South Africa: Financial Institutional Structure

The new Financial Sector Forum Website

2011-09-01T08:00:00.000+02:00

Visit the new Financial Sector Forum Website

The new Financial Sector Forum at http://www.financialsectorforum.com will, in time, consolidate two existing websites: The existing Financial Sector Forum at http://www.finforum.co.za and South Africa: Financial Institutional Structure at http://reservebanksa.blogspot.com (here).
This action was necessitated by a lack of funding,

Posts on the new Financial Sector Forum website include:

This site will also link to sister website, The Financial Regulation Forum at http://www.financialregulationforum.com

PLEASE HELP US TO IMPROVE OUR INFORMATION CONTENT AND CONTINUE THE SERVICE If you found the information on this website useful and if you or your company would like to see it expand please click on DONATE. Thanks on behalf of the Financial Regulation Forum and the Financial Sector Forum - the Editor.

ANC youth leaders want business nationalised

2011-04-13T12:27:00.001+02:00

Flushed with its success in persuading the African National Congress (ANC) to probe nationalising mines, the ANC Youth League is now proposing expropriation of strategic sectors of the economy without compensation.

The demand is contained in the league’s discussion documents for its national conference, released at a press conference in Johannesburg yesterday. The league’s elective conference is due in June.

Last year the league prevailed at the ANC’s national general council when the mother body adopted its proposal that nationalising mines be investigated — despite President Jacob Zuma ’s insistence that the matter would not be discussed at the meeting.

If the proposal to expropriate businesses is adopted at the league’s conference, it could be tabled at the ANC’s policy conference next year and possibly adopted at its national conference in December next year.

ANC leaders desperate for the league’s votes at the party’s elective conference in Mangaung may be forced to support the idea.

The league’s economic transformation discussion document calls for the expropriation of the minerals, metals, banking, energy production and telecommunications sectors.

"The state should expropriate strategic sectors of the economy without compensation because paying for all the key and strategic resources stolen from the black majority, and Africans in particular, will take more than a lifetime to be realised," the document reads. "The state has no other option but to decisively transfer wealth, particularly natural resources from those who currently own it, for public purposes and in the public interest."

Leon Louw, MD of the Free Market Foundation, said such statements were "causing a lot of damage all over Africa".

"Most of Africa is trying to lift itself up to become attractive to investors, but such irresponsible comments knock it down."

Every time such a comment was made, SA shed R1bn of its gross domestic product, he said.

The document predicted that the expropriation proposals would receive an "imperialist backlash". It rubbished views that existing and potential investors would be troubled.

"The myth that such a policy framework will scare foreign direct investment should be dismissed because investors are never discouraged by definitive, concrete policy and legislative provisions," the document reads.

"Investors are mainly discouraged by uncertainty and the unpredictability of the laws and regulations related to business in a country."

Mr Louw warned that the league’s call should be taken seriously as it wielded influence in the ANC. "Unfortunately, it has to be taken seriously because of the popularity of their rhetoric."

Expropriation should take place for the government to construct roads, dams, develop townships and provide services such as telecommunications, water and electricity, the league argued.

It proposed amendments to the property clause in the constitution to give the government the power to expropriate for "public purpose and public interest".

The league also called for bilateral trade agreements to consider the state’s power to expropriate private property.

It was critical of black economic empowerment policy, which it said failed dismally to empower the majority of South Africans.

"Whilst politically liberated, SA remains economically semi-colonised concerning the control, ownership and the orientation of the economy.... The approach adopted by the democratic government in the first 17 years will never change these realities."

The league said the ANC government had failed to "transfer the economy to the majority".

The discussion documents have been distributed to youth league branches. If they are adopted by the league’s conference, they will probably be tabled at the ANC’s policy conference.

Before the ANC’s national general council last year, the league threatened to withdraw its support for leaders who did not support its calls for nationalisation.

That council instructed the ANC’s national executive committee to investigate the feasibility of the nationalisation of mines. The committee has appointed a team of experts to research the issue, and its report is expected to be tabled at the ANC policy conference next year.

League spokesman Floyd Shivambu has repeatedly stated that the organisation would not accept any outcome that is against the nationalisation of mines.

Source: Business Day

Understanding the new Consumer Act

2011-04-12T09:01:00.002+02:00

Consumers are beginning to reap the fruits of the new Consumer Protection Act, especially those who could not cancel fixed or life-long contracts.

In the past Frederick Nong would have been bound to the contract he signed with The Holiday Club if he failed to cancel within the cooling off period.

He was allowed to revoke it but would forfeit the initial fee he paid to kick-start his timeshare contract.

Nong, an existing client, said he signed a second contract on the understanding that he was upgrading the existing one.

The upgrade had additional benefits like car hire, overseas trips and spa treatments.

Nong, who was retrenched in 2003, said he completed the upgrade forms after the agent, Siyabonga, assured him he would freeze his upgrade until he received the go-ahead from him.

"He was also aware that I am a pensioner and no longer employable," Nong said.

His wife, Modieng, 61, who is due for her pension this year, said they made it clear to him they could only consider the upgrade once she received her pension pay-out and had settled all their debts.

"We had just returned from Egypt, which we thought might be our last holiday, considering our age, and had spent a lot of money ... but we were somehow persuaded to complete the upgraded contract," the grandmother of four said.

Modieng said her husband was made to complete the National Credit Regulator forms to assess his ability to pay despite telling Siyabonga that he was no longer employed.

"But to cover their tracks Siyabonga asked for my credit card details and processed payment without my consent.

"We should have followed our instincts and refused to complete the forms but decided to give this young man the benefit of the doubt - only at our peril," Modieng said.

Nong said he was upset when his wife told him Siyabonga had betrayed their trust and that The Holiday Club debited R7100 from her account.

"Siyabonga has not explained his action and now switches his cellphone off once he recognises my voice," Nong said.

He said he suspects that Siyabonga misled them because he knew Nong would not be protected by the Consumer Protection Act.

Riaan Oosthuizen, a national manager of The Holiday Club, agreed to cancel the contract but said Nong would forfeit his R7100.

The consumer Protection Act gives consumers more rights

All consumers need to do is to know their rights to avoid getting swindled.

Rosalind Lake of Deneys Reitz Attorneys said before you rushed off to the consumer commissioner there are a few things you should know:

* Any contract you signed, transactions you made or products you bought before April 1 are not subject to the provisions of the act.

For example, fixed term agreements, like a gym contract or cellphone contract may be cancelled before the end of the period you signed up for and you cannot be forced to pay an unreasonable penalty.

"But this does not mean the contract you entered into before April 1 can now be cancelled on 20 days notice.

"The rules that apply for that agreement will carry on for the duration of that contract," s Lake said.

* The act gives you a right to return goods.

"Under the act you will have extensive rights to return goods if you are coerced into an agreement through direct marketing, if wrong goods are delivered to you or they do not match the description of the sample you were given or if goods are defective," she said.

According to Lake you will also be entitled to a warranty that says goods you buy are safe and free from defect for a period of six month after you receive them.

She adds this does not mean goods bought over the festive season which do not comply with these requirements can now be returned to the supplier today or after April 1, nor can you complain to the consumer commissioner about this fact.

"You will have to rely on any existing warranties the supplier gave you or the common law rights you had before the act came into force," she said.

As for the service providers who had no return policies, they will have to make sure they comply with the act.

Those who had the return policy must replace their notices with the new one.

The office of the consumer commissioner has phrased it nicely for them and it should read as follows:

"Please choose carefully. We do not normally give refunds if you simply change your mind or make the wrong decision.

"You should choose between a refund, exchange or your money back where goods are faulty, wrongly described, different from the sample shown to you or do not perform as intended.

Please retain your receipt as proof of purchase."

Be warned: not all complaints you have as a consumer in terms of the Consumer Protection Act can be dealt with by the consumer commission, Lake said.

According to Lake there are still certain issues, such as the interpretation of the act and claims in relation to harm caused by a defect or unsafe products, that will have to be addressed as at present through the court system.

"The Consumer Protection Act is not a quick way to make money," Lake said.

Lake added that there were limited instances in which a consumer could be compensated for any loss with an award of money.

"Most of the solutions provided for in the act are about ensuring that you receive what you are entitled to, that you are not misled and that you are not forced to pay for products or services which do not exist or poorly delivered or defective goods," said Lake.

She said it would take some time for suppliers and consumers to comply and understand their rights as from today onwards.

"It is important for everyone, no matter what side of the supply chain you are on, to ensure that you educate yourself on your rights and obligations," Lake said.

Source: Business Live/The Sowetan

For more information see booklet: Your guide to consumer rights & how to protect them by the dti

Currency volatility: why it's a problem

2011-04-11T13:07:00.002+02:00

High currency volatility makes it difficult for businesses to plan and budget, according to Michael Keenan, head of forex research at Standard Bank.

"Importers and exporters have to do cost planning for their businesses and a huge part of that cost is not only the product or the service they are offering, but also the exchange rate," he said.

"So if they do not get the exchange rate right when they hedge, or they do not hedge, their competitors could beat them with a more competitive offering based purely on the exchange rate."

Keenan said that SA was one of the few emerging market countries that has not taken steps to curb portfolio inflows - unlike Brazil and certain Asian countries have done - and this had made the rand particularly vulnerable to appreciation and volatility.

Brazil upped its so-called "currency war" this week by announcing it would extend a 6% tax on repatriated foreign borrowing to loans and bonds with a maturity of up to 720 days, from 360 days.

In what was seen a tacit endorsement of capital controls, the International Monetary Fund proposed its first guidelines on the use of measures to control inflows of speculative capital this week.

"Foreign investors know they can come in and buy South African bonds or equities and leave the country as quickly as they arrive," Keenan said.

"Rand volatility is likely to remain fairly high until SA starts going down the capital controls route, or if other emerging markets begin to relax their recent capital control measures."

But whereas the rand is one of the world's more volatile currencies, it is still less volatile, and thus less risky, than some other investments.

Warren Geers, general manager of currency trading at the JSE, said the volatility of the rand's exchange rate to the dollar was low compared to the volatility of the JSE's top -40 index.

Source: Time Live

Survey shows 38 percent want nationalisation

2011-04-11T12:56:00.003+02:00

Some 38 percent of South Africans believe that mines should be nationalised, according to a survey of 2000 people released on Monday.

"The level of agreement differed considerably by race, showing that this could be a very divisive issue," said TNS Research Surveys in a statement.

"In a survey of 2000 residents of South Africa's metropolitan areas conducted in February 2011... [it was] revealed that 38 percent of metro adults feel that South Africa's mines should be nationalised.

"TNS said that 28 percent disagreed and a considerable 34 percent gave a 'don't know' response -– a much higher 'don't know' response than usual, suggesting that the pros and cons of the issue have yet to be fully explicated to people."

The research found that black South Africans were more in favour of the idea than whites.
"Amongst those venturing an opinion, blacks are in favour by more than two to one, whilst whites are not in favour by almost three to one, with an absolute majority being negative (56 percent).

"For the other two race groups, opinions are equally divided. This is clearly a difficult and potentially emotive issue."

Afrikaans-speaking people were the most negative about the idea while Tswana speakers were the most positive.

Source: Time Live

SAFEX shut down on JSE

2011-04-11T12:45:00.002+02:00

Technical issues have brought a halt to trade on the South Africa’s Futures and Exchange market (SAFEX) board of the Johannesburg Stock Exchange (JSE) on Monday.

