Loyal to you or loyal to our economy?…

On my way to work the other day, I was listening to the radio and the guest speaker touched on a very interesting but sensitive topic. He went on to expand on how young people should consider the economic needs at the time of selecting their career paths. I must say he raised some really valid points but as I drove, I couldn’t help but ponder about this issue from a different angle.

There is a paradox inside of me around this. On the one end I am a patriot of my nation and I really believe that the wisdom and the resources to solve most of Africa’s issues do not lie overseas but within the borders of our glorious continent. So I really would like to see our economy flourish.

On the other end though, anyone who knows me knows just how passionate I am about purpose. I often echo in my circle of friends, family and colleagues about the importance of living a “purpose driven life.” I am passionate about purpose because when my purpose unfolded I understood why my life mattered.

So a question that continues to linger on my mind is, encourage young people to go into career paths that address the immediate needs of the economy or encourage young people to do what they passionate about?

But for me to truly answer this, I had to ask the question of what factors are important in aiding with a country’s economic growth/development. I opened this question up on social media and my friend’s shared some interesting insights below:

“Widespread skills; Common vision, Trust in government; Absence of corruption; Too many people studying for corporate jobs-focus on entrepreneurship from primary school; Visionary Leadership; Job creation and a focus on trade.”

You may contest that there are so many other factors that influence economic growth but the aim was not to make this an academic paper, but a simple reflection shared by an ordinary South African fascinated about the happenings in the country.

I still ponder on whether we can advise young people to cement their future on an economy that’s ever changing? And yet as I say this I am also saddened by the escalating high unemployment amongst graduates.

I am opening this up for us to have digital and face to face dialogues. My viewpoint is that we need a healthy economy. When the economy is healthy, we will have very limited dependence on the Government to supply free housing, social grants, public clinics etc. A healthy economy ensures a sustainable livelihood for the country and its occupants. I believe we need to engage more in wealth creation dialogues’ as opposed to the obsession around job creation.

The other catch 22 situation with “you have to finish university and get a corporate job mentality” is that there seems to be a rise of individuals who have great corporate jobs but are miserable. I always seem to meet people in corporate who complain about their jobs and make mention of other things they passionate about and believe that if they were courageous enough to see those passions through, those could actually be the door way to wealth.

I really like what Liz Davidson (CEO of Financial Finesse) said in her article “Eight Ways to Build Wealth like Millionaires Do – Make It A Game” She made some truly powerful reflections but there are 3 points that really stood out for me. These points were;

• “Invent something and sell the concept”
• “Turn your hobby into a business”
• “Solve a problem”

These stood out because they carry the undertone of purpose and that wealth flows through engaging in society transforming actions.

As I continued to read her article, her concluding remarks really hit my core as she said “…if you can pair up your skills and talents with what you love to do, you can actually build wealth by having fun. Isn’t that how it should be?”

If we really want a future for Africa we have got to emancipate peoples thinking. I guess this might be one of those on going paradoxes but I leave you with something to ponder about. I close in the words of Ralph Waldo Emerson “To be yourself in a world that is constantly trying to make you something else is the greatest accomplishment.”

 

Guest Blogger Bongeka Mhlongo considers herself as a vessel of insight and an agent transformation for her generation. She believes that one day her name will go down in history books for impacting the world positively.

She currently works as a Change Management Specialist and shares most of her insights on her blog called PenTheVision. 

Bills, bills, bills- A guide to the South African economy and what this means for you

#BudgetSpeech, #Downgrade, #Deficit, #Dollar/Rand, #Barclays are all trending topics at the moment and they will affect you as a citizen or resident of South Africa directly. In this post, I will attempt to unpack these topics in the simplest terms so you as the reader will understand how these moving parts affect your pocket.

