Tag Archives: economics

Chinese Trade Deals Top Mandela Commemoration for SA’s President

Word has it that President Zuma will miss the first anniversary celebrations of Nelson Mandela’s death today (5 December).

Although the day has not been made a public holiday, raising eyebrows in some quarters, it has nonetheless been marked with an official commemoration at Freedom Park in Pretoria.

In the absence of the President, the ceremony was officiated over by his deputy Cyril Ramaphosa, who lad a “call to action” at exactly 9.56am and 53 seconds this morning.

Such action involved people sounding bells, sirens, musical instruments and vuvuzelas not only in the Park, but also at churches, schools, factories and the like around the country.

This cacophony was followed by a three-minute silence at 10am, bringing the total time elapsed to six minutes and seven seconds in order to represent the 67 years that Mandela spent in service to the country.

The national anthem was then sung, before a wreath-laying service was held at the Union Buildings, the seat of the government in Pretoria.

As to why Zuma decided not to grace such an historic event with his presence, meanwhile, this was due to important business with China – South Africa’s largest single trading partner since 2009, and China’s biggest on the continent.

In fact, it was China’s patronage and influence that saw South Africa being accepted into the influential club of BRIC (Brazil, Russia, India and China) nations in 2010.

This week, however, President Zuma led a delegation of ministers and representatives from 100 companies on his second state visit to the country. Here he met Chinese President Xi Jinping in a bid to review and strengthen existing relations and trade ties.

To this end, the two nations signed a five-to-10-year strategic cooperation programme, which included cementing “political mutual trust and strategic coordination” in international and BRICS-related matters. It also involved a commitment to improving collaboration in the areas of trade and investment, particularly in sectors such as agriculture, finance and transport.

The deal builds on the Beijing Declaration, which was signed four years ago during Zuma’s first state visit, and created a partnership centred around 38 cooperation agreements. These agreements ranged from mineral exploration to political dialogue and joint activity in global arenas such as the United Nations.

Bi-lateral trade

But a joint forum involving about 150 Chinese companies will also take place today, with the aim of generating a raft of new business deals between the two nations.

Getting such deals right could prove tricky though. Although South Africa’s bilateral trade with China increased by 32% in 2013 to ZAR 270bn (£15.6bn) from ZAR 205bn (£11.8bn) the previous year, the trade balance has remained so far in China’s favour.

In fact, South Africa’s trade deficit with the country widened from ZAR36bn (£2.1bn) in 2012 to ZAR38bn (£2.2bn) last year.

The problem, according to Trade and Industry Minister Rob Davies in a written reply to a parliamentary question by African National Congress MP Freddie Adams in March, centres primarily on the make-up of this two-way commerce.

While more than 90% of South Africa’s top 10 exports to China comprise raw materials, all of its top 10 Chinese imports consist of higher value manufactured goods.

But now, it seems, both countries have recognised the unsustainability of the situation and agreed to try and tackle it. The first way, according to Davies, is by working together “to promote value-added exports to China”, while the second is to “increase inward investment from China”, which has traditionally been low.

But trade deficits are not the only way in which doing business with China can apparently be a double-edged sword.

In October, for example, the South African government generated domestic and international controversy by apparently kowtowing to its ally’s political demands.

Pretoria, it appears, chose to deny Tibet’s spiritual leader, the Dalai Lama, a visa – for the third time in five years – to attend a Nobel laureates’ summit in Cape Town in order to honour the memory of fellow laureate, Nelson Mandela. The summit was duly cancelled and is now scheduled to take place in Rome on 12-14 December.

Chinese influence

But the government was widely reproached for being afraid to anger its trading partner, which has occupied Tibet since 1950 and sees the Dalai Lama, albeit in exile in India, as an influential and subversive voice of independence.

China, in turn, only made matters worse for its friend by commending the “correct position” it had taken and thanking it for its support.

Although Pretoria hotly denied any culpability, claiming that the Dalai Lama had cancelled the visa himself, it was roundly criticised for everything from handing over its sovereignity, “selling its soul” and betraying the country’s commitment to human rights since the fall of apartheid 20 years ago.

But China’s influence is also being felt in more temporal ways in the everyday lives of ordinary South Africans.

For instance, according to African TV news channel eNCA’s Checkpoint documentary entitled “South Africa and China’s Trade Relationship”, this very partnership has led to 100,000 jobs being lost between 2002 and 2010 as cheap Chinese imports have flooded in and decimated local industry. Chinese investment has by way of contrast created less than 50,000 new positions.

