There are still opportunities for South Africans to start businesses despite the recession, says Siphethe Dumeko, chief financial officer at start-up lender Business Partners.
South Africa's economy shrank by 2,2% in the first quarter, and 0,7% in the second quarter of 2018, landing the country in a recession.
Dumeko said that entrepreneurs starting companies will, however, face an uphill battle.
“Procuring capital to start a new venture is predicted to become increasingly difficult, as the majority of funding institutions are expected to adopt an increasingly risk-averse stance,” Dumeko said.
Still, Dumeko believes three sectors could prove recession-proof for entrepreneurs.
“In spite of the continued underperformance of the country’s economy in recent years, private security has become an R45 billion industry with a growth rate of 15 percent per annum,” Dumeko said. He said this is because, during a time of economic recession and uncertainty, individuals tend to be more risk-averse.
Dumeko said, as morbid as it might sound, that businesses offering services related to death, including funerals, cremation, burial, and memorials, are usually some of the most recession-proof operations. “Deathcare services usually have a steady stream of business, regardless of the economic climate,” he said. South Africa’s funeral industry is estimated to be valued between R7.5 billion and R10 billion.
Despite economic pressures, the underperforming public education sector has fuelled demand for alternatives, Dumeko said. It is also reported, he said, that South Africa is experiencing skills shortages in almost all of its sectors, emphasising the need service providers that offer more effective, affordable and accessible adult education. “Businesses that offer accredited online training platforms have especially seen increasing interest in South Africa, as well as on the rest of the African continent.”
JOHANNESBURG - President Cyril Ramaphosa says the money pledged at the Investment Conference will translate directly to more jobs in the sectors that contributed.
President Cyril Ramaphosa declared the conference an overwhelming success that will yield thousands of jobs for the people of South Africa.
At the end of the conference on Friday, Ramaphosa announced a combined amount of R290 billion in investments In South Africa.
Over 1,000 local and international investors attended the conference at the Sandton Convention Centre.
Anglo American, the Brics Development Bank and automotive traders were the big contributors, investing R71 billion, R29 billion and R40 billion, respectively. Vodacom announced R50 billion in investment.
President Ramaphosa says prominent among these announcements are the themes of beneficiation, innovation and entrepreneurship.
“The number of new jobs and people who will be employed is going to be phenomenal and unprecedented in the history of our country.”
He says the country has battled with bringing in investment to generate growth.
South African investors' belief that the country is permanently in some kind of pre-Armageddon has probably cost them trillions of rand over the past twenty years. The number of failed global expansions is ratcheting up and investors whose bias remains largely negative toward local assets are bearing the cost.
Retired FirstRand founder Laurie Dippenaar had a rule that whenever an executive came up with an idea for global expansion, the first question he would ask was: “Who on your team wants to go and live there?”
South African shareholders have paid the price for those kinds of international strategies for years as large corporations sought to diversify their earnings streams away from the country. And no doubt, some executives also saw it as a cushy way to move countries at someone else’s expense.
There have been some great success stories: SABMiller, Bidvest, Nando's, Naspers and Investec Asset Management among them.
But a growing number of South African companies' international expansions are coming unstuck.
The list of disasters and missteps is growing.
The latest to join the list is Mediclinic. Its share price this week was pulverised by a warning that its profits are going to be lower, primarily as a result of - yes, you guessed it - challenges in its international operations.
It blamed an anticipated 10% earnings decline on “customary seasonality” in Switzerland and the Middle East but also highlighted that its Swiss operations were coming to terms with regulatory changes and that was causing unforeseen complexity.
On top of that, fewer pneumonia and bronchitis cases in South Africa this year hit its domestic business. Sometimes good news can also be bad news.
Competitor Netcare this year finally chucked in the towel in the UK. Its strategy of picking up overflows from that country’s heavily burdened National Health Service didn’t make provision for austerity and cutbacks brought about by the global financial crisis and, more recently, Brexit. That, coupled with eye-watering property rental agreements, made it untenable to remain.
Famous Brands seems eager to extricate itself from its R2bn Gourmet Burger Kitchen deal and has written off a large part of its value in its accounts.
Old Mutual has just concluded its conscious uncoupling - they prefer the term “managed separation” - and brought its primary listing back to Johannesburg after squandering billions in value by overpaying for businesses across the globe
While the US market devoured one of the founders of the SA unit trust industry, Sage, Discovery saw the light in time. After ratcheting up a billion rand in losses, it rethought its global strategy.
