My SA recession prediction from November 2016

The political economy analysis below I published on November 3, 2016. It only went out to a few people and clients on email, and wasn’t published on my employer’s letterhead. It was my personal view that some folks requested. Now that the economy is officially in recession, some 8 months later (and according to Bloomberg only 1 in 24 had anticipated this recession as late as two weeks ago), I am publishing my analysis here. In the future I will publish my thoughts on SA macro on this blog as these views are personal and not what I’m paid to write about at work (I’m paid to write about frontier markets). I will however charge a small fee to gain access to pay for this site’s maintenance and for the time taken to publish during my spare time, after-hours. The next instalment will be out in the next few weeks in which I update my thoughts on SA political economy and how I see the way forward. My view on the politics has evolved slightly since November, as the situation has evolved (it looks like something between scenario 2 and 3 presented below is playing out).

I hope you enjoy this article. I’ve taken all graphs out the article as they were drawn using my employer’s resources. The thoughts are however entirely mine (and didn’t win me any popularity contests).

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SA’s road repair bill estimated at R149 billion

This is according to Engineering News, following ‘acting transport director-general’ Mawethu Vilana’s comments in parliament’s transport portfolio committee yesterday. Watch this number inflate sharply in coming years as the cost of building materials, labour and government waste also gets added in (for more on this last point listen to this interview I did earlier this year on Moneyweb).

I would also point out that this is only the resources required to fix roads in the “poor and very-poor” category. When we consider that what government believes are ‘good’ roads are also well below original ‘spec’ and in need desperate need of maintenance and investment spending, this bill starts to ramp sharply higher.

The problems here are the same as elsewhere in the public sectors. As I wrote back in early 2012 regarding electricity infrastructure:

“The maintenance backlog of municipal electricity infrastructure is at about R35bn and rising by R2,5bn a year, Parliament heard yesterday. Municipalities are failing to invest in infrastructure because they need funds for operational expenses and because of uncertainty over the future ownership of the assets,” reports Business Day.

Back of the napkin calculation based on the above figures shows that maintenance of municipal electricity infrastructure has been neglected for about 14 years.

This is a problem underlying each and every service provided by government, including water utilities. Taxation, whether direct or indirect, is going to climb dramatically to pay for crisis management, ala Eskom tariff hikes.

A major reallocation of capital into these areas will be required that will be a huge drain on the private sector and the economy.

What all this means is that tax rates and indirect taxes can be expected to rise sharply in years ahead – it’s negative for the private sector and disposable incomes. I’ve also written lots about this trend in crumbling water infrastructure (here’s an article with several links to those water articles).

Presentation in Mauritius, and a short note about the place

Work and personal life’s been busy and there are some developments that have taken up my time and kept blogging to a minimum.

I spoke at the Mines and Money Access Africa conference in Mauritius two weeks ago, and then took some time off with the family at a nearby resort. The conference was good – was more mining focused than the conferences I usually attend, but my presentation was well received and I met some very interesting and smart people over there who I’ll definitely be in contact with going forward.


I spoke after this guy: Dr Fabio Scacciavillani, Chief Economist, Oman Investment Fund.

Here’s my daughter Lily playing on the beach. We got pretty lucky with the weather – my friends in Mauritius tell me it’s been grey and windy all week since we left.

Lily in Mauritius

It was the first time I’d been to Mauritius and it’s striking just how capitalised a country like South Africa is compared to the island nation. Infrastructure in Mauritius is decent and developing, but traffic jams into and out of Port Louis are quite severe (luckily I missed them though). Roads are very narrow (even the highways) and there’s no emergency lanes – so navigating them are quite a skill. It looks like the emergency lanes have been left out to allow space for sugar cane that grows right onto the edge of the roads.

Just about the entire island is covered in sugar-cane, making it a key commodity for the country. Of course, tourism is also a major foreign exchange earner and with a bottle of Libertas red wine or Excelsior red wine costing around $40 or R400 (Rs1200) at the resort we stayed at, there’s a big mark-up on prices and hence foreign currency flows nicely into the country on a net basis (at least they do through the resort). Lastly, the economy is seeing a big surge of foreign capital into trust, fund or corporate structures as Mauritius has positioned itself well to be a launch-pad for investment flows into Africa.