A particularly marked casualty has been the garment-manufacturing sector in the Western Cape, which in its heyday in the 1990s employed 50,000 workers of its own.

But according to Ron Stockdale, managing director of men’s suit producer PALS, the industry has been unable to compete due to labour laws that restrict working hours to 42.5 hours per week compared with China’s 60.

“They’ve got a nearly 50% longer week to produce garments against the same fixed overheads so they can give better prices,” he explains.

His company has survived by cutting delivery times due to productivity improvements and finding a niche by making police uniforms for African states and bowling trousers for the UK.

But Stockdale is also hopeful that, after years of sitting on its hands, recent measures by government to provide interest-reduced loans and productivity-incentive schemes to help businesses purchase new equipment may bear fruit.

Chinese unpopularity

Another issue that is causing local concern, meanwhile, is the large number of Chinese people moving to South Africa. At an estimated 300,000 to 500,000, the country is believed to have the largest such population on the continent, with many workers leaving China in the hope of finding better-paid job opportunities than they would at home.

The almost inevitable consequence of these dynamics though is that the Chinese presence is becoming increasingly unpopular.

According to a survey by the Ethics Institute of South Africa among over 1,000 Africans across 15 countries earlier this year, a statistically significant 43.3% had a negative perception of Chinese businesspeople compared with only just over a third holding the opposite viewpoint.

Locals were just as unimpressed with Chinese products and services (55.9% negative) and their labour practices (46% negative). This was due to a widespread belief that Chinese firms do not treat their African staff with respect, fail to provide decent working conditions and have little regard for either their basic rights or health and safety.

But it appears that, of everyone questioned, it is South Africans who are the most anti-Chinese.

This situation was attributed not only to the fact that they are “generally-speaking more xenophobic than other Africans”, but also that Western media, which tends to paint a black picture of Chinese investment in the continent, has more influence here.

In addition, the long-standing presence of Chinese businesses means that they are more widespread than elsewhere, particularly in rural areas, which has entrenched dislike. The final nail in the coffin is the fear that such businesses are perceived to pose a direct threat to domestic manufacturing, especially the textile industry.

But the one glimmer of hope is that an ongoing complaint that Chinese businesses employ countrymen rather than local workers due to their willingness to work longer hours for lower wages, is starting to loose validity as salary costs rise back home.

Whatever the truth of it though, it appears unlikely that China’s influence in South Africa – or the rest of the continent for that matter – is likely to wane anytime soon.

As Dr Garth Le Pere, author of “China, Africa and South Africa” told Checkpoint: “China is looking at major mining concessions in South Africa and the region at a time when there’s a rentrenchment of commitment, development aid, trade and investment from the European Union and United States. And this is the difference – the Chinese make things happen.”

Is South Africa’s star waning?

What with seemingly endless energy shortages, simmering industrial unrest and innumerable social challenges, South Africa increasingly appears to be a country in trouble.

Although the continent’s second largest economy, and the one that still attracts the highest level of foreign direct investment, there are fears in some quarters that its star may be starting to wan – and will continue to do so unless swift action is taken.

For example, while South Africa may for years have boasted the largest GDP in Africa, it was knocked off its perch by Nigeria in April after a rebasing exercise, making the West African country more attractive to foreign investors overnight.

But the various gloomy perceptions about South Africa’s future were not helped last week by Moody’s decision to downgrade its credit rating to only two notches above junk status, continuing the steady fall from a 2009 high when the country boasted a top A3 rating.

Moody’s took the decision as a result of the developing nation’s deteriorating economic growth, an increasing budget and current account deficit and rising public debt levels (50% compared to 27% only five years ago).

These were caused, among other things, by rolling power outages, known locally as load shedding, apparently endless strikes in the all-important mining sector and generally slow domestic and global demand.

Although the move to cut South Africa’s investment grade status to Baa2 from Baa1 was not entirely unexpected following warnings in July, it has once again raised fears that a slide into junk status could be on the cards.

Similar concerns are also being raised over the country’s five largest banks – Standard Bank of SA, Absa, FirstRand, Nedbank and Investec – after Moody’s likewise downgraded their rating to Baa2 status on Tuesday.

The problem is that, because the banks have sizeable holdings of sovereign debt securities, the SA government’s weakening credit profile is having an impact on their own perceived creditworthiness too.