CEO Adrian Gore is uncomfortable with any assertion that the firm's 25% stake in China’s Ping An Health, a division of the world's biggest insurance company, could be its Tencent.
And Tencent itself is finally proving to be a bit of a drag on Naspers. The latter peaked at over R4,000 a share in the hype cycle that nothing could ever go wrong for the firm in which it bought a 46% stake in 2003 for $200m.
Regulatory changes in the Chinese gaming industry are leading to some concerns about future profits. Yet despite the pull back, this is one expansion that has delivered considerable returns for investors.
Still, why not all global expansions out of South Africa have been disastrous, few have achieved their strategic objectives and returned real value to investors.
Investors need to be more circumspect about the real intentions of management teams when they spend their money on global jollies.
Bruce Whitfield is a multi-platform award winning financial journalist and broadcaster.
The South African economy is in the midst of its longest business cycle downturn in more than 73 years, according to the Reserve Bank, and things aren't looking particularly favourable right now either.
The adverse business climate has impacted the stock market too this year, seeing listed companies declining year-to-date on the whole.
According to analysis done by Corion Capital, a boutique hedge fund manager, 60% of listed counters had depreciated by the end of September, with more than a third slumping in excess of 15%. Only 16% of the stocks in the All Share Index gained more than 15% this year to end-September.
Topping the list of poor performers are Tiger Brands, off more than 40%, two healthcare companies, Aspen and Mediclinic, MTN, and Woolworths.
Performance of the top 40 JSE shares. Tiger Brands and Aspen were the biggest losers, while Sasol and BHP Billiton were the top performers. (Corion Capital)
Performance of the top 40 JSE shares. Tiger Brands and Aspen were the biggest losers, while Sasol and BHP Billiton were the top performers. (Corion Capital)
And the sharp sell-off has continued into October, with only the Resource Index managing to gain ground last week and the Banks Index hardest hit, losing 7%.
Garreth Montano, a director of Corion Capital, puts the bout of negativity swamping investor sentiment this year down to:
- Low GDP growth. South Africa has unfortunately missed out on a resurgence in the world economy and has been left well behind in terms of GDP growth. The reasons behind the sluggish performance of the domestic economy can be debated at length, but many view the Zuma era as a large contributor to the underperformance of SOEs, heightened corruption, lack of job creation and lack of investor confidence in attracting foreign direct investment.
- The land debate and mining charter have further dented prospects of new investment, which would aid growth as well as assist in creating new jobs. All of which are dearly needed.
- Many commentators believe that president Ramaphosa’s hands are tied until general elections, and the righting of the ship and benefits to the economy will start gaining momentum once there is more clarity around the land issue and elections are behind us.
To add to these internal challenges, emerging markets, as a whole, have had a difficult 2018, being largely led down by the crises in Turkey and Argentina. Trade wars have also had a negative effect, creating concerns about a drag on emerging markets exports due to potential for tariff impositions by the US, Montano says.
Locally the negative sentiment towards broader emerging markets has played out in large outflows fromn our bond market, as well as foreigners selling off equities, says Montano. Last week almost R6bn alone was taken out of South Africa by foreign investors.
These disinvestments have also played out in currency markets, driving the rand dramatically lower to more than R15 to the dollar at stages compared with its peak of almost R11.50 in February this year.
Cape Town - The South African Human Rights Commission has said that economic challenges that prompted the VAT and fuel levy hikes announced in the budget could have been averted if the government had earlier demonstrated better management of the economy and clamped down on corruption.
“Public and private sector corruption, according to the Auditor General, a fellow Chapter 9 Institution, costs the nation billions on an annual basis,” it said.
The commission, a national institution established to uphold constitutional democracy and human rights, said it believed a “significant portion” of the economic challenges facing SA could have been avoided had the state “demonstrated better management of the economy and demonstrated an intolerance toward corruption, inefficiency and maladministration”.
In his maiden budget delivered on Wednesday, Finance Minister Malusi Gigaba announced that VAT would increase by one percentage point from 14% to 15%.
The current zero-rating on foods including maize meal, brown bread, dried beans and rice would remain, and “limit the impact on the poorest households”.
The SAHRC said it was “deeply concerned” that the VAT rate would go up, saying it was a tax that impacts the poor the most.
According to the budget, it is expected to bring in R22.9bn in additional revenue in the 2018/19 financial year.