The equity derivatives market on the JSE usually opens up for trade at 08h30am, but this did not occur on Monday morning as a result of "technical issues".

Michelle Joubert, the head of investor relations on the JSE, told Business Day that the exchange’s IT division is hard at work fixing the problem.

"It is down to a technical glitch and not due to problems in the trading engine itself. We have isolated the cause and we are working to rectify it," she said.

Source: Business Day

Growth in house prices remained low in March

2011-04-07T14:17:00.003+02:00

Price growth in the value of middle-segment homes in the South African housing market remained at a relatively low level on a year-on-year basis up to March, the latest Absa house price index shows.

Marginal monthly price growth was evident in two of the three categories of housing measured by the Absa house price indices. Real year-on-year (y/y) price declines occurred in the segments of medium-sized and large houses in the first two months of the year, while real price growth in respect of small houses edged down further in February this year.

In the category of small houses, nominal y/y price growth of 2% was registered in March, compared with 4.1% in the preceding month, thus the average price of a small house was recorded at about R794,200 in March. In real terms, price growth in this segment of the housing market came to 0.4% y/y in February.

The average nominal value of medium-sized houses was down by 0.7% y/y in March this year, after rising by a revised 0.1% y/y in the preceding month. This brought the price of a medium-sized house to about R966,300 in March. A real price decline of 3.5% y/y on average was registered in this segment of housing in February this year.

Nominal y/y price growth in the category of large houses was unchanged at 3.5% in March from February this year. The average price of a large house was about R1.5 million in March. An average real price decline of 0.2% y/y was recorded with regard to large homes in February.

Absa property analyst Jacques du Toit said the slowing pace of house price growth recorded in the first three months of the year was believed to be related to the base effect of a recovery in home values in the same period last year.

Source: Business Live

Monetary Policy Committee decision

2011-03-25T13:51:00.003+02:00

The Reserve Bank kept the repo rate unchanged at 5,5% yesterday, even as governor Gill Marcus warned of significant risks to the inflation outlook for the year.

With analysts and the Bank expecting inflation to reach the top of its 3%-6% target band this year, the next move in interest rates could be upwards for the first time since June 2008.

Analysts said the Bank’s action in keeping rates steady was in line with expectations.

"The monetary policy committee (MPC) is of the view that the risks to the inflation outlook are on the upside," Ms Marcus said when announcing the committee’s decision at a news briefing in Pretoria yesterday.

"Given the significant upside risks to the inflation outlook, the MPC will closely monitor any indications of second-round effects on inflation emanating from these cost pressures."

The Bank adjusted its inflation forecast upwards to average 4,7% this year and 5,7% next year, mainly due to revised assumptions about world oil prices.

"The biggest risks to the inflation outlook remain food and administered prices, in particular oil prices," Ms Marcus said.

"International oil prices had already accelerated in the latter part of 2010 in response to strong global demand and this upward trend had been reinforced by the geopolitical events in North Africa and the Middle East, which have raised concerns about the security of oil supplies," she said.

Even if there is a change of rule in Libya soon and protests died out in other Middle Eastern states, underlying demand pressures should keep oil prices high.

Since the MPC last met in January, Brent crude oil prices have risen by almost $20 a barrel. Domestic petrol prices have increased by almost R1 per litre since January and are expected to rise again next month, along with an increase in the fuel levy.

But Ms Marcus would not be drawn on how high she expected the oil price to climb, or for how long. "No one knows exactly what the oil price would do," she said.

This suggests the Bank will avoid taking rash decisions given the uncertain global climate.

"Her refusal to be pushed into stating what current oil price assumptions underlie the Bank’s inflation forecast suggests that the Bank will not be pushed into a knee-jerk reflex, where they have to tighten policy a lot sooner than they are comfortable with, just because oil prices rally further," Standard Chartered economist Razia Khan said yesterday.

"This is a central bank that is hanging on to its autonomy in all senses," Ms Khan said.

In November last year, the Reserve Bank had expected inflation to average 4,3% this year and 4,8% next year.

In January it forecast an average of 4,6% this year and 5,3% next year.

The year-on-year inflation rate — as measured by the consumer price index (CPI) for urban areas — was 3,7% in January and last month, but economists said they expected food and oil prices to boost CPI eventually.

Ms Marcus said the possibility of raising rates was not brought up in discussions at the two-day MPC meeting, but she said rates would have to rise eventually.

Analysts expect this in the fourth quarter of this year or the first quarter of next year.

"In view of the deterioration in the inflation outlook, it is difficult envisaging the Bank maintaining a steady hold on monetary policy indefinitely, without hiking the policy rate at some point," Brait economist Colen Garrow said. "An added caution is the shift in sentiment towards emerging markets, and towards SA in particular, where nonresidents have lightened their portfolio capital inflows by R18bn."

Mr Garrow said if SA’s "forward rate agreement market continued to be a reliable leading indicator of interest rate direction, it can be expected that the policy rate may tighten by 100 basis points (one percentage point) in the fourth quarter of 2011".

Ms Marcus said wage settlements posed an inflation risk. "High real wage settlements have been a significant upside risk to the inflation outlook. However, there are indications that nominal wage settlement rates may be moderating."

Andrew Levy Employment Publications found the overall average wage settlement rate in collective bargaining agreements was 8,2% last year, compared to 9,3% in 2009.

"Similarly, the downward trend in year-on-year growth in unit labour costs continued into the fourth quarter of 2010 when it measured 7,7%, compared with 9,3% in the previous quarter," Ms Marcus said.

"This positive trend, if continued, may contribute meaningfully to ... low inflation and employment creation."

The Congress of South African Trade Unions said it was "bitterly disappointed" that the Bank had "missed an opportunity" to cut rates and stimulate industry.

Business Unity SA (Busa) agreed with the Bank that the cost-push inflation that may emerge in the near future may not be responsive to monetary policy. "It is also clear that administered prices play an important part in creating upside risks for the inflation outlook," Busa said.

Source: Business Day

Bank fees reform

2011-03-16T14:51:00.002+02:00

Banks have been getting away with charging high fees. It has benefited shareholders to the detriment of consumers. But new reforms are coming soon that will force banks to change their market conduct

In May last year, finance minister Pravin Gordhan summoned the CEOs of the Big Four banks — Standard Bank, Absa, First National Bank and Nedbank — to his office. The bank bosses knew what they were in for. Their market conduct in retail was in question: bank charges were high and there was a lack of transparency around them . Gordhan wanted to rein in these charges.

In 2004 treasury and the Reserve Bank commissioned work into the competitiveness of banks in SA. That led to a banking inquiry by the competition commission in 2006, headed by advocate Thabani Jali, and the banks were forced to divulge the extent of their market dominance and practices.

It uncovered evidence of “abuse” — the Big Four were setting certain transactional fees and were found wanting on their disclosure policies that made interbank comparisons for customers difficult, if not impossible.

It became clear there was market concentration of the Big Four in SA, which is not unusual in other countries. But what was disturbing was that the commission found this market concentration had worsened between 2004, when the initial report was done, and 2008, when the Jali commission finished its inquiry .

Gordhan wanted to crack down: to get banks to commit to increasing competition, and making banking services cheaper and more accessible while preserving stability of the system. He could either strong-arm them through regulation or they could co-operate voluntarily. “Our financial sector has not really shown exemplary market conduct practices,” says treasury deputy director-general Ismail Momoniat. “There is an opaqueness where you can’t understand your statements or ATM charges or your retirement annuity statements because of the layered charges.”

At that meeting, the CEOs agreed , among other things, to :

Lower penalty fees on dishonoured debit orders and improve the management of the current debit order system;

Greater transparency regarding ATM pricing. All banks should display a message, either on a screen or by other means in the case of mini ATMs, telling the customer exactly how much they would be charged for that transaction, with the option to decline . FNB CEO Michael Jordaan says disclosure of this fee would require banks to share pricing information with each other, which needs careful co-ordination at an industry level, as well as an exemption from the competition authorities as banks would be sharing certain competitive fee information.

Produce a detailed breakdown of fees and charges on customers’ statements and create standards for disclosure that would be incorporated into a new Code of Banking Practice. The code was meant to be finalised by November last year, but Banking Association MD Cas Coovadia says it’s coming soon.

Provide banded and fee options, and bundled options for low-income customers;

Provide a fee calculator to reduce search costs and improve comparability of products and services; and

Reduce switching costs and assist consumers to switch.

Now, 10 months later, the banks have made some progress but admit a lot more needs to be done. The most movement in lowering fees has come from First National Bank (FNB) and Nedbank . Absa has not raised bank fees for the past 21 months because it felt it was important to contribute to the recovery of consumers. And Standard won’t move on its prices.

But the reality is while the Big Four boast they have implemented 20 of the 28 recommendations of the Jali commission, this is misleading. Take the penalty on dishonoured debit orders: most banks have slashed it from R105 to R5 on their lowest plans, but customers of other packages are still stuck with the R105 fee.

With the bundled options (transmission and cheque accounts which include overdraft facilities, Internet and cellphone banking) you can now pay a one-off lower monthly fee, with the promise of “unlimited banking”. But most clients don’t realise that after, say four ATM withdrawals (such as in Nedbank’s case), you’re charged for it. FM research shows Standard Bank is the most expensive on ATM charges — R27,30 for withdrawing R2000 compared with the cheapest, Capitec’s flat rate of R3,75. But Standard Bank SA CEO Sim Tshabalala defends its position, saying the bank won’t compete on fees because it’s a larger bank with bigger costs, especially the costs associated with servicing ATMs.

Cash withdrawals made at ATMs are a common activity for most bank clients . In 2006, around 1bn ATM transactions were made through the network, generating gross revenues in excess of R4bn for the banks. The Jali commission found that fee arrangements between banks (similar to mobile operators’ interconnect fees) for use of the shared network have sheltered the provision of ATM services from effective price competition. The commission was particularly concerned with “off-us” transactions clients are charged for using another bank’s ATM.

In addition, clients are still penalised for making cheque, branch or Saswitch transactions. For example, FNB, which now has a different pricing formula to the other three big banks and is the cheapest on its bundled option (its EasyPlan account is even lower than Capitec’s fee), offers “unlimited” ATM withdrawals, debit and stop orders, card purchases, and Internet and cellphone banking. Jordaan says this pricing strategy has worked well for the bank, which is reflected in the latest research showing FNB is now the market leader in personal cheque accounts, winning 7% from its competitors over the past two years.

Absa deputy CEO Louis von Zeuner also talks about innovation and lower charges, saying today a client who goes with a bundled option could save R1400/year in charges, depending on their spending habits .

But the cost savings they speak of should be looked at in the context that clients who get “unlimited” banking services still pay R32 for each cheque, branch and Saswitch transaction — almost a third, and on some accounts more than half, of their monthly fee account . Banks argue that these services are labour-intensive, so cost more.

Switching of accounts is even more difficult and costly (see table on page 38). But Jordaan says “it is more a perception than reality that switching between banks is difficult. We have enabled our online channel for sales so new customers can now open accounts without even coming into an FNB branch. And we can switch a new customer’s debit orders over with a minimum of fuss.”

But that is not good enough considering banks’ earnings from fees. Bank charges are still “opaque” and that has forced government’s hand in regulating behaviour around bank charges. There is no regulator that presently oversees the market conduct practices of the retail transactional banking sector (the National Credit Regulator, NCR, oversees the banks’ credit business).