Hence the Mauritius rupee has been strengthening smartly since 2012, even against the US dollar. Price inflation is low, and so are interest rates. By the way, to everyone who said South Africa would be the gateway to Africa – it isn’t. Several South African companies (i.e. Afgri) has made Mauritius its gateway to Africa thanks to a reasonably sophisticated financial sector (there’s a high concentration of international banks dotted around Port Louis), very good tax rates (15% flat corporate tax), and of course a strengthening rupee provides a stable store of value for cash.

The purple line below shows that the Rand has lost 37% of its value against the Mauritian rupee since the start of 2011. It’s therefore costing South Africans a lot more to holiday in Mauritius today than just four years ago.


Source: Eikon

Of course, our good friends in government think this weakening rand is a good thing. Just a couple of days ago SA tourism minister Derek Hanekom said the weak rand could boost tourism to SA and boost the economy. It’s just a pity the weak rand and poor SA economy means it’s much more expensive and further out of reach for most South Africans to travel abroad, or even in the domestic economy.

And as I’ve been arguing for many, many months now, the weak rand is sending the cost of living for working class South Africans surging higher at a much faster rate than the official CPI indicates, fueling a major and more intense round of industrial action this year. I predicted more intense industrial action this year recently on this interview with Hilton Tarrant on Moneyweb radio (listen here). And I’m afraid this is only going to get worse in coming years unless the government and central bank lifts interest rates into positive real territory (as India has done with very good results) and oversees a strong rand policy. Copy the Mauritians who have a strengthening currency, and little to no social or labour unrest…


The presentation I delivered at the conference can be viewed here.


Must Watch Documentary: “Money for Nothing”

I got round to watching the documentary “Money for Nothing: Inside the Federal Reserve” on the weekend. It’s an excellent presentation of the policies that the Fed has undertaken in the last four decades, and the consequences thereof, that I’ve seen. I can highly recommend this documentary to anyone looking for a quality economics documentary to learn about the crisis the world is staring down right now, the fiat money-government debt bubble.

Trailer below. Buy your own digital or DVD copy here.


TV Interview with SABC about Today’s Interest Rate Decision

I spoke to Francis Herd on SABC News’ Business Review last night at 8pm about the upcoming interest rate decision today.

The Reserve Bank’s in a tight spot. If they don’t raise interest rates, the rand weakens further (because the market’s pricing around 3 percentage points worth of hikes in the next year), and fuels inflation of particularly staple foodstuffs that impact low income earners and the unemployed, and we get more labour unrest and higher wage demands.

Either way, the economy is in for some tough times. It’s now up to the Reserve Bank to decide how they’re going to distribute gains and losses between different segments of society in the short-term. In the past three years they’ve implemented policy that favoured middle to high income people who take on secured debt (the wealthy), let’s see if they decide to switch in favour of supporting pensioners, low income earners, and the unemployed for a change by raising short-term interest rates further and purging the accelerating price inflation out of the economy.

It’s anybody’s guess, really. I’m of the view they should surprise economists again by hiking today, but I doubt they’ll do this. So most likely we see an unchanged decision. YouTube of the interview follows the link below.

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Weak Rand Will Explode Govt Capital Spending Budgets

As is happening with Vodacom, the weak rand is going to fuel a surge of the cost to build capital infrastructure in and around South Africa, and will lead to a major retrenchment of investment in real brick and mortar terms this year and next. It will be interesting to see in government’s budget 2014 when it is announced later this month by how much capital spending inflation rises and must now be extracted from the private sector in the present (taxation) or in the future from our kids (deficits and government borrowing) to pay for it.

It is also possible that the government continues to budget its capital spending according to CPI inflation rates that well understate the rate of capital infrastructure price inflation, and as a result, continues to under-invest on a massive scale to maintain and expand existing infrastructure. This would mean the crumbling of road and water infrastructure continues unabated.

Weak Rand Harms Companies That Serve SA Consumers

A weak rand policy benefits companies operating in South Africa that serve foreign customers, but harms companies either overseas or in South Africa who aim to serve local South African customers. This is how profits and losses are initially being redistributed in the current phase of rand weakness (which I warned about on many occasions, most notably in this interview debate with Coenraad Bezuidenhout of the Manufacturing Circle who in June 2013 said a weak rand “helps manufacturers live to fight another day.”)

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