South Africa’s ruling party has, in recent weeks, pressed on with three pieces of divisive legislation in the face of increasingly (and unusually) vocal dissent from the business community. These new laws codify populist and impractical policies in an apparent attempt to strengthen the ruling party’s prospects during the national elections in 2024.
The laws in question are the Employment Equity Amendment Act, the National Health Insurance (NHI) Bill, and the National Water Act. Each of these laws is problematic in its own right, potentially up for constitutional challenges and has attracted opposition from business and parts of civil society. The ANC-led government is ploughing on, despite warnings about the risks to the country’s economy.
The Employment Equity Amendment Act takes a tougher line on employment equity targets and could force companies to restructure their workforces to reach racial quotas. The NHI bill, meanwhile, envisions an eventual sweeping away of private medical aid funds in favour of a single pool of funding for healthcare. Finally, the National Water Act seeks to impose racial requirements for water use licences.
This comes on the heels of government also ignoring business’s qualms about its ‘non-aligned’ stance on Russia, which many observers believe to actually be pro-Putin. International relations and co-operation minister Naledi Pandor has stated that South Africa will not change its foreign policy, even if it ends up costing South Africa its preferential access to the US market through the African Growth and Opportunity Act (AGOA)!
The economic impacts of these government decisions could be significant. The NHI, for example, will take years to implement and most likely be delayed by funding concerns and legal challenges. But in the interim, it will impede private investment in healthcare as well as drive high levels of emigration, including the loss of medical professionals.
The loss of AGOA, meanwhile, could cost our economy billions of rand and thousands of jobs across the automotive, manufacturing, mining, and agricultural sectors. South African product prices would become less price-competitive in the US, and companies would struggle to replace this valuable market by targeting other countries for export.
President Cyril Ramaphosa recently called business leaders to a meeting to discuss issues such as load shedding and crime. However, these meetings appear to be an attempt to get business leaders back on side following their vocal criticisms of government actions and policies. The government isn’t listening, and the consequences could be dire as these ideologic decisions perpetuate in the months running up to the polls next year. We thus remain concerned about the level of South African specific risk that needs to be priced into the rand, even though we have seen in recent weeks, and may continue to see, the level of the discount close.
“We have a large public that is very ignorant about public affairs and very susceptible to simplistic slogans by candidates who appear out of nowhere, have no track record, but mouth appealing slogans”
– Zbigniew Brzezinski former national security advisor of the US
Global News
- As the Fed paused a rate hike last night, it indicated that this did not signify the end of the cycle as there could be two more quarter-point hikes this year, with the first expected next month. After 10 consecutive increases, Chairman Jerome Powell suggested that the Fed passed on hiking at this meeting to allow additional time to examine incoming data. The slower gains in the US Consumer Price Index provided the Fed with an opportunity to slow interest increases as its policy is starting to bear fruit. The Index gained 4% year-on-year in May, slightly less than the 4.1% economists had predicted and the slowest pace in more than two years. The numbers reflected decreases in the costs of energy products and services, including gasoline and electricity. Although the inflation rate is still about twice what it was before Covid-19, it is down sharply from a peak of 9.1% last summer.
- Former president Donald Trump has pleaded not guilty to Federal charges that he unlawfully kept national security documents when he left office and lied to officials who sought to recover them. He allegedly left secret nuclear documents lying around, which included information about a secret US nuclear programme and potential vulnerabilities in the event of an attack. Trump’s former aide, Walt Nauta, was also charged and pleaded not guilty. The former president has, ironically, never been more popular as the potential Republican nominee for 2024 managing to raise $7million for his campaign, just this week, on the back of the attention he received.