But new proposed reforms, expected to be legislated this year, will result in a retail market conduct regulator being created, which will develop principles on how banks should set and report their fees and what constitutes fair and unfair behaviour. This is part of treasury’s new shift to a “twin peaks” model of regulation (used in Canada and Australia), which will give various authorities more muscle. There will be one macro regulator considering prudential issues regarding the financial stability of the system, comprising the existing Reserve Bank body, plus various oversight committees. The other will be a micro regulator (retail market conduct regulator) based within the Financial Services Board (FSB), which will oversee market conduct . In addition, a Council of Financial Regulators will provide greater co-ordination between the diverse regulators on legislative and conduct enforcement.

This isn’t unique to SA. Globally, authorities have been forced to tighten regulations in the aftermath of bad lending practices that led to the financial crisis. Treasury wants to bring SA practices up to speed with comparable countries. “Everyone is looking at how to regulate apart from the capital and liquidity requirements set in [global banking supervision standards] Basel 3,” says Momoniat. “We want to make all regulators stronger so they can exercise their powers more intrusively in their supervisory roles.”

The area of market conduct is where “we must get tough”, he says. “We want banks to make banking cheaper, accessible and transparent. The banks are very good at making themselves rich, but not very good at explaining what they’re charging for and why they’re charging for it.”

A study by global consultancy group CRA, commissioned by Absa for the period of the Jali commission, concluded that “the average return on equity (RoE ), a measure of profitability of SA banks was — with the exception of 2002 — consistently higher than the weighted average of the world’s leading banks over the study period”.

Momoniat is floating the idea of imposing a levy on the industry to pay for a strong advocacy consumer group. “Banking is a regulated sector so they should pay a levy. It’s not the kind of money that would make them broke; it would create an environment that makes practices more acceptable and makes it easy to understand their rates so customers feel in control and can comfortably agree to charges upfront.”

The banks are uncomfortable with government trying to control prices, cautioning against a “regulator of profits” that will stifle growth. They have called for a meeting with Gordhan to discuss the proposed reforms. They say over- regulation could push up their already escalating costs and stunt growth at a time when advances growth is flat and affects their non interest income.

Says Coovadia: “The banking sector is already significantly regulated, with more regulations from Basel 3 leading to banking becoming more expensive. I don’t have a problem with treasury saying fees must be more transparent, but trying to regulate charges would be inappropriate.”

Von Zeuner adds to the chorus that controlling fees will “constrain and suppress” innovation. “No customer is the same, so you can’t cap fees. Also, no bank is the same, so can’t have the same cost structure. It will suppress the diversity banks have. A lot of work is being done by the industry in terms of switching of accounts and we’re doing a lot to provide customers with more information on their statements and recommendations on how they can reduce costs.”

Banks rely hugely on fees and commission for their non interest revenue. Coovadia says the regulations would stump banks’ ability to raise good capital. “Banks’ RoE and revenue are already under pressure. Banks need to compete with other businesses to maintain their shareholdings and get investors to buy into them. Basel 3 requires banks to raise more capital, but if they can’t grow their RoE, then they won’t be able to raise capital.”

But banks regulator Errol Kruger notes that banks shouldn’t be so reliant on fees that this overshadows their banking income. If one looks at banks holistically, they are there in the public interest but not “charitable institutions” — they have shareholders who do put pressure on them, especially during a downturn.

“But, equally, it’s prudent that they don’t become too reliant on net interest income,” says Kruger. “Fees should be fair; banks shouldn’t abuse clients. It’s not right for them, for example, to charge astronomical fees for dishonouring a debit order, where they become blatantly out of line. Fees shouldn’t be the balancing number to push up their income.”

But analysts say trying to control bank charges will add to the complexities and create other problems as banks would find other innovative ways to cover their costs. Treasury acknowledges this. “There has to be a balancing act. We realise if we try to reduce fees, banks will become unprofitable and it could force them to take on riskier lending,” says Momoniat.

The banks have been operating as an oligopoly where the Big Four dominated — not a cartel, like the construction industry. But because banking is a closely knit industry with few players, executives got together frequently at a high level to discuss and agree on issues concerning inter operability in the payment system. Banks know a great deal about each other, according to Jali, so are well placed to shadow business strategies and set rules and conditions that collectively favour themselves. This obstructs competition.

Market concentration is particularly high in personal transaction accounts, ordinary current accounts and transmission accounts (savings accounts with transactional facilities), where the Big Four together control more than 90% of this market. These facilities are bundled, packaged and priced, which varies from bank to bank, making the choices for consumers more complicated.

The result is the banks have maximised their profits by avoiding outright price competition (though competing for customers in other ways), and by taking advantage of the degree to which customers, once recruited, become locked in to a particular bank.

SA banks have a very fee-driven banking model (see tables on non interest revenue). They do not compete by fixing prices, but rather by differentiated product offerings and complicated pricing structures, says Penelope Hawkins, MD of Feasibility, a consultancy that helped draft the 2004 report into competitiveness of SA banks. Within established market segments, though, treasury says the Big Four tend to set their fees within a close enough range of each other so one cannot impinge on the market share of another .

The commission found that one of the banks may charge a lower fee (or no fee) for a particular transaction service in order to differentiate its product. However, for the same product, it will be prepared to charge a higher fee than its competitors for another transaction service. This is the classic rationale of oligopolists who stand to gain more in the medium and longer term if they refrain from price competition in the short term for the sake of temporary market share gains.

It is clear that there are large fixed costs in the banking industry. About 80% of banks’ costs are fixed and these costs in turn are common costs that are difficult to allocate to particular products or, in some cases, business units. As a consequence, the banks argue that there are large economies of scale. So, in this kind of industry there will be prices that are in excess of the marginal cost of providing any particular service necessary to cover all those fixed costs and provide a return to shareholders.

The reality remains, however, that the cost structure of retail banking — high fixed and common costs — drives concentration in banking and places certain limits on the extent of competition, says Hawkins.

But banks argue that the costs of establishing and maintaining physical branch networks and ATMs are substantial. This poses a significant barrier for new entrants, especially smaller players, who do not have established branch infrastructure.

“There is definitely a different cost structure if you compare bigger banks with the smaller ones,” says Zeuner. “On the commercial side, servicing all sectors of the economy costs more in terms of infrastructure, so cost structures can get complex.”

He uses the costs of servicing and maintaining ATMs as an example. Absa has 8000 ATMs, a third more than its competitors. “One has to consider the components that make up the cost of an ATM: there is the initial substantial investment of the physical ATM, the maintenance and sending out a van to the ATM, the dependency on Telkom so we can maintain a 90% availability of keeping it online — all that comes at a huge price.”

He adds that one must bear in mind the costs of putting cash into the ATM when it is depleted, as well as the telecommunications costs. “But again, we’re doing our best to see how we can making banking cheaper through mobile, Internet and prepaid cards, which should reduce the costs.”

The banks say they are also using retail stores such as Pick n Pay and Spar to cut the costs of banking.

Treasury still has to thrash out the nuts and bolts of its proposed plan after consulting with industry. There is no doubt there is room for charges to fall further. Customers have a constitutional right to know what they are being charged for upfront.

But government should be careful about over regulating so as not to kill an industry which is at the heart of every economic activity. The solution is to try to drive competition by opening up the market and breaking the oligopoly.

There is potential for greater competition from innovative banking minnows such as Capitec, as well as other banks and non bank players in the payment system such as retailers and telecommunication companies. These players have the potential to impose an effective competitive constraint on the Big Four banks across the retail market, but their success depends on whether existing restrictions on competition, both on the supply and the demand side, can be effectively addressed.

Source: Financial Mail

Index shows factories more confident, and hiring again

2011-03-02T12:47:00.002+02:00

The manufacturing sector may be hiring again, according to the Kagiso purchasing managers index (PMI) for last month.

The PMI — which reflects the percentage of purchasing managers in an economic sector who reported better business conditions compared with the previous month — stabilised last month, increasing from 54,6 points in January to 54,8 points.

A number above 50 implies that overall sentiment is positive, while a figure below 50 suggests managers have a generally negative outlook.

Last month, the PMI’s employment subindex rose above its key 50- point level into expansionary territory, after nine months of below 50 readings.

Theo Vorster, a specialist consultant at the Kagiso Group, said that the "most heartening trend in the latest numbers is that the PMI employment index rose back above the key 50 mark to 51,6, indicating that the factory sector may have started employing again".

In the fourth quarter of last year, the manufacturing sector increased employment by 70000 jobs.

SA’s overall unemployment rate sits at 24%. The government’s New Growth Path has set a target of creating 5-million jobs in 10 years.

The PMI price index surged by more than 10 points last month to above 80 index points, its highest level since the end of 2008. It suggests manufacturing input costs are accelerating sharply.

These higher costs were unlikely to encourage purchasing managers to employ people, Ilke Smit, economic analyst at Metropolitan Asset Managers, said yesterday.

"With higher prices paid at the manufacturing level while new employees are taken on board, one hopes that retailers further down the supply chain will be able to pay these higher prices by either absorbing some of the price pressure or passing them on to consumers."

But, "given a slow-to-recover labour market and still fairly price- sensitive consumers, the shifting of price increases onto consumers wouldn’t be a viable option for some retailers, especially those selling discretionary items", she said.

The PMI’s subindices measuring new sales orders and business activity were stable. However, managers were not as optimistic about future business conditions.

Source: Business Day

State of the Nation: R29bn over three years to finance job-creation

2011-02-11T09:14:00.004+02:00

The government will make R9-billion available for job creation and R20-billion for allowances and tax breaks over three years, mainly in the manufacturing sector, President Jacob Zuma said in his state of the nation speech in parliament.

In a generally upbeat speech in which he claimed that progress had been made in most of the government's priority areas, he included the announcement of R800-million in immediate relief to communities hit by the recent flooding and promised further spending on reconstruction.

Confirming that local government elections would be held before the end of May, Zuma conceded that some municipalities and public services were not performing well.

"We have to make people's experience of local government a pleasant one [because] it touches their homes and their lives directly every day," he said.

He dodged specific pronouncements on the major debates of the day, including the nationalisation of the mines and what would constitute "decent work".

He announced no new spending or initiatives on fighting crime.

Zuma arrived at parliament at the end of a sweltering day, escorted by bandsmen in scarlet, and paused for a 21-gun salute and an air force fly-past.

Watched from the public gallery by guests including former presidents Thabo Mbeki and FW de Klerk, former speaker of parliament Frene Ginwala, ANC Youth League leader Julius Malema, cricketer Makhaya Ntini and a host of diplomats, Zuma noted the absence of former president Nelson Mandela and appealed to the public to leave him in peace.

Declaring 2011 "the year of job creation", he said R9-billion would be made available for job creation over three years and R20-billion for allowances and tax breaks as a job-creating stimulus to the manufacturing sector.

He reiterated that the state-owned Industrial Development Corporation had set aside a further R10-billion for investment in businesses with high job-creation potential, taking the budget dedicated to job creation to R39-billion over the next three to five years.

Zuma said experts estimated that South Africa would be able to continue mining for at least a century - but his comments on the state's role in mining were ambiguous.

"The government has endorsed the African Exploration, Mining and Finance Corporation as the state-owned mining company that will undertake the mining of minerals of strategic significance.

"One of the government's priorities this year is also to finalise and adopt the beneficiation strategy as the official policy of the government so that we can start reaping the full benefits of our commodities," he said.

Some of those in the public gallery interpreted the comment as a warning to Malema that there would be no further state role in mining. Others saw it as a claim to an exclusive mandate for the state to mine "minerals of strategic significance".

