Giraffe & Co

The current economic reality, by and large, is being informed by Putin’s war in Ukraine, a war that is going disastrously for the man and as such it is likely to drag on for some time unless Putin is sidelined, in whatever form that might transpire.
Nevertheless, it might be interesting to view SA’s economy between a year ago and after Q1 2022, when our economy was reaching pre-Covid 19 levels on the back of surging commodity prices.
The USA Department of Commerce’s International Trade Association publication on SA commerce noted the following just over a year ago:

  • Under government spending it noted that this would be curtailed (as it had been since 2016) “Due to cyclical, structural and regulatory/policy challenges in the economy…“, and as such the economic decline would continue in the short term, despite the Rand strength due to the high post-Covid commodity prices.
  •  Under management, it noted the following: “There is growing concern about a host of political, economic, and regulatory factors that affect foreign businesses adversely. These include reports about corruption and mismanagement in government, significant unemployment, violent crime, insufficient infrastructure (read infra structure management and load-shedding into this as well!), and poor government service delivery to impoverished communities.”
  • Under exchange rates it noted the following: “The volatile Rand-dollar exchange rate can complicate planning, especially for smaller or new-to-market firms.”
  • Under ownership it noted the following: “The South African Government has continued to tighten labour and foreign ownership laws and mandated industrial localization. Sectors of specific concern include the extractive industries, security services, and agriculture.”
  • Under labour it noted the following: “Due to the poor state of the public education system, skilled labour can be difficult to find in many technical and professional segments despite steadily increasing unemployment. While the pre-Covid-19 nominal unemployment rate is above 29 percent, including those who have given up looking for a job raises it to 37 percent. In addition, HIV/AIDS affects approximately one in ten South Africans with negative implications for labour availability, productivity, and healthcare costs.”

So most of the challenges to economic growth existed prior to the Ukraine war, with commodity prices, stable inflation rates and the absence of war at that stage being the positive forces for SA. And despite these challenges the SA economy regained pre-Covid levels by the end of Q1 2022.

The Ukraine war added inflation and currency weakness to SA’s challenges as has been noted in detail in previous editions of MD’s Insights. The flight to US Dollar security and inflation differentials (the latter affecting Euroland and Britain more than SA) has not only affected the Rand but also currencies such as the Euro and Pound Sterling in material ways. Consider the following graphs in relation to those two currencies over the past year.

The Rand’s performance during that time is reflected in the next graph:

The flight to US Dollar security has clearly impacted all three currencies, but it is interesting to note the relative effects – the Euro has declined by 22.4%, the Pound by 21.7% and the Rand by 17.9%. This must be a reflection of relative inflation rate differentials, with the UK being the worst performer at 9.9%, Euroland following at 9.1% and SA being at 7.6%.

The effect of this is probably seen best in a graph of the Rand Euro exchange rate over the last year where the Rand has effectively lost no value during this period.

And given the ongoing inflation differential between SA and Euroland, the Rand should continue to strengthen against the Euro, which is good news to our partner resellers.

If Escom could be brought back to an even keel, if the RET faction and ANC electoral shenanigans could be brought under control, the future might just not be as dark as it appears now.

To take snippets of good news from previous MD’s Insights, the tertiary sector grew in Q2 2022, whilst oil imports have added to our inflation burden it is still materially offset by commodity exports, and when world economies recover from the current recessionary environment, demand and prices of commodities will climb strongly. SA’s tourist season is set to boom as we move into spring and summer and Europe tries to flee bad weather and gas shortages. Inflation in any event appears to have peaked, assisted by hawkish Reserve Bank interest rate hikes, but hopefully this will be reversed as quickly as inflation slowly declines to avoid the recessionary pressures of the said rate hikes.

Gross Fixed Capital Formations (GFCF) has grown over three consecutive quarters, boding well for future capacity, the president’s undertaking to remove caps on private power generation by large manufacturers and mines to render them independent from Escom was mentioned previously as well as the applications that have recently been lodged with NERSA, a massive announcement as detailed in the last MD’s Insights.
And Escom’s board is being strengthened as I write this.

On another note, I recently posed the question of where Unify is going and our partners have overwhelmingly accepted our invitation to our Atos Unify / Giraffe & Co partner event where we believe new insights will be provided in respect of this question. We look forward to welcoming you at this event at the Inanda Club on 7 October 2022. Don’t miss this one!

Peter Gees
Chartered Accountant (SA)
Advocate of the High Court of South Africa

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