“Further, the SAHRC is also concerned with the increase in the fuel price through the introduction of a 52 cents per litre fuel levy,” it said. “This increase in fuel price particularly impacts on the poor as it affects the price of public transport and the price of goods as the vast majority of goods sold to the public are transported on the road.”
The commission also acknowledged that the budget was a “complex and difficult balancing act”, saying it was “fully aware” of the difficulties in limiting expenditure while collecting revenue through taxes and stimulating economic growth.
Gigaba had argued that the government was doing all it could to reduce the impact of the VAT hike on poor households, noting that the state was also boosting social grants payments and increasing the bottom three tax brackets.
He said plans to spend R57bn over three years on fee-free tertiary education for students with a family income below R350 000 per annum was another “important step forward in breaking the cycle of poverty and confronting youth unemployment”.
“Labour statistics show that unemployment is lowest for tertiary graduates,” he said.“Higher and further education and training is being made accessible to the children of workers and the poor.”
JOHANNESBURG - Old Mutual Plc returned to its South African roots on Tuesday when it listed its $11 billion African financial services business in Johannesburg, a move which largely completes a major overhaul of the company.
The 173-year old group has been disentangling its conglomerate structure created after a series of acquisitions since it moved its headquarters and primary listing to London in 1999.
Chief Executive Bruce Hemphill set the break-up in motion in 2016, saying the company’s four main businesses — a U.S. asset manager, a British wealth manager, an African financial services division and a South African bank — would achieve higher investor ratings as separate entities.
Old Mutual Plc’s African financial services business, Old Mutual Ltd, listed roughly 5 billion shares on Tuesday. They traded at 29.39 rand each during the session, valuing the company at roughly 145 billion rand ($10.7 billion).
Old Mutual Ltd, now the parent to what is left of Old Mutual plc, will also have a standard listing in London, and secondary listings on the stock exchanges of Malawi, Namibia, and Zimbabwe.
Hundreds of Old Mutual Ltd’s employees, blowing green vuzuzelas and beating drums, danced through the streets of Johannesburg ahead of the listing.
“What’s most exciting about our listing as an independent, standalone entity is that it enables us to unlock shareholder value and create a business with a strong strategic focus on sub-Saharan Africa,” Old Mutual Ltd’s chief executive Peter Moyo said.
Old Mutual, which traces its roots back to the mid-19th as South Africa’s first mutual aid society with 166 members, has already sold its U.S. asset management business and on Monday separately listed its U.K wealth arm, renamed Quilter.
The break-up is part of a growing global trend for conglomerates to hive off bits of their businesses, sometimes in response to pressure from activist investors.
General Electric said earlier on Tuesday it would spin out its healthcare business and sell its stake in oil firm Baker Hughes, leaving the U.S. company focused on jet engines, power plants and renewable energy
“The nice thing about this Old Mutual break up is that you now have a vehicle that’s purely emerging market, if you want to buy that, and another vehicle that’s purely UK,” Michael Treherne, a portfolio manager at Vestact, said.
Later this year, Old Mutual’s African business will spin off part of its 53 percent interest in South Africa’s fourth largest lender, Nedbank.
Old Mutual, which will retain a roughly 20 percent stake in Nedbank, bought into the bank in 1986 when it was forced by apartheid South Africa’s strict capital controls into being a major shareholder in several local companies.
The company’s head office in London will be wound down this year. It has been cutting staff in London since it first announced the demerger two years ago. Staff numbers in London are expected to fall to around 40 this year from 120, Old Mutual has said.
JOHANNESBURG - South African markets are pricing in the possibility of an interest rate hike this year as the rand falls, even though economists say this is unlikely as inflation expectations have not breached the upper end of the central bank’s target range.
South Africa’s rand has slumped nearly 9 percent against the dollar year to date, hurt by global risk-off sentiment and poor domestic economic data. It fell to a 7-month low last week.
Capital Economics senior emerging markets economist John Ashbourne said the currency fall has raised speculation that South African policymakers would follow some emerging market countries that have started raising interest rates.
Some have moved as a pick-up in their economy or other factors push up inflation, while others are being forced to act to steady their currencies.
South Africa’s forward rate agreements are implying a 25 basis-point hike in interest rates by the end of the year.
But a Reuters poll found last week that economists expect the South African Reserve Bank to keep its repo rate unchanged at 6.5 percent until 2020.
