Sunday, August 21, 2011

South Africa's hidden economy

Consider these cases. A builder has about eight people who work on his projects on a more or less regular basis, but his company has only one employee, himself. Everyone else contracts to the company.

Case number two is a small business owner involved in the manufacturing of signage, who outsourced his operation to a labour broker after protracted disputes with a union. He now has one-third fewer workers, the same productivity and, from his point of view, hassle-free labour relations.

The third case is a Mpumalanga plantation owner who has 18 farms on which 400 people work, but not a single one of them is an employee; the work is all done on an out-sourced, contract basis.

Official figures show that the number of jobs peaked at 14.1-million in 2008 and has fallen since to 12.9-million. The latest Statistics South Africa quarterly labour force survey -- for the second quarter -- shows that unemployment is at 25.7% and 174 000 more people are unemployed than in the previous quarter.

The Democratic Alliance's Ian Ollis said: "Since 2009, when President Jacob Zuma took office, South Africa has shed a net total of 902 000 jobs."

Finance Minister Pravin Gordhan this week bemoaned the over-regulation of the labour market. He did not give details, but treasury has been trying unsuccessfully for some years to introduce a youth subsidy for first-time workers. Gordhan has said that the new scheme will begin in April next year. His complaint comes as the National Economic Development and Labour Council is deliberating on new labour market restrictions.

But policymakers in the department of economic development argue that critics of labour regulation fail to give specifics when invited to do so. They say that at a median wage of just R2 800 a month South African wages cannot be considered excessive or the labour market to be too regulated.

When the democratic South Africa dawned, gross domestic product (GDP) stood at a humble R550-billion; tax collected amounted to R113-billion. This year GDP will top R2.7-trillion; tax collected comes in at R664-billion.Social spending -- welfare, health and education -- increased from R33-billion in 1995 to R181-billion today. The number of registered taxpayers has increased tenfold from 1.8-million in 1995 to 10-million; companies registered to pay tax have exploded from 456 000 in 1995 to two million.

The increase in tax revenue has funded a dramatic increase in social spending, including on grants, which were paid to 2.9-million people in 1997 compared with 13.1-million now.

Unemployment stands at 25% of the economically active population, but employment grew by 62%, from 8.7-million in 1997 to a peak of 14.1-million in 2008, before declining to the present 12.9-million.

The 62% growth in employment represents 5.4-million new jobs, but the size of the economically active population (anyone aged 15 to 64 employed or looking for work) increased more or less as fast as the job growth rate: from 13.5-million in 2001 to 17.4-million in 2011, according to data from the Commission for Employment Equity. This increase in population size has meant that the unemployment rate has remained stubbornly high, at about 25%.

The poor performance of manufacturing has been blamed for the lack of employment growth; this sector's contribution to the GDP has fallen from 20% in 1995 to 17% now. But this is a relative decline -- finance and business services have increased from 16% of GDP to 24% in the same period. In terms of value-add manufacturing has grown from R106-billion in 1995 to R459-billion last year.

A war of words broke out earlier this year between Adcorp's Loane Sharp and Stats SA's Pali Lehohla after Sharp claimed that the government underestimates the true size of the job market by as much as four million.

Adcorp estimates the job market at 12.8-million formally employed and 3.8-million temporarily. It estimates that close to one million people are employed through labour brokers.

Stats SA shot back, saying that it uses rigorous, peer-reviewed methodology whereas Adcorp has not disclosed the research methods that underpin its findings. Both measurements include the contribution of the informal sector, but Adcorp sees this to be greater than Stats SA.

Earlier this month the Commission for Employment Equity published its biannual review based on the compulsory reports of 18 500 companies each of which employs more than 150 workers.

It found significant evidence of informalised labour. Of the 926 976 new jobs included in its 2010 reports, nearly half -- 445 703 or 48% -- were temporary.

The official number of employed people may stand at about 13-million, but many more people have bank accounts and are accessing credit.

National Credit Regulator records show that 18-million people have credit accounts and banking statistics show that 21-million people have bank accounts. This is up by 53% since 2004, when the number stood at 13.7-million.