Ministers are expected to spell out the details of some of his comments in briefings next week.

Zuma did not renew the pledge he made in last year's state of the nation speech to implement a youth wage subsidy to encourage the employment of first-time workers. Unions castigated the plan but the R9-billion jobs fund could be used to finance it.

He said a discussion paper on the national health insurance scheme proposed last year, and a government "position paper" on social security reform, were imminent.

"[Social security] issues to be dealt with include the funding and nature of the National Social Security Fund, how the private sector occupational and retirement funds will fit into the entire system, and the possible regulatory structure," he said.

Zuma acknowledged Mbeki - who has not been to parliament since he was fired in 2008 - in his opening remarks, but gave him no credit when he congratulated President Omar al-Bashir, of Sudan (who is wanted by the International Criminal Court for human rights crimes) the AU and the UN for guiding Sudan to a successful referendum on the secession of the south.

Zuma ended with an appeal to all South Africans to think about how they could help in overcoming unemployment.

"Our goal is clear. We want to have a country where millions more [people] have decent employment opportunities, which has a modern infrastructure and a vibrant economy and where the quality of life is high," he said.

Source: TimesLive

Mine nationalisation not currently policy

2011-02-11T08:59:00.002+02:00

Nationalising South Africa's mines is "not the option", Mineral Resources Minister Susan Shabangu said in her strongest comments in a year against an idea that has unnerved investors in Africa's biggest economy.

Under pressure at a mining industry conference to counter radical elements in the African National Congress who want state ownership of the mines, Shabangu reiterated that nationalisation was "not currently policy".

But she then went on to say nationalisation would mean South Africa missing out on a global commodities boom, as it did for most of the last decade when prices soared and mining in countries such as China, Brazil and India posted huge growth, while investment in the industry stagnated in South Africa.

"Is nationalisation going to give us jobs? No. We have got to make sure that we become responsible and we attract more investments, because we need investment in South Africa," she told a news conference.

"We have a boom in the mining sector. We can't afford to miss this opportunity. We lost it the last time. It cannot happen again," she said.

"I still believe, I feel very strongly, that nationalisation would not be the option for South Africa."

For years the pillar of white economic power, mining accounts for 8% of South African GDP and employs more than 500000 people, but it has struggled to adapt and grow since the end of apartheid rule in 1994.

In the last few months, the government has placed it at the heart of plans to tackle 25% unemployment, although most of its ideas involve more, not less, state involvement, leading to scepticism it will be able to turn the industry around.

Shabangu also said that although the industry might be on the way to recovery, some concerns remained.

"The mining industry is expected to grow at an average 4% to 7% in volumes terms in 2011, and is thus recovering to the levels preceding the crisis," said Shabangu.

Earlier, global mining giant Anglo American piled the pressure on the guardians of the world's fifth biggest mining economy not to heed what it said were "false prophets" whose ideas threatened investment and growth.

"Mining companies will not invest if they cannot be assured that the assets they create will be secure," Anglo CEO Cynthia Carroll said.

"In ignoring this truth, the false prophets who argue for nationalisation are advocating the road to ruin - a path we must not follow."

ANC Youth League leader Julius Malema has spearheaded the drive over the last year to nationalise South Africa's mines, which remain overwhelmingly owned and run by whites despite an ANC push for greater black involvement. The notion was even tabled at a major ANC policy meeting last year.

Senior figures from Shabangu to President Jacob Zuma have failed to slap Malema and his backers down, suggesting the idea may have some traction in the corridors of power.

At last year's mining conference, Shabangu said nationalisation would not happen "in my lifetime" but softened her tone under the guise of ANC protocol.

Uncertainty about nationalisation and affirmative action policies to boost black ownership of the industry have caused mining investment to stagnate since 2000, although South Africa remains the world's biggest platinum and No 3 gold producer.

The industry has also been plagued by controversies in the administering of mining and prospecting rights. On Monday, Shabangu said a planned overhaul of the system would eliminate corruption and blunders.

Source: TimesLive

Can Zuma become the president who delivers on jobs?

2011-02-07T15:55:00.002+02:00

As President Jacob Zuma takes the parliamentary podium next Thursday and pronounces on the state of the nation, business and labour constituencies will be watching intently.

What tiny signs might there be that a real shift has taken place in the ANC’s thinking on how best to create jobs? Will Zuma hint, like ANC secretary-general Gwede Mantashe , that the time to talk tough to the trade unions has come and that it’s better to have more lower-paid jobs for more people than fewer jobs of better quality?

Trade unions stand poised to accuse Zuma of betrayal should he backtrack on the concept of “decent work” (see box on page 31) that was agreed to at the 2007 ANC conference and which appeared in the party’s election manifesto. Given these political sensitivities, whatever is said will be phrased in deep code and more than likely be open to ambiguous interpretation.

Next week’s speech aside, it is becoming clear that the ground is again shifting on the most contentious issue in the ANC alliance: the principles around which the labour market should be regulated. While the local government elections, likely in either April or May, will take up a lot of time and attention in the first quarter of the year, the jobs debate and policy around it will dominate politics and government this year.

Among those, especially in business, who have long complained that trade union power and the close political relationship between the ANC and Cosatu are responsible for distorting employment conditions and wages, Mantashe’s comments caused excitement. But beware: rather than such comments being the result of a thoughtful and considered debate behind closed doors within the ANC, they have popped up in a chaotic context with hardly any process of prior discussion.

None of the recent policy documents from either government or the ANC — including economic development minister Ebrahim Patel’s New Growth Path — has raised the labour market for discussion. Nor has it been discussed in the forum where the ANC’s economic policy heavyweights meet: the party’s economic transformation committee. ...

Read more in the Financial Mail

China's economic invasion of Africa

2011-02-07T12:43:00.003+02:00

About a million Chinese, from engineers to chefs, have moved to work in Africa in the past decade. Xan Rice talks to some of them to find out why

In December 1999, a 24-year-old Chinese man called Zhang Hao left behind the freezing winter of his native Shenyang city to fly to Uganda. Zhang was nervous. He spoke no English. The journey was not even his idea, but that of his father, who had worked in Uganda a few years before on a fishing project involving the Chinese government.

"If you want to start something – and be the boss – Africa is the place to do it," Zhang's father had told him when he asked for business advice.

Zhang had quit university to travel to east Africa, but he did not need a degree to spot easy money-making opportunities as soon as he set foot in Kampala: goods that were available cheaply in every city in China were either expensive here, or unavailable. He started by importing shoes. Then schoolbags. Then fishing nets, nails and bicycles.

"I imported everything. At that time they needed everything!" recalls Zhang, an affable man with rimless glasses.

His business grew quickly; he made money and local friends. But after a few years he grew weary of the long buying trips to China. So he and his wife bought a large plot of land in Kampala. On it they constructed a spectacular Chinese-Korean restaurant, with private dining areas, karaoke rooms and a giant 500-seat dining hall. To the side of the restaurant they built a bedroom, which became their home. The business prospered, and soon he started additional enterprises including a bakery, a firm selling flat-screen televisions and a security company.

"Chinese don't think, they just try without studying the market too much. Otherwise, the chance is gone," he says.

At the site of each new enterprise, Zhang built a room for his family – he had a son in 2007 – to sleep in. They literally live at work.

It has paid off. Zhang says he is now the biggest Chinese employer in the country, with 1,200 local staff. He has even been offered a Ugandan passport, but has refused, just as he has declined to take an English first name.

"I am Chinese, and we need to build a Chinese name here – to let people know that our country is not like before. We are richer, catching up the world."

Few Ugandans need reminding of that. When Zhang arrived in 1999 there were only a few hundred Chinese in the country, including embassy staff. Today, the most conservative estimate is 7,000, from the petty traders who have taken over whole blocks of the central business district to the construction engineers changing Kampala's skyline and the sharp-suited oil executives who frequent Zhang's restaurant. It is a similar story across the continent. Figures are hard to come by, but a decade ago there were probably no more than 100,000 Chinese people working in Africa. Today, there are around a million.

The first Chinese reached Africa nearly 600 years ago during the Ming dynasty, when the armada of admiral Zheng He landed on the Kenyan coast. The next significant arrival was in the early 1900s, when 60,000 Chinese miners worked on the South African goldfields. Half a century on, Chairman Mao Zedong sent tens of thousands of agricultural and construction workers to Africa to enhance ties with countries emerging from colonialism.

But post-cold war migration concerns economics rather than politics. China-Africa trade grew from $6bn in 1999 to more than $90bn (£56bn) in 2009, roughly split equally between imports and exports: Africa's natural resources – oil, iron, platinum, copper, and timber – flowing east to feed China's factories, and finished goods, from flip-flops to trucks, travelling the other way. Last year, the trade is estimated to have topped $100bn. Chinese state involvement in the trade is crucial. Each year Beijing provides billions of pounds in grants and loans to African governments as a sweetener to secure raw material deals or to finance infrastructure projects that could benefit its companies.

That is what brought Liu Hui to Kenya. A slight, 41-year-old civil engineer, he was working for China Wuyi, a state-owned construction firm, in Fujian province in 2006 when he was called into his "leader's" office, and told he was needed on a project to upgrade Nairobi's main airport. Liu had never set foot outside China. He was reluctant to leave his wife and seven-year-old son. He knew as little about Kenya as Zheng He's sailors. "My image was: very poor, dry and hot," says Liu. "But if my company wanted to send me somewhere, what could I have done? You have to show your capacity for work."

On arrival, Liu found that Nairobi was neither dry nor too hot. When the airport contract finished, he was assigned to oversee the construction of a highway between Nairobi and Thika, a pineapple-growing district to the north-east.

Liu lives at China Wuyi's main site office, a four-storey building alongside the highway. Though the commute to work consists of a flight of stairs, the day is long – from 7.15am to 6pm. The pace of work is often frustrating, and can be complicated by language difficulties; Liu speaks in halting English, and knows a few phrases of Swahili. "Chinese work very hard, very quickly," he says. "But here we are training local people to do the work, and if someone does not understand, he works slowly. You have to watch."

Most evenings Liu and his Chinese colleagues – there are about 100 on the road project – watch DVDs on their laptops or chat to family and friends over the internet. But they do get out occasionally, for coffee or dinner in nearby malls. Liu says he intends to return to China for good – his bosses permitting – when the road project finishes, in order to spend more time with his family.

But for Wang Lina, seated in her shop in downtown Nairobi, a few miles away, family is the reason she is here. The child of "normal worker" parents, Wang grew up with few thoughts of leaving Benxi, an industrial town nearly 600 miles north-east of Beijing. But in 2003, when she was 21 and newly married, her husband's uncle approached them with a proposition. A few years before he had travelled to Kenya to set up a home furnishings company. Now his business was expanding fast, and he was looking for family members to help run it. Wang and her husband agreed to join him.

But she missed her friends. In Kenya she could not find any clothes to fit her. She was too shy to talk to local people. So, after a year, she and her husband quit and returned to Benxi. But soon his uncle came calling again, begging them to give it another try.

This time Wang found herself appreciating the upside of living in Nairobi. In Benxi, she had lived in a flat, but was now sharing a large house and garden with two other couples from the extended family. Instead of simply being a cashier in the store, Wang moved into design and sales. She works hard, often seven days a week, but has also found time to enjoy some of east Africa's best tourist attractions – a safari near Mount Kenya, a beach holiday in Zanzibar. She and her husband have saved enough to buy an apartment back home, which is the goal of many young Chinese who take jobs abroad, even though she has no intention of returning soon.

