will be taken to achieve this in a manner that does not erode further value,&#8221; the company said in a statement.
&#8220;Continued setbacks in Nigeria as well as the ongoing shareholder dispute have frustrated all attempts to develop and improve the property.&#8221;
Sun International is the latest South African company to clash with Nigerian authorities after telecoms group MTN was fined for failing to disconnect users with unregistered SIM cards.
Sun International&#8217;s decision to exit Nigeria follows food and clothing retailer Woolworths and Tiger Brands, which sold its loss-making Nigerian division to Dangote Industries.
Nigeria, Africa&#8217;s largest economy, is suffering its worst financial crisis in decades as a slump in oil revenues hammers public finances and the naira. The central bank governor has said recession is likely.
Shares in Sun International were down 0.7 percent by 0855 GMT.
Reporting its results, the company said poor economic conditions and general negative sentiment in its home market of South Africa resulted in revenue growth at casinos of only 0.8 percent at 7 billion rand ($514.78 million).
&#8220;In South Africa, the economic environment remains a serious concern. We do not anticipate any meaningful growth in gaming revenue until there is a recovery in the economy and renewed consumer confidence,&#8221; Chief Executive Graeme Stephens said.
The South African Reserve Bank expects economic growth at zero percent this year, due to a severe drought and falling commodity prices. ($1 = 13.5980 rand)﻿

South Africa's Sun International leaves Nigeria on weak economy

Chinese state-owned Beijing Automobile International Corporation (BAIC) has signed a deal to invest 11 billion rand ($823.30 million) in an industrial zone in South Africa&#8217;s Eastern Cape province, the operator of the zone said on Thursday.
The deal will see BAIC open an automotive manufacturing plant in the Coega Industrial Development Zone near South Africa&#8217;s Nelson Mandela Bay, the Coega Development Corporation said in a statement.﻿

South Africa

OPINION: SMEs struggle for survival in South Africa

South Africa remains in grip of drought

FirstRand bank warns South Africa faces downgrade this year

Report: How global flights rank

South Africa's rand rallies ahead of expected GDP boost

South Africa's AMCU, platinum mines fail to reach wage deal

S.A private sector activity subdued in August

South Africa's rand firmer, long-term risks linger

OPINION: Impact of S.A politics and currency depreciation on tourism.

South Africa's Gordhan complied fully with police: lawyers

South Africa's drought recovery could be stalled by uncertain rain prospects

OPINION: Medals, spreads & hawks – a tale of two countries

South Africa's finance minister to be charged for graft -City Press

South Africa finmin says Treasury managing to remain "fiscally credible"

South Africa's rand, bonds sink after police summon finance minister

South Africa's Sun International leaves Nigeria on weak economy

Beijing Automobile Intl Corp to invest $800 mln in S.African industrial zone

News Tips

Advertise With Us

South Africa

OPINION: SMEs struggle for survival in South Africa

South Africa remains in grip of drought

FirstRand bank warns South Africa faces downgrade this year

Report: How global flights rank

South Africa's rand rallies ahead of expected GDP boost

South Africa's AMCU, platinum mines fail to reach wage deal

S.A private sector activity subdued in August

South Africa's rand firmer, long-term risks linger

OPINION: Impact of S.A politics and currency depreciation on tourism.

South Africa's Gordhan complied fully with police: lawyers

South Africa's drought recovery could be stalled by uncertain rain prospects

OPINION: Medals, spreads & hawks – a tale of two countries

South Africa's finance minister to be charged for graft -City Press

South Africa finmin says Treasury managing to remain "fiscally credible"

South Africa's rand, bonds sink after police summon finance minister

South Africa's Sun International leaves Nigeria on weak economy

Beijing Automobile Intl Corp to invest $800 mln in S.African industrial zone

News Tips

Advertise With Us

Newsletters