The regulator's data show that the biggest category of credit facilities accessed is through store cards (38%), with credit or garage cards (32%) and overdrafts (16%) making up the bulk of the rest.

The gross monthly income of the people who had credit facilities granted to them was lower than R10 000 in 72% of cases.

How easy is it to get credit? The RCS Card is indicative of most others and works at 14 000 shops. All that is needed for an application are proof of employment, bank account and residence. These details are checked and the card company then decides to grant credit or not. For most bank-related credit facilities it is the same -- some require a minimum monthly salary, but most just ask for proof of employment for the previous three months.

South African Revenue Service (Sars) data show a rapid growth in people moving up the tax brackets. In 2003 37% of the 3.35-million taxpayers were below the pay-as-you-earn threshold; by 2009 this had fallen to 18% of 3.58-million taxpayers. Only 14.3% of taxpayers were in the R150 000 to R400 000 bracket in 2003; by 2009 this number had more than doubled to 35.5%.

Sars does not provide a racial breakdown of who pays what tax, but All Media and Products Survey data analysed by economist Servaas van der Bergh have shown that an additional 5.6-million people joined the working and middle classes -- earning above R200 000 a year (for a household of four) between 1994 and 2008. This is an impressive 65% growth from 8.6-million to 14.2-million people.

The black share of these classes grew from 33.4% in 1994 to 80% in 2008, according to Van der Bergh. In the case of the higher-middle class -- R320 000 annual income for a household of four -- the black share jumped from 12.3% to 36.4%.

The Commission for Employment Equity review showed that black people remained under-represented in senior management and in general were making slow progress up the ranks. An exception was qualified black professionals, who were up by 50% since 2006.

Thursday, August 11, 2011

Transnet, Eskom bonds beat US ratings

Transnet and Eskom bonds are now more highly rated than US government bonds, according to the latest ratings by Fitch and Moody’s Investment Services.

After revising the parastatal’s outlook last month, Fitch affirmed Eskom’s national long-term rating at AAA(zaf) with a stable outlook.

The agency also affirmed Transnet’s government guaranteed bond issue at AAA(zaf).

The utility’s national long-term rating was affirmed at AA-(zaf) with a stable outlook.

These ratings meant that the two South African utilities were now more creditworthy than the US after rating agency Standard and Poor’s (S&P) downgraded the country’s credit rating from the top-notch AAA on Friday to AA+.

The favourable rating would ease the cost of borrowing in international markets for both Eskom and Transnet as they were currently seeking funds for multibillion-rand expansion programmes.

S&P adjusted the ratings and outlooks of the two parastatals in January, moving Eskom up to stable from negative, and affirmed the company’s long-term South Africa national scale rating at ZaAA and long-term foreign and local currency corporate credit ratings at BBB+.

My note: This report is incorrect in that it assumes AAA(zaf) is the same as AAA worldwide. In fact, AAA(zaf) is far inferior to AAA globally. Unfortunately the journalist and Business Report are mistaken. Nevertheless, it makes for fun reading.

Source: BusRep

Monday, August 8, 2011

Temasek, Oppenheimer set up $300m Africa PE fund

Singapore's Temasek Holdings is teaming up with the investment holding company of the Oppenheimer family to set up a $300m private equity fund that will focus on consumer and agriculture businesses in Africa.

Tana Africa Capital will be an equal joint venture between E. Oppenheimer & Son and Temasek's indirect wholly-owned subsidiary, Sennett Investments (Mauritius).

"With a growing population of more than a billion, the African domestic economies are growing with the emergence of a middle class with an increasing disposable income. We believe that the consumer and agriculture-related businesses will strongly benefit from this trend," Temasek's investment managing director Nagi Hamiyeh was cited as saying.

Tana Africa may also consider opportunities in the media, health and education sectors, he said.

Temasek, which had a portfolio valued at more than $160bn as of March 2011, has a 45:55 mix between emerging and mature economies. Given the slowdown in mature markets, it said it would focus on emerging economies, growing middle income populations and "emerging champions" for its investment picks.