"My friends who now work in Beijing and Shanghai are so tired," she says. "There's no time to relax, it's always faster, faster! Things are slower here, and I like that. No hurry in Africa, that's what they say."

China's move into Africa has not all been driven from the east. Countries such as Uganda have actively courted Chinese companies, to good effect: in 2010 China replaced the UK as the biggest source of foreign direct investment. One of the largest firms to have set up in Uganda is ZTE, China's second-biggest telecommunications equipment company. Zhu Zhenxing, 32, is its MD in Uganda. Growing up in Jiangsu, along China's east coast, Zhu was certain about two things: he wanted to learn English, and wanted to be an international businessman. He was recruited by ZTE at a job fair, with the promise of a job abroad.

"I did not want to stay in my home area, or even in China," he says, puffing on a Dunhill cigarette. "I wanted to experience things, to grow. The further away the better."

So when he was asked to go to Abuja, the capital of Nigeria, Zhu did not hesitate. "Other people said: Africa is like this and like that. But I thought if other humans lived there, I could too."

He learned a lot. The corruption dismayed him. But Zhu liked Nigerians' optimism, "always talking and smiling, not worrying about tomorrow". He was so desperate to prove himself that he nearly burned out. He developed vitiligo, a disorder that causes loss of pigmentation. His face turned white "like Michael Jackson" and he was forced to return to China to recover.

He returned to Africa via Vietnam. In Uganda, he has grown ZTE's business exponentially – the company sold more than 500,000 handsets this year. Zhu looks the modern high-flyer – smart shoes, trousers with a Mont Blanc belt, a dress shirt and trendy black glasses. At weekends he plays golf with clients and Chinese embassy staff. But beyond that his lifestyle is far more modest than that of most expats. He and his staff all live in the same apartment block. A company vehicle takes them to and from work each day. His salary is good by Chinese standards but not comparable with those of his western competitors. Still, he has no complaints.

"We are still working towards being a world-class company," he says. "Our core competency is our low costs, so we must keep expenses down."

If there is one home comfort Chinese migrants in Africa can't do without it is their food. Most companies, including ZTE, bring over their own chefs. Xu Jianwen, 34, is one of them. Raised and trained in Sanhe, in northern China, he was working in a restaurant in Beijing when he heard that the China Road and Bridge Corporation, a state-owned construction giant, was hiring cooks. When he was offered a job in Uganda, his wife, with whom he has a young daughter, protested vehemently. But he won her over when he told her the salary – two and half times what he was earning in China. "Salaries in China are not enough," he says. "I had to come for the money."

His first job was to cook for 20 Chinese workers in Soroti, a small town in eastern Uganda. He had two local assistants but, lacking English, no way to communicate with them. At least the cooking was uncomplicated. Only five vegetables were available locally – aubergine, cabbage, potatoes, green peppers and tomatoes. "And there was no spicy sauce," he says. "I work every day, because people need to eat every day. I wake up at six in the morning and finish at seven. Every day is like that. I rest on Chinese public holidays."

Currently based at head office in Kampala, Xu plans to spend another two or three years overseas, saving all the while for "housing, education and food" for his family. He won't miss the mosquitoes, he says, but he will miss the people. "They are very nice. Friendly to Chinese."

That is not always the case. In parts of southern Africa there has been strong resentment towards Chinese traders, many of whom arrive on tourist visas and stay on illegally. In Zambia, the Chinese managers of a coal mine recently shot two Zambian employees who were protesting over pay, causing anger across the country. And in Sudan and Ethiopia, rebel groups have killed Chinese workers because they view them as proxies of the local government.

In Kenya, home to up to 15,000 Chinese, the main problem for some of the early migrants was a mistrust of their goods. Xu Hui gave up an editing position at the state news agency Xinhua to start a toy-import business in the mid-90s. But when he moved into computers, people did not trust the quality. He resorted to showing potential clients the labels on the computers they already owned that said: "Made in China".

Today Xu runs a successful business importing Great Wall-brand televisions and giant rolls of toilet paper that are repackaged locally. He regards Kenya as his home – he enjoys the "simple, healthy lifestyle", playing badminton at a sports club every week – and only reluctantly sent his family back to China for educational reasons. But though the attitude to Xu's products may have changed, he is aware that western attitudes to China's push into Africa remain largely negative – something he struggles to understand.

"Western countries also buy oil, and have mines around the world. People don't talk about 'grabbing', or 'new colonialism' there. So why is it different for Chinese? We are not sending our armies to places and saying: 'Now sell us this!'" Xu says. "If you can't compete with us, you find an excuse. It's like two children fighting, and the losing one crying to his parent about funny tricks."

In fact, there is competition now on lots of levels. Every month thousands of African merchants travel to cities such as Guangzhou and Yiwu to buy wholesale goods. And other Chinese firms, including state-owned companies, battle for local tenders.

This can be stressful for company managers. Just ask Dong Junxia, an earnest, smartly dressed woman. Since 2008 she has been in charge of the small Ugandan office of the China Railway Seventh Group Corporation, a subsidiary of CREC, one of the world's largest construction companies. She worked on road-building projects in difficult environments in Tanzania and Liberia, with some success. But in Uganda her company had yet to win a large tender. Dong seemed ashamed, and insisted that her name and that of her company stay out of this story.

"I have progressed professionally [in Africa], but suffered loss in being away from my family. In western culture it's different. Being with the family is the priority. Chinese sacrifice themselves for the family. It is hard to decide which is more important."

But a week later she called to say that her name could be used. She sounded exuberant: her company has been awarded a large contract to build a road. "After two years of hard work! You must understand how good that feels."

Source: The Guardian

Confusion over policy hampering growth

2011-01-13T14:34:00.003+02:00

Uncertainty over economic policies such as nationalisation was hampering efforts to raise SA’s growth rate, business said yesterday, while acknowledging confidence improved slightly last month.

The South African Chamber of Commerce and Industry (Sacci) business confidence index showed only a slight increase last month, according to data released yesterday , suggesting business was still pessimistic about SA’s future.

The index rose 0,6 points to 87,6 last month from 87 in November.

"It will be challenging to muster the momentum towards growth while investment and household spending are driven by credit, and while employment and fixed investment remain subdued," Sacci said.

Low levels of investment, low household spending and unemployment were areas of concern.

Although the government has said repeatedly that nationalisation, especially of mines, is not official policy, the ruling African National Congress (ANC) has set up a task team to report back to its national executive on nationalisation. While some critics see this as the death knell for nationalisation, which has been promoted aggressively by the ANC Youth League, others fear it keeps the policy thrust alive.

Sacci economist Richard Downing agreed nationalising mines in SA would upset business and said he believed it would severely stifle foreign investment, a key tool in the economy’s future. "SA must aggressively explore opportunities in international trade as an important source for demand and investment," he said.

"The present level of business confidence, although better than a year ago, will remain vulnerable to questionable economic policy positions and disruption of economic activity."

Although business confidence overall improved last year from the year before, Mr Downing was worried SA’s infrastructure projects would not create an environment strong enough to boost economic growth significantly.

"With substantial investment in economic infrastructure, especially electricity and roads, the level of fixed investment should continue to support the demand side of the economy although it will not be at a level that could fast-track growth," he said.

Sacci also said that low levels of investment, household spending being driven by credit and weak job creation posed threats to business growth.

The business confidence index improved gradually last year compared with the year before. It began the year with a fall to 82,5 in the first quarter, from 83,3 in the last quarter of 2009, but averaged 83,7 in the second quarter before rising to 86,6 in the third quarter and 86,8 in the last quarter of the year.

Its average for the year was 84,9, up from 82,8 in 2009.

Source: Business Day

Invitation to join Bric

2011-01-03T09:15:00.002+02:00

The decision this week by the Chinese government to invite SA to join the Bric (Brazil, Russia, India and China) group of emerging countries has caught many analysts off-guard.

According to Chinese Foreign Ministry spokesman Jiang Yu, Chinese President Hu Jintao has invited President Jacob Zuma to attend the third Bric leaders' meeting to be held in Beijing this year.

Yet many analysts are sceptical about SA's suitability as Bric material.

First, the country's economy is only a quarter the size of the next-smallest Bric economy, Russia; second, SA's growth rate is pedestrian compared with the Bric average; and third, SA does not have the population of the other members.

"It's not a natural fit," said Razia Khan, Africa head of research at Standard Chartered.

Goldman Sachs Asset Management's chairman, Jim O'Neill, who coined the Bric phrase earlier this decade, was reported to have said: "While this is clearly good news for SA, it is not entirely obvious to me why the Bric countries should have agreed to ask SA to join.

"How can SA be regarded as a big economy? And, by the way, they happen to be struggling as well."

Lyal White, director at the Centre for Dynamic Markets at the Gordon Institute for Business Science (GIBS), was even more doubtful about the benefits of Bric membership.

"SA must not misunderstand the nature of Bric - it is an acronym dreamt up by orthodox banks based in the global north. Bric does not have development initiatives emanating from it, unlike the Ibsa (India, Brazil and SA) forum; rather it is a grouping about market and economic access.

"The reality is that there is very little consensus within Bric. For example, each country has a different growth path or policy, and there is no political will to deal with global issues such as the ensuing currency war.

"SA should realise that Africa is the future. We should focus on our competitive strengths and position ourselves as the 'gateway country' in Africa," he said.

Politicians, however, are adamant that SA's ascension to the big league of emerging markets is a portend of the new world order that is unfolding in the wake of the severe recession of recent years.

The SA government believes the decision is the key to unlocking further investments into the local economy, as well as solidifying the country's ambitions to be a central player in the emerging global landscape.

Department of International Relations and Co-operation Minister Maite Nkoana-Mashabane said: "The rationale for SA's approach was in consideration of a matter of crucial importance to Bric member states, namely the role of emerging economies in advancing the restructuring of the global political, economic and financial architecture into one that is more equitable, balanced and rests on the important pillar of multilateralism."

On Wednesday, Russian foreign minister Sergey Lavrov justified the decision saying: "The entry of SA, an active participant in the G20 and the largest economic power in Africa, will not only increase the total economic weight of our association, but also will help build opportunities for mutually beneficial co-operation within Bric."

The decision clearly makes more sense politically than economically. For SA it is seemingly part of a larger plan to join key global decision-making bodies, with the UN Security Council being the ultimate prize.

Dawie Roodt, chief economist at the Efficient Group, said: "China is after the country's resources, but another thing the Chinese covet is SA's political clout - the country, due to its history and its transition, commands a lot of global respect. SA definitely punches above its weight and this ascension to Bric will definitely add to SA's growing political clout.

"Bric represents the second tier of the most important countries. SA and Russia represent the commodity-producing countries, China is the manufacturing centre of the world, Brazil is the agricultural giant and India is the software and IT specialist. Therefore the countries each have their unique competitive advantages," he said.

Marvin Zonis, professor emeritus at the University of Chicago Booth School of Business said: "It is smart on the part of China to do this and it is also good for SA. It legitimises SA as a future global power and as an investable country."

Economically, the impact is already being felt in view of the significant strengthening of the local currency since the Chinese announcement.

The rand touched three-year highs against the US dollar on Thursday morning, trading below R6.60 to the US dollar. This brings its total gains against the dollar to over 30% since the beginning of 2009.

