HILTON TARRANT: The weaker rand is not only hitting you and me at the petrol pump and at the supermarket. It’s hurting companies in South Africa dependent on imports for their production processes.
Chris Bekker of ETM Analytics joins us now. Chris, a Reuters report from the weekend that quotes Toyota and Vodacom executives specifically flags concerns about the prices of imported components and imported equipment. Vodacom chief executive Shameel Joosub was quoted on a call with analysts last week as saying: “It’s a pity because obviously we could get more equipment if the rand was more stable. This is a double-edged sword. Yes, we get more for our exports, but any imports are coming at a serious price.”
CHRIS BEKKER: Ja. And we are exporting products, goods and services to foreigners who are essentially getting a good deal. But, as you pointed out, local South Africans who are looking forward to perhaps increased cellular mobile coverage, better broadband services, Vodacom’s going to be spending a lot more in terms of importing the capital equipment to roll that out to lower-income and middle-income South Africans who are living in areas that don’t have good quality services in that regard at this point.
Ja, it’s a negative outlook for the local South African who is going to not only see his prices at a retail level go up, but he’s also going to see less investment that has a more indirect negative consequence in his living standard. In essence what we are going to see as this rand has weakened, we have seen commodity prices ramping up and it doesn’t only come for imported goods and commodities, but also commodities prices in rand terms that are priced at export parity in South Africa. Those prices have gone up 20% since the last government budget, Budget 2013 or February 2013. So those prices have gone up 20% since then, raw commodity prices.
What it means is with this weaker rand if government doesn’t ramp up its infrastructure spending – they are at a rate that exceeds 20% – with the money that’s allocated to infrastructure spending we are going to be buying a lot less bricks, cement and tarmac that we can invest in this economy. So the weak rand has a way of retrenching capital investment spending in the South African economy.
Now, I think what’s going to be interesting is to see how the government responds to this, and whether they try and keep the pace with the rate of inflation that we are seeing in raw commodity prices because, if they do, it means they are going to have to tax businesses, individuals and households more or they are going to have to run a bigger budget deficit, which means that down the road our kids and grandkids are going to be hit with higher taxes to pay for the infrastructure.
I think, though, that they are underestimating the rate of inflation in the infrastructure space and that’s a big cause of the crumbling infrastructure that we are seeing pretty much throughout the economy in South Africa at this point, where we are seeing water infrastructure failing, roads are not being maintained. I think that’s a direct consequence of under-budgeting for investment in this sector.
HILTON TARRANT: Simply put, these companies and government will be spending as much as they had originally forecast – they are simply going to get much less bang for their buck.
Look at something like Vodacom, a capital expenditure budget of around R7bn. That’s been pretty constant over the past number of years. They are going to be able to buy less equipment.
If I look at government, something like Eskom building power stations, Medupi and Kusile, those are R100bn-plus power stations each – they are not going to be able to necessarily afford a power station the size of either of those for the same price that they would be paying now.
CHRIS BEKKER: Ja, exactly, Hilton. So for, say, if that budget is R10bn or R15bn on a specific project, that R10bn or R15bn is just going to buy you a lot less actual stuff. So if they wanted to build a power station that is sized at 100, it’s going to have to be sized at 80 as a consequence of this weaker rand. And that’s the direct consequence of this weak rand.
And it’s going to impact consumers where the efficiency and productivity of the capital infrastructure that is existent in South Africa is not as great as it could have been. And it’s greater capital equipment and savings that are funded into these avenues that allow us to be more productive and grow wealthier through time. So it might not necessarily be directly seen, there might still be spending on capital infrastructure, and we might still become wealthier, but it means we are not as wealthy as we could have been otherwise.
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