Budget Speech

Last week, I had the privilege of being a panelist of the ABSIP (Association of Black Securities and Investment Professionals) Budget Speech Powertalk. My view of the speech was that while the Minister presented a number of plans to reduce the budget deficit over the next three years not enough detail was provided on how this will be achieved by way of policy reform. I was however encouraged by the Minister’s emphasis on the importance of collaboration between business and government which is tantamount to stimulating growth in our stagnant economy. But perhaps the biggest shocker of the budget speech was the lack of income tax hikes. Analysts were adamant in the weeks leading up to the speech that an increase in personal income tax, VAT or company tax was more than likely. Neither of these tax metrics were adjusted and the intention was to stimulate much needed growth.

The increase in personal income tax is quite simple to understand, if you were paying 41% tax last year and 42% tax this year then you are contributing more to government coffers. However, don’t be fooled, Treasury will still be earning more tax from you, despite no official increase in income tax this year, by way of what is termed the “fiscal drag”. Tax brackets for middle to high income earners have not been significantly adjusted for inflation, this means that if you receive an annual salary increase you may be forced into a higher tax bracket and therefore pay more tax. Without the inflation adjustment in real terms you may not be earning more than you did before your increase. This is likely to affect those earning approximately R400 000 per annum or more. Those earning less will receive some relief from the inflationary adjustments and the increase in the minimum tax threshold to R75 000 per annum.

I am not a proponent in the increase of a regressive tax such as VAT. A progressive tax system ensures that the more you earn the more tax you pay. Increasing VAT will hurt low income earners across the board and not only reduce aggregate demand but threaten public’s trust of the government. An increase in company tax is an absolute “no-go” zone, the ramifications of this would be widespread across income groups and will likely trigger capital flight i.e. foreign companies withdrawing from South Africa. Instead, significant increases in capital gains tax and transfer tax (for properties above R10 million) were announced as well as the usual suspects- sin tax, fuel levy and now sugar tax. I’m quite amused by the sugar tax and wholly support the health benefits that underlie the intention of its implementation however I may need more convincing as to whether it will really change consumer behavior. I applaud the Minister for not touching the direct tax and rather focusing on indirect and wealth tax.

Downgrade and Deficit

National Treasury have adjusted the economic growth forecasts to 0.9% this year and 1.7% in the next fiscal year. This is one of the key metrics that inform the credit rating decision undertaken by the top 3 credit agencies- Standard and Poors (S&P), Moody’s and Fitch. Credit agencies exist to inform investors on the creditworthiness of a company or country. What is meant by creditworthiness is the ability to meet debt repayment obligations. A simple example would be a typical clothing account or bond. The bank will charge you a rate based on its perception of your creditworthiness, the more favourable your profile the better the interest rate charged. This works more or less the same for sovereign debt i.e. a country’s debt obligations. Why we have sovereign debt in the first place is largely to fund the budget deficit which is the gap between what is earned by the government through tax and what the government spends. Below is an example of credit grading matrix used by the top 3:

The 2016/17 budget deficit is 3.2% and Minister Pravin Gordhan has announced that this will reduce to 2.4% in the 2018/19. News headlines in the weeks leading up to the budget speech were dominated by the possible downgrade of South Africa’s sovereign credit rating to sub-investment grade. The current credit rating is one notch away from being deemed junk (sub-investment grade), this means that there is at least a 1 in 3 chance of South Africa defaulting on its debt obligations. The worst case consequences of a ratings downgrade would be the calling up of South African bonds i.e. lenders demanding settlement of the outstanding balance. However, demanding settlement is an unlikely scenario. What will definitely happen if sovereign debt is downgraded to junk, is that bonds and loans will be repriced at higher interest rates further straining the country’s ability to meet its obligations and its ability to borrow. This causes a domino effect on the wider economy including, but not limited to, foreign capital flight and currency depreciation.