- China is looking at a broad package of stimulus measures as president Xi Jinping’s government seeks to boost the world’s second-largest economy, according to sources. These proposals include at least a dozen measures designed to support areas such as real estate and domestic demand. Further interest rate reductions are also among the policies under consideration. There has been increasing speculation by investors about looming cuts to China’s longer-term policy rates after the central bank unexpectedly lowered its seven-day reverse repurchase rate. This comes at a time when China’s growth rate is stagnating. Industrial production only gained 3.5% in May year-on-year. This was in line with the median estimate in a Bloomberg survey of economists. Retail sales climbed 12.7%, missing the median estimate of a 13.7% increase.
- A recession in the UK is looking less likely as falling energy prices and stronger-than-expected spending helped to support growth in the first half of 2023. Britain’s two biggest business lobby groups – the Confederation of British Industry and the British Chambers of Commerce – are both anticipating the economy will expand slightly this year, avoiding the two consecutive quarters of decline that they had previously expected. The business groups anticipate gains of between 0.3% and 0.4% even as markets expect interest rates to hit 5.5% this year – 50bps higher than the point at which they will become uncomfortable for consumers.
- The US stock market is currently top heavy, with just two stocks, Apple and Microsoft, accounting for nearly 15% of the S&P 500 Index. When including other significant companies such as Amazon.com, Alphabet, and Nvidia, the total concentration of the top five holdings reaches 24%, the highest level since at least 1990. This high concentration has led some investors to question the risk associated with buying a broad market index. However, the changes in concentration within the index do not necessarily make it more or less risky, but such changes are more likely to help stabilise the risk of investing over time.
- The Federal Trade Commission has taken Microsoft to court to block the software giant from closing its $69 billion purchase of Activision Blizzard before the 18 July deadline. Microsoft, which makes the Xbox console, won approval in the European Union, but the UK’s Competition and Markets Authority ruled against the takeover, saying Activision titles like Call of Duty would increase Microsoft’s edge over rivals in the small yet growing cloud-gaming market. Microsoft shares closed 1.6% higher at $331.85 on the news, while Activision Blizzard ended 0.8% lower at $79.77.
- The European Union is taking Google to task in what will be the most significant in the current five-year mandate of the European Commission. According to sources, the charge sheet – released on Wednesday – will target the core of Google’s ad tech business model. Google’s advertising business is by far its most successful, accounting for about 80% of its annual revenue. In 2022, its ad sales amounted to about $225 billion. This marks another escalation in a long-running saga that’s already led to a trio of EU penalties adding up to more than €8 billion ($8.6 billion.)
- Google’s parent, Alphabet, is still seeking a place for the company in the AI boom even as it lays the foundations for its offering, in competition with the likes of Microsoft, said CEO, Sundar Pichai. In an interview with Bloomberg, Pichai says that it is vital that AI incorporated into search engines is done correctly, otherwise answers could be made up. AI is not something that will happen overnight, he says, and this helps attract the best talent who want to work on innovation at the cutting edge. “I view this as a very, very early time… It’s a competitive moment, but I’ve built the company to be AI native for a long time. I feel better positioned for this than we were for the shift to mobile.” For more on this interview, go here.
- Nvidia chip rival, AMD, has seen its share price rocket 87% this year, reflecting its place in the eyes of investors looking to make an artificial intelligence trade the best backup plan. AMD aims to prove it’s also a player in AI computing after unveiling new data centre chips at an event in San Francisco. Investors, who were exposed to the Epyc processor aimed at cloud computing, were also interested in the forthcoming MI300X, a purported rival to the H100 from Nvidia that’s at the heart of that company’s strong position.
- Twitter’s new CEO, Linda Yaccarino, said on Monday that Twitter is on a mission to become the world’s most accurate real-time information source and a global town square for communication. This, she said, in a series of Tweets, is not an empty promise, but rather a reality for the social media company. Yaccarino took over from billionaire owner Elon Musk almost two weeks ago. Detailing a vision of Twitter as being the world’s “town square” and a “reliable source of information,” she laid out what she called Twitter 2.0 in a bid to refresh the company, which has been roiled by controversy since Musk bought it in October 2022 – including layoffs of 80% of its staff, the need to pay for a blue tick, and advertisers fleeing the platform.
