It is the end of the year. Another one down and it has gone flying by faster (if that were possible) than last year. The speed at which time is flying by has moved from the sublime into the insane! It seems like only last week that Boney M and tinsel were everywhere and here they are again in a whole new Christmas season. Looking back on the year it has been tumultuous to say the least. On the local front, Marikana has been a Rubicon moment (or a Marikana moment) and that has unleashed a genie that will be with us for years (see the farmworker’s strikes as an entree). An immediate consequence of that has been, in spite of the PR, Gold Fields unbundling (read divesting) as hard business decisions are made based on profit, loss, security of rights and investment returns. Until it can be recognized that there has to be a link between earnings and productivity, this unfortunate entitlement disconnect is likely to continue, aided and abetted by populists, rabble rousers and those with their own specific political agendas, which are often diametrically opposed to those of the factions that they purportedly represent………………
Please see below an article by Felicity Duncan, dated the 8 October 2012. It is two months old, however, it is worth noting how the sentiments herein have unfolded (and what subsequent events have taken place).
Last week saw a cascade of South African debt downgrades from ratings agency Moody’s. First, Moody’s started at the top and downgraded South African government bonds to Baa1 from A3, with a negative outlook indicating the potential for future downgrades.
Moody’s then downgraded the long-term ratings of “13 South African sub-sovereign issuers, including 12 local governments and one government-related issuer (East Rand Water Care Company), and changed the ratings outlook to negative from stable on another seven local governments in the country.” This action included the downgrading of the ratings of Cape Town, Johannesburg, Tshwane, Nelson Mandela Bay; the downgrading of the outlook for a host of municipalities; and the downgrading of the outlook for the South African National Road Agency (Sanral).
That was a lot to cope with, but Moody’s still wasn’t done. The agency then announced that it had downgraded Telkom to Baa3 from Baa2, and the outlook for Gold Fields’ to stable from positive. For most of us, that would be enough work for one week, but Moody’s kept at it, announcing the downgrading of Eskom to Baa3 from Baa2, the downgrading of the Development Bank of South Africa (DBSA) and the Industrial Development Corporation of South Africa (IDC) to Baa1 from A3, and the downgrading of South Africa’s top five banks’ foreign currency deposit ratings to Baa1 from A3. And on the seventh(ish) day, Moody’s rested.
Now, what you just read there was a long list, but I decided to include all of it to make a simple point: the current instability in the country is costing everyone something, from national government to your city to your local bank. All of them are facing diminished credibility and increased borrowing costs, and that’s going to impact you and your family unless you do something about it.
According to Moody’s, it downgraded the daylights out of South Africa because it saw “a decline in the government’s institutional strength amidst increased socio-economic stresses and the resulting diminished capacity to manage growth and competitiveness risks,” “shrinking headroom for counter-cyclical policy actions, given the deterioration in the government’s debt metrics since 2008, uncertain revenue prospects and the already-low level of interest rates,” and “challenges posed by a negative investment climate in light of infrastructure shortfalls, relatively high labour costs despite high unemployment, and increased concerns about South Africa’s future political stability.”
What Moody’s is trying to say is that the way things are going in South Africa is not working, that the country is headed firmly and fast in the wrong direction. Now, a number of South African pundits have responded to Moody’s statements by pointing out that ratings agencies have made big mistakes before (sub-prime mortgages anyone’) and that South Africa is a unique place to which ordinary measures of success may not apply. This is all true, but I invite you to just consider the possibility that Moody’s is right, that South Africa actually is on the road to disaster, and that drastic measures are needed.
The hullabaloo around the ratings downgrades has now passed into back of mind, however, these increased costs are insidiously working their way into our lives and living/ borrowing costs as we speak. Further to the aforementioned, it never ceases to amaze me how the president of the country can be that, whilst his former financial advisor had a one-sided corrupt relationship with him.
I am also constantly astounded by the sheer stupidity, incapacity, ineptitude, incompetence and general all-round uselessness of government. The issue that I have is that government makes the rules without having the relevant experience to do so. That would be like tasking me (and giving my outputs statutory powers) to design safety procedures for a nuclear reactor. I have no idea about nuclear reactors and tasking someone who knows nothing is frankly, stupid. Government stupidity is endemic here in SA, but it is prevalent (in varying degrees) world-wide.
Please see below: A Simple World, By Charles Gave of GaveKal (referring to the US and written before the US elections):
Many of our readers seem to believe that the world is getting ever more complex. I disagree. In fact, I have never seen a world whose key drivers were so simple to grasp. Almost everybody, save a few politicians in France, realize that government is the problem. Even the 50% or more of US citizens who receive “bribes” with money borrowed from their grandchildren concede the spending has to slow. As the anti-Obama adverts on TV put it: “Where did the trillions go’”
Servicing debt is not a problem when there is growth. However, increased government spending does not lead to higher growth but to lower growth. We won’t hear this message from complex souls like Paul Krugman and Joseph Stiglitz, both Nobel Prize winners in economics. But as Hayek said while accepting the prize, there should never have been a Nobel Prize in Economics. Even a cursory look at economic history shows that increased government spending drags down the growth rate, largely because it drives out productive investment (see How The World Works).