Tana Africa Capital would appear to ticks all those boxes.

Source: FMTilt

Friday, August 5, 2011

African banks are among the world's most profitable

Here's why African banking achievements should be cause for global cheer: they are among the world’s most profitable in the frontier market universe.

Yes, the region's financial industry is minuscule. The continent's institutions accounted for 0.72 per cent of total assets and 1.01 per cent of total Tier 1 capital from the overall Top 1000 World Banks ranking, with both figures fractionally down from last year, according to the The Banker's review of the Top 1000 World Banks for 2011. First up, check the regional ranking, which is unsurprisingly led by South African banks:

Top African banks - The Banker

The modest showing of African banks in global rankings should be a source of disappointment considering the region holds 15 per cent of the world's population and vast natural resources.

But to get granular detail on African banks' relative performance against its peers, The Banker has fleshed out a list of contenders to the Top 1000, which comprises the biggest 267 banks by Tier 1 capital that did not make it into the main list.

Referring to African banks, here's more from The Banker (Emphasis FT Tilt's):

They are still small, with only two featuring in the top 50. But they have punched far above their weight when it comes to profitability. Of the top 10 lenders measured by return on capital (ROC), five are African, while seven of the 10 with the highest returns on assets (ROAs) are too.

Top 25 Top 1000 contenders - Return on Assets

Overall, African banks – there are 17 in this survey, compared with 40 in the Top 1000 – made average ROAs of 3.65% (on an unweighted basis) and ROCs of 35%. These levels are far higher than the next most profitable region, South America, where banks made returns of 1.95% on their assets and 19.6% on their capital.

Top 5 ROC/ROA - The Banker

Okay, on Tier 1 measures -- yardstick for common stock, preferred stock and hybrid debt-equity instruments etc. -- African banks resolutely disappoint. But here's the money shot:

Astonishingly, despite accounting for just 5% of the overall Tier 1 capital in the rankings of $38bn, African banks made 38% of the total profits of $1.66bn (a figure that was net of losses of $727m among the 103 North American institutions listed and $150m among the central and eastern European ones).

Perhaps because of pent-up demand and a relative lack of competition the big business of small loans has proven a lucrative trade in recent years then.

Furthermore, these African banks have proven high returning institutions even with strong levels of capitalisation and they boast competitive cost-to-income ratios that many EM banks can only dream of:

African banks have been able to achieve high levels of profitability without taking substantial risks. Their capital adequacy ratios (CARs) average 11.3%, only slightly below those of banks in South America, which have the highest CARs of 12.3%. Also, the data counter arguments that banking in Africa, which often involves building branches in remote, sparsely populated areas, is prohibitively expensive and necessarily inefficient. African lenders have the lowest average cost-to-income ratios (49%) in the survey. Those in the Asia-Pacific and South America have respective ratios of 57% and 64%.

Of course, foreign investors might snub investments in these niche banks given the illiquidity of their respective stocks. But the figures should illustrate that the narrative of Africa's 'unrealised potential' that perennially underscores investment pitches in African banking stocks and debt products is just one side of the story then.

As these figures highlight, investors in African banks can generate strong profits today while banking on tomorrow's growth prospects -- from a currently low base.

And once the Nigerian banking sector -- the only large African banking sector that had a domestically-driven credit crunch -- gets its act together, the number of mainstream investable opportunities for foreign investors will surely grow.

For more details, do visit The Banker. Stories sit behind a pay-wall but you can sign up for a free trial and view five free articles a month.

Source: FMTilt

Tuesday, August 2, 2011

Renaissance AM: The Case for Africa

"The case for Africa is not a short-term speculative story that will burn out after a few years, but story of fundamental structural change, similar to that which transformed Asia. Africa is finally starting to play a significance role in global commerce and the power of one the largest populations on the planet is beginning to make itself felt."

Continue reading here...

Read a report on Africa from Renaissance titled "Africa - 57 Questions Answered" here.Link