- Swiss bank UBS has wrapped up its emergency takeover of plagued rival Credit Suisse, creating a giant entity with a balance sheet of $1.6 trillion and greater muscle in wealth management. It will oversee $5 trillion of assets, giving UBS a leading position in key markets it would otherwise have needed years to grow in size and reach. UBS announced several management changes including at Credit Suisse. Of the more than 160 leaders confirmed or appointed, more than 20% are from Credit Suisse.
- As at Wednesday’s close the S&P was 1.7% up for the week.
Local News
- China expressed support for South Africa in hosting BRICS activities this year, during a phone call between Presidents Xi Jinping and Cyril Ramaphosa last Friday , according to a statement from the Chinese Foreign Ministry. The call took place as Pretoria considers switching the venue of an upcoming summit of heads of state from the five-member bloc to avoid having to execute an international arrest warrant for Russian President Vladimir Putin if he attends, a partial reason for the rand recovering part of its recent losses. However, the statement made no reference to the possibility of the summit being moved to the Asian nation. China isn’t a member of the ICC, meaning Putin could travel there without fear of arrest.
- Meanwhile President Cyril Ramaphosa will this week join five other African heads of state on a peace mission to Russia and Ukraine with the aim of finding a peaceful resolution to the conflict in that region. The upcoming visit to Russian and Ukraine occurs amidst criticism aimed at Pretoria for its alleged failure to condemn Russia’s invasion of Ukraine.
- In addition, a high-level delegation of ministers headed by trade, industry and competition minister Ebrahim Patel are heading to the States to try repair South Africa’s relationship with the US and, to address potential threats to the African Growth & Opportunity Act (AGOA). The department of international relations and co-operation is determined to still host the AGOA Forum to ensure South Africa still benefits from a trade deal, despite Washington’s legislators wanting to move the conference to another country. Separately, the president will send four ministers to meet the G7 countries to explain South Africa’s nonaligned stance on Russia’s invasion of Ukraine. According to Stanlib, South Africa could lose almost a 10th of its GDP value should some of its main trading partners impose sanctions in retaliation against its unwillingness to take a stance against Russia’s war in Ukraine.
- Although organised business put forward several names following last week’s meeting between the presidency and business leaders aimed at resolving issues such as infrastructure and crime, corporate South Africa did not send its CFOs to participate in workstreams on the polycrisis of energy, logistics, and crime. CEOs responsible for each work stream will, however, attend a joint strategic oversight committee with Ramaphosa to touch base on priorities, problems, and progress. The CEOs include Sasol boss Fleetwood Grobler and Anglo American chair Nolitha Fakude (to focus on the energy crisis); former Exxaro boss Mxolisi Mgojo and Toyota CEO Andrew Kirby (to focus on the rail and ports network); and Sibanye-Stillwater CEO Neal Froneman and Remgro CEO Jannie Durand (to focus on reducing crime, speeding up prosecutions and protecting economic infrastructure from criminal syndicates).
- Government’s current thinking about state-owned enterprises is to put the major corporations into a single vehicle, much like is the case in countries such as Singapore, China, and Malaysia. The aim is to try reverse the massive loss of skills and human capital that has turned once proud entities into “dysfunctional, uncompetitive and degraded organisations,” as Business Maverick editor Tim Cohen calls them. He asks whether this will work, or just be “another complicated reshuffling of the deckchairs on these ships that won’t keep them from sinking”. Unless government can be effective shareholders and not controllers, this will not make any difference, he adds.