The Rand

The dollar/rand exchange rate is on everyone’s lips and it’s the one economic indicator that everyone can and wants to relate to. The oscillation of the exchange rate inspires fear and hope in many but it may not always clear to the layman what drives movements and what the consequences are. The Rand traded at a record high of R17.99 to the Dollar when the previous Minister of Finance Nhlanhla Nene was fired in an unprecedented move. In the wake of the 2016 budget speech, the Rand depreciated against the dollar. These two incidents are reflective of investor confidence. Perceptions of political and economic growth drive investors to either buy or sell the Rand. Below is graph illustrating the Rand/Dollar exchange from 1/11/15 to 2/3/16:

Selling the Rand (for Dollars) creates excess supply in the market thus decreasing price for every 1 Dollar bought. Depreciation is not all doom and gloom, it helps the current account deficit by making our exports cheaper. The converse is, of course, imports become more expensive so an exceptionally strong currency for a developing economy or an exceptionally weak currency is not ideal. South Africa is a net importer of goods and services.

How a depreciating currency affects your pocket directly is rising prices for imported goods and services and increases in interest rates which affects any debt obligations you may have. Interest rates are likely to continue to rise to curb inflation. My advice is to reconsider any major asset acquisitions such as property and save more, you can find more savings and budgeting tips here.

Barclays

Barclays Plc announced on 1 March 2016 that it would be unwinding its 62.3% shareholding in Barclays Africa/Absa over the next 2 to 3 years. This is an example of foreign capital flight, although the main impetus of the divesture is due to the greater operation and profitability efficiencies at a group level it does have a negative impact on investor confidence. The market did take a slight hit but not as badly as one would expect.

Political instability, SARS wars, student protests, falling commodity prices, stagnant growth, rising electricity prices, rising interest rates all sound like the beginning of the end. But it isn’t. The best way to ride this wave is to implement a few austerity measures of your own, save as much as you can, review your investment portfolio and most of all remain positive about the future of South Africa.

Best

Nswana

Co-founder of Mbewu Movement

Sources: 

https://www.resbank.co.za/Research/Rates/Pages/SelectedHistoricalExchangeAndInterestRates.aspx

http://www.treasury.gov.za/documents/national%20budget/2016/speech/speech.pdf

8 Things Youth Should Know About the African Economic Outlook

Africans and the youth in particular are engaging much more actively in topics that impact us every day such as race and politics. One area that needs more focus and attention among the African youth is economics. The economy of Africa, the cornerstone of its renaissance, has more impact on the African individual, however we find external parties scrutinise and analyse the economy more than those directly affected by it. The onus is on us to do our research and share informed opinions.

This month Professor Mthuli Ncube, Professor of Public Policy at Oxford University and former Chief Economist at the African Development Bank, shared his views in a lecture in Johannesburg. He gave a diagnosis and possible solutions on African regions, their bottlenecks and their opportunities and pointed out 3 things that will impact Africa’s economic outlook in the short to medium term: the Chinese economy, US interest rates movements and Commodities market.

These points are discussed below along with others you, as a (young) African, should know about Africa’s economic outlook:

1. Africa’s rising stars and countries to watch

East Africa is a prime example of how inter-regional activity can insulate global economic volatility. The rising stars in the region include Rwanda – Dubbed the ‘Singapore of Africa’, their success has been largely attributed to leadership and good governance. Kenya, Tanzania and Ethiopia, which grew at 10% in 2014, are also countries to watch.

In the West, Professor Ncube is particularly enthusiastic about Cote d’Ivoire, en route to becoming an emerging nation by 2020, their services industry has contributed significantly to GDP. Ghana and Nigeria will continue to be strong despite debt challenges and other economic issues.

2. Commodities price dip has impacted the continent negatively

Countries like Nigeria, Ghana and Angola have been negatively affected by the drop in the oil price. Nigeria’s economy in particular is highly dependent on the oil price movement and has suffered currency depreciation. Further, China, the world’s second largest crude oil consumer, is experiencing a slowdown in growth.