Source: Sunday Times

Changes to financial and foreign exchange regulatory arrangements

2010-12-14T10:31:00.004+02:00

Introduction

In the 2010 Budget and the Medium Term Budget Policy Statement, the Minister of Finance said that details of proposed changes to financial and foreign exchange regulatory arrangements would be published before the end of this year. These proposed changes include:

Regulation 28. The second draft of Regulation 28 was released on 10 December 2010. Linked to this draft, today the prudential foreign asset limits for institutional investors are also being revised.
Discussion document. To allow for more time for internal consultations within government, the release of the comprehensive discussion document entitled Strengthening the financial sector to better serve South Africa is postponed and will now be released for public comment in February next year.

Background
Drawing on the lessons learnt from the global financial crisis, Government has previously announced reforms to improve the capacity of South Africa to better manage flows of capital, and to complement the current system with a macro-prudential approach to the regulation of foreign exposure. A broader, long-term emphasis on prudential financial supervision was indicated as early as 1997, while reforms aimed at shifting towards prudential regulation for institutional investors were announced in the 2004/2004 Budget. In terms of this approach, a number of announcements were made in the 2010/2011 Budget and in the 2010 Medium Term Budget Policy Statement..

The prudential approach to regulating foreign exposure aims to manage and encourage two-way flows of capital, whilst allowing a small, open economy such as South Africa, to respond to external shocks with appropriate policy instruments. In addition, a gradual and sequenced liberalisation of exchange controls also protects the economy against large outflows of domestic capital and an increased reliance on volatile foreign capital. The country’s approach to reform therefore takes cognisance of the need to find the right balance between supporting outward investment and cushioning the economy against shocks.

In the 2008 Budget, the Minister announced the replacement of exchange controls on institutional investors with prudential regulation. This was a major announcement since it removed the inefficient exchange control application and approval process on institutional investors’ offshore investments.
In the 2010 MTBPS, the Minister announced that “the prudential framework for foreign investment by private and public pension funds, including the Government Employees Pension Fund will be reviewed to support portfolio re-alignment and offshore diversification of these funds, especially in the rest of the African continent and into other emerging markets”.

Current analysis shows that a number of institutions, in particular retirement funds, representing a significant portion of the industry investable assets, could be constrained by the current prudential foreign asset limit, especially if GEPF is excluded in the analysis.

As part of a package of measures to respond to surging portfolio inflows and to concretise the announcements made by the Minister in the 2010 MTBPS, National Treasury announces a 5 percentage point increase in the limit to the percentage amount that institutional investors can invest offshore.

New revised limits:

	2008	2010
Retirement Funds	20%	25%
Collective Investment Schemes	30%	35%
Investment Managers	30%	35%
Long-term Insurers (Investment-linked)	30%	35%
Long-term Insurers (Non-investment linked)	20%	25%

National Treasury would like to alert investors that the announced increase in prudential foreign asset limits should also be regarded as a mechanism for absorbing current holdings of inward listed instruments not having a domestic classification. Specifically, this includes those inward listed shares which have been granted an extension or exception by the Minister to allow for their holding outside the foreign investment limits for a transition period that will expire in the next two years. It is the Treasury’s view that the 5 per cent increase in the foreign prudential limit should be sufficient to incorporate such existing holdings.

The Reserve Bank will provide further details on these announcements.

Issued by: National Treasury
13 December 2010

SA Reserve Bank: Quarterly Bulletin

2010-12-09T10:35:00.002+02:00

Quarterly Bulletin

The global economic recovery continued in the third quarter of 2010, characterised by a considerable degree of divergence in economic performance and policy direction between countries and country groupings. Emerging-market economies continued to record stronger economic growth than developed economies. Monetary policy was tightened in a number of countries in order to obviate the possibility of overheating of the economy with the associated risk of escalating inflation. However, very low interest rates were maintained in the euro area, Japan, the United Kingdom (UK) and the United States (US). The US went further by stepping up quantitative easing. In the euro area concerns about fiscal sustainability and financial stability in Ireland intensified, with a steep increase in yields on Irish bonds being recorded. By late November the Irish authorities had entered into an agreement with the European authorities and the International Monetary Fund (IMF), providing for a large support package alongside a programme of fiscal consolidation.

In South Africa the pace of economic growth decelerated slightly in the third quarter of 2010, held back mainly by a contraction in the secondary sector as industrial action in the automotive and related industries reduced output. In the tertiary sector growth slowed, partly due to a lengthy strike in the public sector. By contrast, growth in the real value added by the primary sector accelerated in the third quarter of 2010 as mining output recovered, having suffered setbacks in the second quarter on account of routine maintenance work on smelters, as well as industrial action. Agricultural production recorded strong increases in both the second and third quarters of 2010, consistent with the bumper maize crop harvested.

Real final consumption expenditure by households maintained a fairly brisk pace of increase in the third quarter of 2010, supported by rising nominal income, subdued inflation and lower interest rates. Household finances improved further as the debt-service ratio continued to edge lower, while household net wealth increased alongside rising prices of financial assets. Purchases of durables were, to some extent, constrained by the non-availability of certain types of new motor vehicles in the wake of the industrial action in the automotive industries referred to above.

Final consumption expenditure by government was held back somewhat by the industrial action in the public sector in the third quarter and by the absence of major armaments purchases during that period.

Aggregate real fixed capital formation rose marginally in both the second and third quarters of 2010, recovering after five consecutive quarters of negative growth in the wake of the global financial crisis. Capital spending by the private sector increased somewhat over the same period. Public corporations continued to play a major role in developing the country’s infrastructure, raising their already-high level of fixed capital formation further in the third quarter. General government, in turn, continued to reduce its fixed capital expenditure.

While inventory reduction continued in the third quarter, its pace slowed considerably compared with previous periods, given an already very low ratio of inventories to production. South Africa’s trade surplus with the rest of the world increased significantly in the third quarter of 2010 as the country’s terms of trade improved further, alongside an increase in the volumes of both exports and imports. However, the deficit on the income, services and current transfer account widened notably in the third quarter, partly because of a contraction in travel receipts from foreign tourists as their expenditure receded after the conclusion of the 2010 FIFA World CupTM tournament. The net result of these two offsetting trends was a slightly wider deficit on the current account of the balance of payments in the third quarter, amounting to 3,0 per cent of gross domestic product.

With large amounts of capital flowing to emerging-market economies, including South Africa, the financial account of the balance of payments has recorded sizable surpluses in recent years. This trend continued into the third quarter of 2010 as portfolio inflows, notably into the bond market, were recorded. Moderate reserve accumulation continued and the overbought forward position in foreign currency of the South African Reserve Bank (the Bank) was increased, while the exchange value of the rand against a basket of currencies essentially moved sideways in October and November 2010. This followed a sizable appreciation of the rand during the first nine months of 2010.

In the labour market a modest increase in formal-sector employment was recorded in the second quarter of 2010, constituting the first increase after six successive quarters of contraction. The increase was the result of jobs created in the public sector. While increases in unit labour cost and wage settlements remained high, wage settlement rates continued to moderate in the course of 2010, partly in response to slowing inflation. However, industrial action intensified considerably during the second and third quarters of 2010 and was related mainly to wage demands.

Inflationary pressures continued to moderate, reflecting the sustained large output gap in the economy, the strengthening exchange value of the rand and the subdued behaviour of food prices. Consumer price inflation decelerated significantly to a twelvemonth rate of only 3,2 per cent in September 2010 before edging slightly higher to 3,4 per cent in October. The Monetary Policy Committee (MPC) projected future inflation to be sufficiently contained to allow for reductions in the repurchase rate of the Bank at its meetings in September and November 2010. The repurchase rate had previously been reduced by 50 basis points in March 2010 to a level of
6,5 per cent; in September it was lowered to 6,0 per cent and in November to
5,5 per cent – its lowest level in 30 years. Banks adjusted their benchmark interest rates in accordance with the reductions in the repurchase rate, bringing the prime lending rate to a level of 9,0 per cent following the November MPC decision.

The lower interest rate environment and rising levels of income and expenditure were reflected in an expansion of the banking sector’s balance sheet. The pace of increase in both the broadly defined money supply (M3), and bank loans and advances to the domestic private sector gained some momentum in the third quarter of 2010. The earlier contractions in bank lending to the corporate sector started to make way for renewed increases, albeit at muted levels.

Financial asset prices rose further in recent months as share prices trended higher and bond yields declined, reflecting profit expectations, lower inflation and indications of a smaller government deficit to be financed. However, despite the lowering of policy interest rates, house price increases lost traction from around mid-2010.

Government tax revenue trended higher in the first half of fiscal 2010/11 alongside rising levels of income and household consumption expenditure. The Medium Term Budget Policy Statement (MTBPS) released in October 2010 projected smaller deficits and a lower trajectory for government debt over the period to 2013/14, with the debt ratio expected to peak at less than 41 per cent of gross domestic product. A slightly quicker pace of withdrawal of fiscal stimulus was therefore foreseen in the October 2010 MTBPS than in the February 2010 Budget. Government remained committed to stability, and sound and sustainable fiscal policies.

SA regulators shielded the banking sector from the financial crisis

2010-12-09T07:43:00.002+02:00

SA’s tight banking regulations have drawn praise for shielding the sector from the worst of the financial crisis that claimed iconic institutions such as Lehman Brothers two years ago.

In a joint report issued yesterday, the International Monetary Fund (IMF) and World Bank said local banks and insurance firms had remained profitable during the crisis, while their capital adequacy ratios had remained above the regulatory minimum.

The report states:

Banking supervision in South Africa has been effective and has contributed to reducing the impact on the financial sector of the global financial crisis. Throughout the crisis, the banks have remained profitable and capital adequacy ratios have been maintained well above the regulatory minimum. The registrar’s direct access to the board and the audit committee, combined with the sound governance requirements for banks, have been effective in raising board awareness of regulatory and supervisory matters and ensuring strong risk management in South African banks.
The Bank Supervision Department (BSD) of the South African Reserve Bank (SARB) is to be commended for its early adoption and full implementation of the Basel II framework in an emerging market environment on 1 January 2008, and its continuous efforts to remain in line with subsequent international developments. The systemic risk-add on and the implementation of idiosyncratic capital buffers have contributed to the strength and stability of the South African banking system. The overall implementation of the Basel II advanced approaches has been rigorous and comprehensive.
The supervisory and regulatory framework has been strengthened substantially following the recommendations of the 2000 FSAP and the 2008 FSAP Update. A legal framework and practical arrangements for combating money laundering and other forms of financial crime have been introduced, as well as regulatory powers to address related party lending. Banking supervision is now applied on a consolidated basis, and cooperation between the BSD and the Financial Services Board (FSB) has advanced. The authorities are encouraged to further intensify their cooperation, e.g., by conducting joint inspections at group level and by exchanging supervisory reports on individual groups.
The assessment found some areas where the regulatory and supervisory framework should be further improved. The capital adequacy regulation should allow for explicit revocation of the advanced approaches for credit and market risk. A specific regulation dealing with country and transfer risk regulation should be drafted. Although the exposures are considered relatively small, the BSD does not have a consolidated view of banks’ individual country and transfer risks. Prudential returns should be expanded to include information on country and transfer risk exposures, as well as related party lending.
The registrar’s remedial powers for addressing problems in banks should be strengthened. The registrar cannot appoint a curator at a bank, and there are severe limitations on his authority to cancel or suspend a bank’s license. These constraints limit the registrar’s ability to act decisively in case of emerging problems at a bank.
The BSD appears to be short of human resources, considering the increasing complexity of banking and banking regulation. It needs to expand its expertise in specialized areas such as operational risk (including IT risk) and countering the abuse of financial services (AML/CFT). It also needs to expand staff involved in credit risk reviews. The BSD’s extensive reliance on internal and external auditors for IT operational risk matters is not in line with international best practice.