- Stephen Grootes, writing for Daily Maverick, suggests that there are better options for the ANC than forming a coalition with the EFF, which would “leave it less exposed to the whims of a party dominated by the volatile leader of the Red Berets”. This comes on the back of several polls indicating the ruling party may drop below 50% next year, leading to suggestions it will party up with the EFF. Grootes opines that a better manoeuvre would be for the ANC to work with several parties, instead of the DA or EFF, to take it to 60%, without collapsing cabinet, as a minority of parties would not be able to make big demands. South Africa never has, according to Imraan Buccus, a postdoctoral fellow at the Durban University of Technology and senior research associate at Auwal Socioeconomic Research Institute, produced a leader who could really rally the left – and that side of the spectrum is in a “sorry” state.
- The ANC has confirmed it expelled former secretary-general Ace Magashule, who was found guilty by the party’s national disciplinary committee for failing to apologise for his unilateral decision in 2021 to suspend Ramaphosa. He was given seven days to appeal against the decision but failed to do so. While Magashule’s expulsion is in line with the ANC’s reform agenda, it could also lead to the ANC further haemorrhaging support in the Free State in the 2024 general election. This move, says Grootes, is a non-event as he has failed to build up his own constituency of ordinary people prepared to fight for him, showing a complete lack of political power.
- The National Health Insurance (NHI) is a step closer to implementation, which comes at a crucial point ahead of the 2024 elections. It will allow the governing ANC to show it delivered on its 2019 universal healthcare election promise. Some opposition parties are worried about the vast ministerial powers, potential for corruption and public health facilities’ general unreadiness, and rejected the bill. However, smaller parties gave it the nod, and it went through. Political analyst RW Johnson has stated that government doesn’t have a plan on how to fund the NHI and that this will ruin the country’s finances. He was commenting on last month’s adoption of the Bill by the Portfolio Committee on Health, despite strong opposition from many stakeholders. Johnson said the Bill, which seeks to create universal healthcare regardless of one’s financial position, is unlikely to be funded by current contributions to medical aids as, should people no longer get private health care, they will simply stop paying.
- South Africans with dual citizenship no longer need to worry about losing their local passports after the Supreme Court of Appeal (SCA) struck down a provision in the Citizenship Act that automatically strips South Africans of their nationality on acquiring citizenship of another country. The SCA held the automatic loss was “irrational” and ordered the provision contained in the Citizenship Act be struck down, restoring South African nationality to “all persons who had lost their South African citizenship” because of the provision. The decision was unanimous.
- Embattled Eskom is owed R58.5 billion by municipalities which are, in turn, owed R294.74 billion, mostly due by households at R214.4 billion. Businesses owe R25.8 billion, with government’s debt to councils at R4.7 billion. Despite Eskom being owed billions, it has argued it followed proper protocols when it awarded a contentious contract to Fidelity Services Group using emergency procurement policies.
- South Africa is set to get a power boost from Mozambique as 1,000MW will be fed into Eskom’s grid, which will enable the power utility to reduce load-shedding by one stage thanks to the gas-fired energy. The initial 80MW-100MW of power, which will be sourced from Mozambique’s gas rich Cabo Delagado region, is available to be plugged into the local grid immediately. This will gradually increase to 600MW within the next six months after the conclusion of power purchase agreements between Eskom and that country’s power utility, Electricidade de Moçambique.
- Coal miner Thungela Resources, which was spun off from Anglo American, has told shareholders its profit will drop by almost 66% when it releases its interim results in August because of weaker coal prices, lower output and ongoing freight rail problems. The price of seaborne coal is down from the record highs of 2022 and has fallen sharply since the start of the year, while Thungela’s total saleable production is expected to decrease 4.9% year-on-year. Headline earnings per share are expected to decline by between 65.8% and 74.7% compared to the same period last year. It is this type of cyclicality that reinforces our decision to avoid these types of companies, where possible.
- As at the time of writing, the rand was 2% stronger and the ALSI was 1.4% up for the week.
Sources: Dynasty, BusinessLIVE, Daily Investor, Bloomberg, Daily Maverick, Moneyweb, NY Times, MyBroadband, TechCentral, EFA News, Al Jazeera, Reuters, etc.