“We think that markets are getting ahead of themselves by pricing in rate hikes in South Africa... We do not think that this is likely,” Ashbourne said in a note.
“Policymakers have explicitly said that they will not react to currency moves until they see a lasting effect on domestic inflation. And the pass-through between currency moves and inflation is weaker in South Africa than in many other EMs.”
The central bank said in May it would maintain its vigilance to ensure inflation remained within the 3 to 6 percent target range, and would adjust the policy stance should the need arise.
The bank currently forecast CPI to average 5.1 percent in fourth quarter 2018, and 5.2 percent in the last quarters of 2019 and 2020. The next interest rates decision and inflation forecasts are due on July 19.
South Africa’s consumer price inflation slowed to 4.4 percent year-on-year in May as the rise in food prices eased.
“A weaker currency makes (the central bank) more fearful but it depends on how it impacts inflation twelve months out,” Citi economist Gina Schoeman said.
“We don’t think we will see rate hikes in 2018. It doesn’t mean there is no risk of it, and the market is correct to price for that.”
Schoeman said rate hikes over the past five years happened when the inflation forecast for twelve months out had breached 6 percent and stayed above that for two or three quarters.
“So it has to not only breach 6 percent, it has to also breach it for a sustainable amount of time. If it is not doing that, then we don’t have a risk of interest rate hikes,” she said.
Mexico’s central bank raised its benchmark interest on Thursday in a bid to counteract the effects of a peso slump and keep a downward inflation trend on track.
Argentina, Turkey, India and Indonesia are among the other countries hiking rates.
Inflation eased to 4.4% for May compared to 4.5% in April, despite the implementation of a VAT hike implemented in April.
This is according to Statistics South Africa (StatsSA), which on Wednesday released the consumer price index figures for May. The index increased 0.2% month-on-month.
The market consensus was for CPI to accelerate to 4.6%, and in a market update on Wednesday RMB economist Isaah Mhlanga had projected an increase to 4.8% having considered the VAT pass-through.
Mhlanga also expected the fuel price and weak rand to impact inflation. “The oil price and a weak rand have had a huge impact (on inflation), but the second-round effects will only be visible in the months to come and they are difficult to quantify and separate from the first-round effects,” said Mhlanga.
He expects the current account deficit data due on Thursday to be a “shock to the currency”, RMB projects it to be 5% of GDP.
By 10:23 the rand was trading 0.44% firmer from the previous close at R13.68/$.
Contributors to May's inflation include food and non-alcoholic beverages which increased 3.4% year-on-year. Inflation for restaurants and hotels increased by 5% year-on-year.
Transport contributed to the month-on-month inflation, the index increased 1.2%.
In May the CPI for goods increased by 3.5% year-on-year, unchanged from April. The CPI for services increased by 5.3% year-on-year, also unchanged from April
Eskom's current load shedding due to the impact of protest action by workers will add to the weakness of the South African economy which is already battling, Economist
"Load shedding is unfortunate, because South Africa already has serious economic problems. Load shedding will take away consumer and business confidence as South Africans are already struggling to make ends meet," said Schüssler.
"Investors have pulled out of South Africa and continue to do so. South Africa has so many protest actions. It really hurts the economy."
He believes it will be harder for the local economy to catch up on whatever pace it loses now, due to the impact of load shedding. It would also make it harder for the country to avoid going into a recession.
"South Africa is sending out a message that we have severe interruptions in economic activity, and that we are not quite as open for business as we'd like to advertise," said Schüssler.
"We are creating a reputation of not implementing what we claim we will do. We say we will create a certain number of jobs and that we are open for business, but then Eskom implements load shedding."
'Totally irresponsible and grossly negligent'
"If this is the way Eskom's new management wants to run the power utility, then they must not be surprised that we are having load shedding and blackouts. In my view, it is totally irresponsible and grossly negligent of them to operate the national energy supplier in this way. This is very serious," said Blom.
He thinks Eskom's management could even be held personally liable for losses due to load shedding.
"They knew what was coming and know how vulnerable the situation is. We are heading for dark days and if Eskom wants to bully its workers and bully analysts critical of its management, the public should act as watchdogs," said Blom.
Earlier this year, Fin24 reported Blom as warning that load shedding could likely be expected this winter. Eskom subsequently denied that possibility.
"Eskom will remain vulnerable until it sorts out the labour and coal issues - which will not be soon. Furthermore, I hear of plant breakdowns," said Blom.