Address by Governor Gill Marcus

2010-12-08T17:30:00.003+02:00

Address by Governor Gill Marcus to the Ordinary General Meeting of Shareholders of the South African Reserve Bank 8 December 2010

Today is an opportunity for us, together, to consider a very serious overview of where the Bank stands in terms of its internal organisation, its relationship with shareholders, and its role in the South African economy as we move into what will undoubtedly be a very challenging 2011 for the world and South Africa.

In the proceedings so far today we have endeavoured to address the questions you have asked as they relate to the work of the Bank and arising from the Annual Report and Financial Statements. While there are still a number of matters that will be addressed towards the end of the agenda, we trust that the open interaction marks a new beginning in the relationship with Bank shareholders who, in our view, have a vital role to play in ensuring independence, good governance and accountability.

I wish to assure everyone here today of two things:

* firstly, that this meeting is compliant and in line with the regulations governing Ordinary General Meetings of the Bank, as elaborated upon earlier, and
* the Board, Executive and staff of the Bank will continue to act in the best interests of South Africa without fear or favour, and do so professionally, upholding the highest standards of governance and ethics.

We are very grateful and express our appreciation to a number of people and institutions for the professional and highly committed manner in which the amendments to the SARB Act, which led to the postponement of this year’s OGM, were drafted, taken through an elaborate process of open and thorough consultation, and enacted into law. Allow me specifically to mention in this connection the Minister of Finance, Pravin Gordhan, the National Treasury led by Lesetja Kganyago, and Parliament, the chairperson of the standing committee on finance, Thaba Mufamadi and the chairperson of the select committee of finance in the NCOP, Charel de Beer, and their members.” ...

The Rand navigating big winds

2010-12-08T08:55:00.010+02:00

FNB Comment, by Cees Bruggermans

South Africa professes much protective policy action aimed at containing the Rand’s strength.

There are the SARB’s ongoing purchases of foreign reserves ($0.5bn monthly budgeted, these reserves likely climbing to $50bn by end-2011).

The SARB is using forward swaps to neutralize incoming corporate deals (there could still be many such deals, for many of our corporate assets still look desirous).

There is the exchange control relaxation (improving Rand two-way trade) and possible increased overseas diversification by public pension funds.

Yet despite these many protective intentions, the Rand may remain primarily influenced by global events.

That’s not to say that our own protective measures will fail. Merely that other forces may prove bigger while we still have a small current account deficit and dividend outflows requiring only modest foreign funding (always relatively judged).

If all that is so, where is the Rand heading – still towards 6:$ (and 8:€) or 8-10:$ (and 12:€)? And when?
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I am inclined to Rand strength for the time being, for as long as US policy activism and European brinkmanship are evident. Going by appearances, this could be a while.

Those deep winds alone could grease the Rand’s ascent. If we then also still face a precious metal boom, sourcing its strength in these selfsame global ponds, the Rand acquires yet more backing.

Never losing track of China and its regional brood as their catch-up growth fuels global commodity demand and prices, offering us yet more fuel for Rand firmness.

In other words, the Rand’s recovery story of 2009-2010 may not be over, and could continue in 2011-2012. The entire movement can be seen as a cyclical upswing phase reminiscent of the 2002-2006 Rand firming episode.
--------------------
US growth is clocking 2%-2.5% while unemployment jumped to 9.8% last week, never forgetting the additional 7% of the US labour force identified as underemployed or discouraged (no longer even trying). In total 25.5 million people as compared to more normal frictional strain of 8-10 million on a 150 million labour force.

Despite a bit of US retail firmness, and some more growth firming in 2011, US unemployment is unlikely to dip much during 2010-2012, with underemployment and discouragement also remaining elevated and historically challenging.

This alone will prevent a lift in US inflation, with core likely to underperform the Fed’s 2% wish for years still.

None of this suggests a US policy exit soon, yet US fiscal policy is now firmly exiting, courtesy of some truly convoluted politics according to which political party wishes have preference over the national interest.

That leaves Fed monetary policy the only barrier between gradual US recovery and structural recasting as compared to backsliding and deepening despair.

For the Fed to continue its supportive role, it probably can’t be passive. In order to be supportive, the Fed may need to keep moving (if you wish nervously dancing around the ring, in imitation of Mohamed Ali decades ago, jabbing air and occasionally crunching bone).

The Fed already lowered interest rates to zero nearly three years ago. As a supplement, it bought $1.7 trill of bonds (QE1) two years. Last month it embarked on a second programme of buying Treasury bonds held privately (QE2), at a rate of $75bn monthly, plus reinvesting repaid debt proceeds of $35bn monthly.

The aim here is to reduce the stock of such bonds in private institutional hands, inviting investors to use the cash to buy other things (equities for instance). This determined bidding up of asset prices assists in overcoming private scruples, creating wealth effects via various household, business and foreign channels, thus inciting more spending, boosting US and global growth.

For as long as the Fed is so engaged, it would have an expansionary supportive influence over asset markets and the global economy, a firm backstop to backsliding.

One set of arguments say the Fed will continue doing this beyond its mid-2011 target date, eventually buying over $1 trill through 2012 instead of the $600bn announced.

Others are saying that both slightly better US growth data and political aversion and pressure to desist may influence the Fed to limit this intervention to mid-2011.

Bear in mind 2012 will see Presidential elections and another Congressional upheaval, and Bernanke’s (first) term as Fed chairman will end shortly thereafter.

Not a reason to go for broke (yet), but one wonders about the nuanced calculations here, everything over there being politics and then some.

It is probably premature at this stage to suggest the Fed will hold back beyond mid-2011. US performance will likely remain too slow for very long, and lingering labour despair will be VERY important in the 2012 election cycle.

It may be fatal for the Fed to be seen doing “the wrong things” but it may be politically catastrophic to be doing nothing.

My sense is that come mid-2011, the Fed won’t desist, but will carry on implementing its mandate DESPITE any incoming political torpedoes, as the economic and financial case for ongoing policy support will simply remain too compelling (let me add, to American eyes).

If so, that will be one massive engine making for more Dollar weakness against all currencies that can rise because they have their domestic debt and growth stories under control and their protectionist shields only partially deployed (including South Africa).
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Whereas only very recently Europe was seen as the PRIME candidate for seeing its free-floating Euro strengthen further against the Dollar as these US policy stances play out, this looks increasingly no longer the case.

For Europe’s internal problems are like a poison pill, probably not taken with any overt calculation in mind, but merely the accidental consequence of many political actions and choices.

Europe has a sovereign debt problem, and hidden behind it in deep background apparently an even greater banking problem. Encompassing it all is a yet greater political problem as political elites procrastinate or pursue wildly disruptive agendas, still focused on European integration.

The ECB, as chief financial conductor of this wayward continental orchestra, has turned prematurely grey, trying to forcefully talk European governments into taking more reform action WITHOUT instantly sinking the ship underneath its feet (an apparent German inclination) and similarly coaching capital markets to come along for the long ride WITHOUT these also at any stage rebelling and sinking the ship.

And doing all THAT without become bailer or jailer of last resort and burdening his balance sheet with bankrupted sovereigns and banks. Those headaches are for governments and markets to sort out, even if the ECB likes to watch how they fare, and give a helping hand where this is sensible WITHOUT becoming engulfed by either party.

Quite a dancing master, our Trichet, as ever charmingly French as opposed to the German gruffness on display. One wonders HOW the ECB will cope post-2011 with the challenging public eye, once Trichet retires, unless the equally charming Italian dancing master Draghi gets the nod instead. A space worth watching.
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Europe is a crisis in progress as it tries to institute important changes to its governing rules of the game (unvarnished Germanic discipline for governments and their market creditors) without having morose investors detonating funding markets by walking away.

So far, Greece and Ireland had to be taken out of the line, no longer privately funded for the next four years as Europe carries them (at a price).

But financial markets keep signaling their unease with these arrangements, sniffing out new victims to give the beauty treatment, encouraging Europe to buy out yet more of its members in the short term (and storing up how much problems in the medium term?).

Portugal is next. Beyond her looms Spain. And beyond her loom Italy and Belgium (and even France and Britain).

This isn’t over yet.

Further bedeviling the whole thing is that beyond these sovereigns having non-sustainable features there loom still many European core banks having heavily feasted on such peripheral sovereigns and associated private (bank) debt. To the order of a couple of trill (three at least).

That makes a few private bank balance sheets still highly doubtful.

No wonder Trichet is everywhere. With so many walking wounded in his flock, our good shepherd needs to give the impression of firmness to circling predators while giving succour where it is needed most to prevent anyone giving prematurely the ghost and having the predators move in for the kill. Meanwhile he is urging governments at every turn to do more to address these many weaknesses while there is time.

They certainly are making him earn his pension, but he seems to love his job, like Bernanke, so see this all as positive.

Not least because both these gentlemen are deeply convinced their arguments are right and will win out. And also not least because they have VERY deep pockets (the deepest, for they can print money without end, if the notion takes them, understood by all).
--------------------
So how will the Europeans square their circle?

Probably very, very slowly. Do expect episodic market attacks on weak stragglers, after which evasive ECB action creates time for governments to take some more defensive action, giving some respite, until the next round (still thinking Ali).

In the process, the Euro can be expected to go through bouts of weakness (during market introspection and attacks) and partial revivals (when the ECB wastes a bit of its precious ammo to keep the predators hopping).

But instead of the Euro steadily gaining on the Dollar as it is consciously made to slide QE2 assisted, Europe’s internal problems may well regularly trump America’s.

As hedge fund fundy Fink opinioned two weeks ago, this could well make for the Euro revisiting 1.20$/€ (from over 1.30 now).
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For the Rand these are intimidating storylines playing out. With American (and European) actions feeding global anxieties we could see our precious metal prices still boosted episodically. And this is in addition to naturally weaker Dollar and Euro tendencies.

These are powerful engines against which we should see our own protectionist efforts for what they are worth.

On balance, a yet firmer Rand seems likely, though not as a straightline proposition. Instead, with many ups and downs, regular feints as our policy defences are tested (and the Americans, Europeans and Chinese each in turn encounter their own hiccups) markets are like to continue to churn on their wild camel-ride.

For now I would expect Rand firmness and further firming. And it could still last quite a while.

Too much power for state in Patel’s NGP

2010-12-03T13:31:00.002+02:00

Economic Development Minister Ebrahim Patel’s New Growth Path document put too much emphasis on state intervention, and could both spook investors and drive skilled workers out of the country, SA’s largest business group warned yesterday.

There was little recognition of the private sector as the real driver of the economy in the document released by Mr Patel last week, c (Busa) said.

It maintains there is little new in the proposals, compared to several official growth programmes launched since 1994, including AsgiSA, the accelerated and shared growth initiative of SA.

"If we have a patient who is not well we can’t keep diagnosing it without dealing with the sickness," Busa CE Jerry Vilakazi said. He was speaking at the release of Busa’s own growth plan, which includes what it describes as "tough choices" for SA.

"If talking could be factored into gross domestic product SA would be the fastest-growing economy in the world," Busa said in an outline of its priorities.

The New Growth Path aims to achieve an official goal of creating 5-million new jobs by 2020, and reducing poverty and inequality.