Wealth is not created by artificially cheapening money. When prices are manipulated to the point where they have nothing to do with reality, then the only rational decision is to shift to cash and to wait for prices to send signals again (see A Measure Of Keynesianism). As a result, the velocity of money goes to zero and the economy moves ex-growth. This is exactly what we are seeing today as the world’s idiotic central banks apply a strategy that Japan has spent 20 years proving does not work.
None of this is rocket science. Let’s look at the banks – a web of financial complexity we’re told. But one does not need the ability to slice a lousy mortgage loan into 37 different risk-rated tranches to know that when a bank has to go bankrupt, the shareholders and the bondholders of the bank should go to zero. The executives should go to jail if needed (always very popular) and the depositors can remain protected though a nationalization of the said banks. Three or four years later, once their balance sheets have been cleaned up and their capital reconstituted through an infusion of public money, the banks can then be reintroduced in the stock market and privatized at five times the amounts spent by the government. This is what happened in Sweden after 1992 but did not happen in Japan over the last twenty years and is certainly not unfolding today in Europe. We all know the results.
Equally, there remains no justification for comingling the casino-like operations of an investment bank and the post-office function of a commercial bank. This is because these institutions are in different businesses; the first one plays with the partners’ money and the second one with the depositors’ money.
Tampering with prices, or with interest rates, allowing a quasi-monopoly to develop in the banking system, using debt to pay for current expenditures, manipulating exchange rates, killing the saver, etc… all of this does not work, and never did.
So the solution to our current malaise is very simple: we have to stop now. Reduce government spending, stop manipulating money, let market pricing return – or the result will be a vicious cycle of low growth and rising debt, or certain depression.
So, everywhere it seems that governments are a waste of time, effort and money.
The ongoing national embarrassment that is the Companies and Intellectual Property Commission (CIPC) remains just that. Don’t hold your breath for it to improve any time soon. A friend of mine told me that he urgently needed something done to enable a transaction to proceed. Going through normal channels was an exercise in futility, frustration and fury so he got onto a jet, flew to Pretoria and went and spent five hours in the building loudly refusing to leave until it was resolved. That is, to put it mildly, absolutely scandalous that one can run a government department that is that truly and utterly awful. It is insulting the good name of national embarrassments and banana republics the world over.
As has been previously mentioned, SARS have added a truly vicious and malevolent beast to their arsenal known as an IT14SD. This is a reconciliation which requires reconciliation between the payroll numbers on the financial statements to the payroll reports (IRP5s and EMP501s) and a reconciliation of the VAT inputs and outputs (to cost of sales). This is an incredibly labour intensive reconciliation which easily takes 40 man hours. It is a VERY VERY expensive and time-consuming submission (and seeing as SARS developed this without informing the software providers, as of August 2012, there isn’t a software provider in South Africa that has set up their software to generate the inputs/ reports in the format required). I asked the question at the annual Southern Suburbs SAICA/ SARS meeting if we could not submit the document and rather invite SARS to audit. The considered reply was NO. It has to be submitted, irrespective of the time and cost (and of course God help you if a mistake is made). Of course, the fact that, for example, in a manufacturing environment, where (say) salaries are included in cost of product manufacture and therefore cost of sales, there is no way on God’s green earth that the financial statements will ever be able to reconcile to this, which leads to audits and more time and money wasted.
We are also finding that, quite literally, one in three tax returns are going for review or audit. It is absolutely ludicrous! Basically if one is receiving a refund or has ANYTHING other than a plain vanilla type of the tax return the documents are required to be submitted. It is chewing up time and costing money that is unnecessarily spent due to poor risk profiling. It is making us change the way that we approach tax on an annual basis as instead of aiming for a small refund, we are going to have to rather pay in. Even then, where clients are having to pay in, we are finding an inordinate amount of document requests/ audits. It really is a lose/ lose situation.
As mentioned in October and November, the unemployment insurance funds earnings limit has increased from R149 736 to R178 464 per annum (from R12,478 to R14,872 per month). The Department of Labour kept this fairly important fact a secret before admitting reluctantly that this increase would affect neither employers nor employees. It took a while for them to connect the dots and realise that if the price increases then someone has to pay for the increase. What this means is that employers will pay an extra R23.94 per month per employee for the privilege of employing staff and staff will have an extra R23.94 per month deducted for the privilege of being administered by the absolute imbeciles that currently enjoying sheltered employment in the Department of Labour. (Interestingly enough, the definition of an imbecile used to be: “somebody with an IQ between 25 and 50 and a mental age of between three and seven years”. It appears that these Departmental of Labour muppets are insulting the good names of imbeciles).
To end with something a little lighter in nature, I hope this tickles your funnybone:
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