As a net exporter of commodities, Sub-Saharan Africa has been hurt by lower prices, however according to Makhtar Diop, World Bank Vice President for Africa, “The end of the commodity super-cycle has provided a window of opportunity to push ahead with the next wave of structural reforms and make Africa’s growth more effective at reducing poverty”.

3. South Africa (SA), will continue to experience slow/no growth. Unless…

Since 2008, SA’s GDP has slowed to 1.8% per year, with unemployment hovering around the 25% mark. Labour issues, energy constraints and a weak currency have contributed to the contraction of the economy by 1.4% in the first quarter of 2015.

McKinsey Global Institute released a report in September identifying 5 opportunities that should reverse the negative trend, growing GDP by 1.1% per year and creating 3.4 million jobs. These opportunities include advanced manufacturing, infrastructure productivity, natural gas, service exports and raw and processed agricultural exports. The effective implementation of these various initiatives and SA’s National Development Plan are central to achieving the growth figures Cyril Ramaphosa, the deputy president has claimed.

4. The youth bulge and the next billion

The United Nations (UN) estimates that Africa will have a population of 2.5 billion by 2050 – The Next Billion. “Currently 41% of the population is below the age of 15 and another 19% are between the ages of 19 and 24”, the UN director of the Population Division, John Wilmoth has stated. These statistics present a great opportunity, provided the proper planning for and management of this population growth takes place.

Source: BBC

5. #BringBackTheDiaspora

The African Diaspora are a very important factor in the rise of the continent. Africans in various parts of the world can come back home and exercise their school of thought, build businesses, provide services and invest in their countries. Together, leaders and the diaspora should develop innovative solutions for growth.

An example of this is the Grand Ethiopian Renaissance Dam (GERD) that used what is termed as ‘Diaspora Bond’ to raise finance for the construction of a hydro power dam in Ethiopia. While it has its challenges, it’s a great step involving those scattered across the globe.

6. The impact of China’s slowing growth

China recently suffered a knock in its financial markets due to the slowdown of growth in its economy. Contagion resulted and the stock markets across the globe and emerging markets currencies plummeted (In SA, R14 to the dollar!), on what analysts have called ‘Black Monday’.

The traditional trade relationship between Africa and China has been that Africa exports raw materials and imports manufactured goods from China. They are also the leading partner in our infrastructure development, these deals are linked to extractive industries proving China’s slowing growth is unfavourable to African countries.

That said, Africa needs to make sure it gets “the best deal possible” for its natural resource exports, particularly with its largest trading partner China, to protect itself from global market turbulence, according to the new president of the African Development Bank, Akinwumi Adesina.

Source: Project M

7. US interest rates speculated to increase

In the US, there’s been speculation about the rise of interest rates, which after the recent plunge in financial markets and a strong US dollar, would be especially detrimental to African countries as, among other factors, debt commitments will be more painful to service.

An overall trend observed recently is that the world’s developed economies and their markets are converging upwards, whereas emerging markets are slowing down and vulnerable.

8. Lack of Infrastructure and slow structural transformation stifling growth

The infrastructure deficit is commonly referred to as the single most important factor stifling Africa’s growth. If we don’t have adequate roads, buildings, commercial hubs, public transport systems, industrial plants such as power plants etc. we won’t be able to unlock all our opportunities. Lack of access to suitable funding (structures), inadequate strategies and collaborative and integrated planning are probably the most important challenges in infrastructure development.

Critical however is, the structural transformation of the economy with growth strategies sensitive to equity and sustainability. This will help diversify the economy and pull the continent out of the commodity-dependent state it’s in right now. This involves a value addition/beneficiation focus, investing in the services and manufacturing sectors (sometimes at the cost of the economy in the short-run). Of significance is education and skills development with investment in social infrastructure for health and well-being of the populace.

Article by Lilitha Mahlati, an investment banking associate and co-founder of Mbewu Movement. She describes herself as a transformation, youth and gender activist. Follow her on twitter: @misslilitham