Busa welcomed its calls for a strong social dialogue to focus the government, trade unions and business on those goals. But Busa disagrees with many of its proposals, which it says gave too much power to the state.

"We would caution on an overemphasis on an interventionist state that would create uncertainty in the minds of investors," Mr Vilakazi said. "The role of the state is paramount in defining policy ... but it must set parameters so that investors know what they are dealing with."

Mr Vilakazi said that, as far as he knew, business and other social partners had not been consulted on the content of the document.

The deadline for responses is mid-January, which both business and trade unions think is too soon due to year-end holidays.

"There are issues which we are highlighting, if we don’t deal with them we run the risk of being circled with a policy direction which would have unintended consequences," Mr Vilakazi warned.

Spooking investors would be one unwelcome outcome. Driving skilled workers out of SA with wage caps would be another.

It was important for SA to get a "delivery" state in place before embarking too far on a "developmental" state, Busa said.

It pointed out that the growth path was silent on tax policy, which had to be addressed.

SA was in the grip of "welfare dependency" which would be a problem without a large number of taxpayers, said Raymond Parsons, Busa’s deputy CE. The group is calling for an incentive-based approach to welfare payments.

Busa welcomed the growth path’s goal of more competition in the economy, but criticised the lack of attention to "network industries" like electricity, transport and telecommunications.

"The pro-competition approach is lopsided," Busa said. It also criticised the plan’s proposals for an "incomes policy" on wages, prices and executive bonuses.

"Some people may decide that it’s not worth it, some people could go and live elsewhere," Busa’s economic policy director Simi Siwisa said. It was important to provide the incentive to encourage people to live in SA as "we are competing globally," she added.

Busa said it was concerned by the fact that "multiple state units" were creating policy frameworks which did not necessarily "align".

It also said that some of the job targets were "unrealistic". More skills and support should be pumped into education, rather than more money, Busa said.

State capacity had to be taken into account while addressing the priorities of job creation.

But it concludes that the growth path discussion document was "agenda-rich" with a wide range of proposals for "debate, controversy and negotiation".

Ms Siwisa said that Busa was taking the growth path proposals "very seriously" as they had been approved by the Cabinet.

Source: Business Day

Has monetary policy independence been undermined?

2010-12-01T10:19:00.002+02:00

Address by Gill Marcus, Governor of the South African Reserve Bank to the 1926 Rand Club, Johannesburg - 30 November 2010

We are nearing the end of a difficult year, a year that began with so much promise but is now ending on a note of high uncertainty. On the global front, the expectations of a normalisation in the advanced economies were proved to be wrong, and indications are that low growth and accommodative monetary policies are likely to be sustained for some time. This has contributed to the strength of the rand exchange rate as capital continues to flow out of the advanced economies in search of higher yields. Domestically, growth has also disappointed. However the strong rand has contributed to the more benign inflation environment which, along with a persistent negative output gap, has contributed to lower interest rates.

During the year there has been a focus on issues relating to monetary policy independence in response to the letter from the Minister of Finance clarifying the mandate of the Bank, as well as the recent New Growth Path document, in which reference was made to a looser monetary policy stance.

There are perceptions that these documents have undermined the independence of the Bank, and there has been a tendency to over-interpret monetary policy actions in terms of these discussions. For example, when the repo rate was reduced at the previous meeting, some analysts argued that because there was no economic rationale for this move, it therefore must have been politically inspired. A few days later, when the disappointing growth figures were announced, these analysts conceded that our decision was vindicated on economic grounds. There are some who believe that any reference we make to growth or unemployment is an indication that we are not independent enough. At the same time there are elements in society who believe that we are too independent and that the goals of monetary policy should be changed.

In my talk this evening, I will state the Bank’s perspective on these issues and then briefly review our monetary policy actions over the past year. ... more

Patel's New Growth Path

2010-11-28T16:14:00.004+02:00

In summary

Create five million jobs over the next 10 years, especially in the green economy, agriculture, mining, manufacturing and tourism.
Infrastructure investment will focus on energy, transport, communication and housing.
An African development fund will be established to invest in African infrastructure.
State agencies, including the Reserve Bank, will be reoriented to ensure the state "is not hostage to market forces and vested interests".
Monetary policy will be looser to support a more competitive exchange rate.
A state mining company and state bank must be established.
Wage settlements will be moderate to save jobs, create jobs and address inequality. This includes a "modest increase above inflation" for employees earning between R3000 and R20000 a month, increases pegged to inflation for those earning between R20000 and R45000 and pay caps or increases below inflation for those earning over R45000.

Commentary

The plan, aimed at creating five million jobs in 10 years, among other things, got little positive reaction from analysts.

"You can't have a weak currency and low inflation and loose monetary policy. One of them will give," said Investment Solutions economist Chris Hart.

"You can't have less regulation and price and wage controls - they just do not go together."

Hart said the impression was that business did not have much input in the compilation of the NGP document.

This impression was strengthened at a press briefing on Thursday after Patel and business leaders met. Business Leadership SA chairman Bobby Godsell called the NGP an "idea-rich document".

But Godsell said companies were not going to give up the right to decide their own salary levels or accept a cap on what people might earn.

"If that is what the government is intending, then there is very little chance of that happening," he said.

Godsell also said that capping pay was not likely to happen, echoing concern voiced by trade unions about the possibility of having to give up their right to collective bargaining.

Hart said business people were, in a sense, to blame for the lack of input as they tended not to be activists.

There were also questions about consultation with other government departments.

Speculation about differences in approach between Patel and Trevor Manuel, the Minister in the Presidency responsible for the National Planning Commission, has been rife since their appointments last year - and it flared up again this week.

Patel assured the media that his document was endorsed by the cabinet through the cabinet system.

"In the process, National Treasury and the National Planning Commission and other economic ministers all had a number of moments to contribute to this," he said.

Manuel appointed his planning commission, on which Godsell also serves, in April, but it has not yet produced any plans.

Hart said he feared the country would end up with "lovely think-tanks and an acrimonious limbo where nothing actually happens" because of differences between competing departments.

"They are not complementary, they are competing," he said of Patel's and Manuel's departments.

But Piet Croucamp, a lecturer in politics at the University of Johannesburg, said he believed the planning commission would complement the NGP.

"I think the planning commission's task will be to sort out the practical problems of implementing the plan as the plan does not spell out how the targets will be reached.

"I think Manuel will become involved at a certain point, but I am not worried about the fact that he does not seem to be involved with the development of this master plan. His role will ultimately be to give effect to the master plan."

Much has been made of an apparent shift to left in the plans formulated in the NGP.

Investec economist Annabel Bishop said the NGP increased state control to the point of socialism.

She said that while the goal of social upliftment of the majority of South Africans was laudable and necessary, the implementation of the plan was likely to prove faulty and unattractive to the private sector.

Dawie Roodt, an economist at Efficient, agreed that the NGP represented a clear shift in policy direction.

"This is a clear move from a demand economy to a command economy," he said.

"It comes straight from the book of the Soviet Union."

The problem with increased government involvement in the economy, said Croucamp, lay with government's bad management systems.

"Government involvement, where government determines the value of the currency or controls capital flows, like it is insinuated in the document, has a very bad history worldwide, even in places where the state is much stronger and more efficient," he said.

"We have a government which is not managed efficiently."

Croucamp said he did not believe the NGP represented a shift to the left, but rather an increased effort by the government to be more involved and take more responsibility for economic growth and job creation.

"The big debate now is how it is going to be done with ideological and practical differences in opinion between Cosatu and the ANC."

Source: Times LIVE

Bring haves and have-nots together

2010-11-25T13:10:00.002+02:00

Patel, the minister of economic development, believes workers and bosses can agree on a package of productivity, wage restraint and price moderation. Gordhan, the minister of finance, believes new money and old can be persuaded to consume less conspicuously and stop looting the public purse.

The new growth path framework tabled in parliament on Tuesday will test the optimism of the minister of economic development, who will run it, and the minister of finance, who will fund it, because it presumes a national conversation that will quickly deliver a consensus on how to take the country forward to common prosperity, even at the cost of some personal profit.

"We will have to develop a collective national will and embark on joint action to change the character of the South African economy and ensure that the benefits are shared more equitably by all our people, particularly the poor," the document says.

Blacks seeking the economic empowerment denied them under white rule, must worry more about production and less about ownership, it proposes.

The search for a unifying common identity, a shared vision and agreed priorities was launched by Thabo Mbeki when he was president and was a focus for his Policy Coordination and Advisory Services unit, headed by Joel Netshitenzhe. But with no results to show, the ball was passed to Trevor Manuel and his National Planning Commission, which is expected to release a draft one-page national vision for public debate early next year, leading to a complete national plan by the commission's November 11 deadline.

Many will feel that somebody should just take charge, tell us where to go and whip up the stragglers so that the long promised mass march to a better future can begin. After all, that worked with the World Cup, which was imposed without consultation, it worked with the abolition of capital punishment, which would not have been the outcome of genuine national consultation, and it worked when the government decided, against the sentiment of an obvious majority, that gay marriage was the right way to go. It even worked with Gear, the 1996 economic plan reviled by the left.

But Patel insists it should be possible to achieve a social compact tying workers into wage restraint, business into price restraint and the private sector at large to a promise, backed by tougher regulation, of less collusion, more competition and moderation of the runaway executive packages that have been stretching the income gap for the past decade.

So far, there is no queue at his door to start talking. Business Unity SA's deputy CEO, Raymond Parsons, promised a statement on the package, but had not delivered it by late yesterday. Cosatu did not return calls when asked to comment on the call for a wage-price pact that would require anyone earning more than R20000 a month to accept that they are rich enough for now.

Nor is it going to be easy to get agreement on the NGP's fiscal and monetary proposals, which call for slower acceleration of government spending and a continued commitment to low inflation - which will worry labour and the left - as well as a more aggressive attempt to manage the rand and a call to the Reserve Bank to keep interest rates low, which will worry the free marketeers looking for a confirmation of the central bank's independence.

The 33-page document is not yet a blueprint for the growth, employment and equity that it targets, but it is the most specific statement of economic intent to come from President Jacob Zuma's government and it clearly shifts the locus away from the market and towards the state as it seeks to fuel the supply side with improved infrastructure and the demand side by developing local and regional demand.

The private sector is being offered a down-table, junior partnership.

The primary target of the growth path is to create five million new jobs by 2020. Perhaps mindful of the negative press Zuma got for his vague promise of 500000 new jobs by the end of 2009, the plan itemises where most of those jobs will be created - and it is not in the make-work expanded public works programme, it's in the real economy.

Details of the strategy to achieve those targets have yet to emerge in consultations between the government, business, labour and civil society organisations, which is where Patel's optimism will be tested.

"We must develop this new growth path in conditions of active, noisy democracy," the document says. But Patel, whose department of economic development is largely responsible for the framework, stressed in a presentation to MPs on Tuesday that it would not be necessary to agree on everything before starting on anything. The same point is made in the text itself, clearing the way for piecemeal implementation of agreements as they are made.

But Patel warned that the plan would have to be accepted as a whole if it was to work. Cherry picking the pieces each sector wants would unravel the plan, so he, Gordhan and, if he is invited to the table, Manuel, need to start the conversation soon to find the combination of carrots and sticks that will bring sides that see their interests very differently towards some sort of a compact.

Pressed by sceptical reporters after the first announcement of a new growth path to explain why this one would work when others had not, Patel and Gordhan separately resorted to the same exasperated reply: "There is a new team in charge now. Let's give it another try."

Source: Times LIVE