But any shift to junk status would cost the country dear by triggering an automatic sell-off of its bonds by foreign institutional investors and resulting in new buyers charging higher interest rates in order to counterbalance higher levels of investment risk.

In real terms, this means that it would cost South Africa, and its private sector, significantly more to service their debts. It would also become harder to borrow money in order to fund much-needed projects such as infrastructure development. Other potential repercussions include a likely nose-dive in the value of the rand and a rise in inflation.

Credit downgrades

To make this situation a reality though, two out of the three credit rating agencies would have to make the move. But Standard & Poor’s has already assigned South Africa a BBB- rating, the lowest grade before junk, while Fitch is expected to follow suit in December. This would mean that the country does not have much further to fall.

In South Africa’s favour though, Moody’s appears to have given its sovereign currency the benefit of the doubt. By shifting its outlook on the rating from negative to stable, the agency has made it clear that change is unlikely to occur any time soon.

On the downside, some analysts are predicting that if South Africa fails to sort out key issues such as weak tax receipts and sluggish exports fairly quickly, a downgrade could occur in as little as five years.

But David Knee, head of fixed income at financial services firm Prudential, believes that, when compared to other developing markets, South Africa is not in too bad a shape.

“It is clear that much hinges on economic growth over the medium-term”, he says, adding that South Africa “could indeed be downgraded by the ratings agencies should GDP growth remain weaker than expected for an extended period of time”.

But when “looking at the metrics of South Africa’s peers”, which include India and Brazil, Knee points out reassuringly that “the deterioration would likely have to be fairly significant to prompt ratings action”.

One area that the country really does need to sort out sooner rather than later if it is to prevent such deterioration though is its energy sector.

To this end, the government pledged to inject at least ZAR 20 billion (£1.1 billion) in equity to help plug state-owned utility Eskom’s funding gap at the close of last month – a move that saw both Standard & Poor’s and Moody’s hold off from downgrading its bonds to junk status, a seemingly a recurring theme here in South Africa at the moment.

Eskom needs the money not only to service the debt required to pay for completion of two new power stations vital to ease the country’s chronic power shortages, but also to maintain its existing ageing estate.

Evidence of what happens if such action is not taken came only a few weeks ago, in fact, when a coal silo at the Majuba power station in Mpumalanga collapsed, leading to yet another series of rolling power blackouts across the country.

Reducing exposure

South Africa’s iconic weekly documentary programme, Carte Blanche, attributed the collapse to non-existent maintenance following the introduction of incentivisation schemes that linked senior managers’ bonuses to keeping expenditure levels low.

But Majuba is not expected to function at maximum capacity for another six months, making scheduled load shedding an ever-present threat to both business and the economy.

As a result of all this, organisations such as South Africa’s second largest supermarket chain, Pick ‘n Pay, have been working hard to reduce their exposure by finding ways to cut electricity consumption.

As David North, the retailer’s group strategy and corporate affairs director, explains: “The objective of saving money motivates any business. South Africa is not immune to energy price hikes or electricity outages from load shedding. So when you get a combination of rapid increases in pricing and uneven supply, most companies will look at how they can reduce these challenges.”

To date, the retailer has managed to slash its power usage by 30% per square metre against its 2008 store baseline simply by addressing lighting and refrigeration efficiency issues. Such action has saved it a total of ZAR 508 million on electricity (£28.6 million) since the project began.

In fact, last year alone the company’s ZAR55 million (£3.1 million) investment in retrofitting lighting and refrigeration across 10% of its stores and two of its key distribution centres saved it a huge ZAR14.5 million (£814,949).

Measures taken included implementing less energy-intensive lighting systems, encouraging staff to turn lights off when no longer required as well as introducing motion sensors and key-switches to automatically put them out at night.

Moreover, all of the retailer’s stores now have online electricity metering, which means that managers can monitor energy usage via a dashboard. It alerts them should a refrigeration unit suddenly start consuming more electricity than normal, for example, so that they can take immediate action.

But because 85% of Pick n’ Pay’s buildings-related carbon emissions are generated by electricity consumption, the move has likewise helped it slash carbon emissions by 19.4%, beating the target it set itself in 2010 of a 15% reduction by 2015.

The firm’s efforts have, in fact, earned it an accolade from the Carbon Disclosure Project for being the top-performing retailer in Africa. Which just goes to show that every cloud truly does have a silver lining.