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Whooops...confrontation ahead?

I refer to my bold predictions of a few weeks ago (see article in archive) that Mbeki and Zuma are heading for a fall-out, that power cannot be shared and that Mbeki won't see the end of this legislative period.

Here is an article just published by The Citizen. I say no more...

Zuma downplays key comments


JOHANNESBURG - ANC president Jacob Zuma has downplayed his statement that President Thabo Mbeki no longer has power, and his comments on the death penalty.

He insists his comments were “misrepresented” by the media.

Zuma also denied having been “summoned” by Cosatu to explain some of his statements.

“There have been a lot of reports in the media in the past two weeks on remarks made by the ANC president at public engagements, which are claimed by various journalists and commentators to be inconsistent with ANC policy,” he said.

“We have stated repeatedly that the ANC government implements ANC policy. Therefore all ANC members in government, from a national to a local level, are accountable to the movement,” said Zuma in a statement on the ANC website yesterday.

“This is nothing new, nor should it change simply because different people occupy the positions of ANC president and President of the country.”

Zuma said Mr Mbeki’s powers as President of South Africa “have not been changed or diminished”.

He also denied he had defied the ANC policy with his views on the death penalty and affirmative action.

“Policies should not be seen as equivalent to the Ten Commandments, instead, they should be open to review and ongoing interrogation,” said Zuma.

He said a debate on the death penalty would not change “the fact that the ANC’s policy and the country’s Constitution remain very clear on the right to life of every South African”.

Political analyst Aubrey Matshiqi said Zuma’s actions were an indication that the new leadership “has not started managing him”.

“There are no signs of proper coaching and briefing of the President,” said Matshiqi.

“His belief that he can charm everyone exposes him to accusations of populism,” he said.

The ANC Youth League, known for its unwavering support for Zuma, declined to comment.

end of article.

The Armchair Economist also declined to comment.
11.3.08 11:48


Right, but not quite

I've been busy with forecasts on my blog lately, I noted today. Too busy. It's never good to forecast. The risks are too high.

But, when one MUST forecast...and the forecast turns out spot-on, then one should blow that horn very loud. So, that's what I'm going to do today.

I'm talking about my assessment of Trevor Manuel's inflation forecast for the year ahead (as published in his recent budget). It's part of my article under the headline "Budget 2008: No signs of populist pressure" below. Among others, I said Trevor's assessment that inflation will be dropping later this year was wrong and that it was premised on another assessment which was wrong, namely that the rand would not drop further.

Since the budget, the rand has dropped significantly.

The (probable) under-estimation of inflation by Trevor in his budget, is also relevant to the more recent articles I wrote, namely on the theme "Inflation is much higher in SA than officially measured".

Here is an article lifted from today's Business Day. It's the reason why I think I may blow my horn today...roughly one month after Trevor's budget speech.

South Africa: Falling Rand a Risk for Inflation, says Analysts

Business Day (Johannesburg)

10 March 2008
Posted to the web 10 March 2008

Renée Bonorchis

LAST week was a disaster for the rand, which dropped to record lows against the euro, threatening to boost inflation, increase the risk of rising interest rates and disrupt SA's already large current account deficit.

The rand reached R12,43 against the euro, the currency of SA's major trading partners, and weakened substantially against the pound and the dollar.

To add to the impact, the price of a barrel of Brent crude oil rose to a new record at $103.

All of this may spell disaster for the local economy because the flailing currency and the ever- increasing price of fuel will have inflation figures rushing upwards.

John Cairns, currency specialist at RMB, said renewed concerns over electricity supplies contributed to the rand's slide, but the big story was that of further dislocations in the US credit markets.

"Data on Thursday showed mortgage delinquencies hit their highest levels since 1985, while mortgage company Thornburg failed to meet some of its debt repayments. Global equities are in a rout as a result and even with fresh dollar losses, all global risky currencies faced large losses."

At a Nedgroup Investments conference in Johannesburg last week, Tim Allsop, who founded Polaris Capital, said he was deeply concerned about the rand.

"There are so many potentially compounding negatives on the rand. It's very worrying."

Commodity prices lost some ground on Friday while bonds weakened and the JSE all share index ended in negative territory.

Most experts expect the rand to continue to weaken and the knock-on effects could be serious. Dave Foord, who runs Foord Asset Management, said inflation was probably going to be "a lot worse than we're all expecting ".

Sapa reported on Friday that "portfolio outflows of R12bn and concerns about the outlook for the South African economy had kept the rand well above the R7/$ level during February", according to Nedbank's economic unit .

This had constrained the Reserve Bank's ability to accumulate reserves . Foreign exchange reserves last month rose by only 1,4 % month on month to $30,3bn. The increase in gross reserves (up 1,8% month on month to $34,2bn) was attributed mainly to the sharp increase in the gold price.

end of article.

Afterthought: When the rand was around R10 to the Euro I thought it was on its way to R12 to R13 to the Euro. I didn't expect this to happen so quickly, though. So, I'll have to revise my forecast (yes, I was wrong!) and say the rand will come to rest somewhere between R13 and R14.

And to cover my tracks, I'll say I didn't expect Trevor to announce the forex rules relaxation in the budget and so bring another downward pressing force into play at a time when the rand was already reeling...

But then again, I'm quite convinced now that Trevor did it for exactly that reason: to put pressure on the rand.

But, smile. All is not so between R13 and R14 at least South Africa's exporters can get back to work.
12.3.08 09:24

SA faces heavy bout of "bursting bubble blues"

So, at last South Africa's consumer bubble is bursting. Read what I mean below this "scene-setting" article (lifted from today's Business Day.

South Africa: Collapse in Confidence Confirms Country's Dark Mood

Business Day (Johannesburg)

13 March 2008
Posted to the web 13 March 2008

Mathabo Le Roux

BUSINESS confidence dived to its lowest level in seven years in the first quarter of this year, as the cyclical economic downturn started to bite.

But rolling blackouts in January and concerns about political changes have also contributed to dampen the mood in the country, Rand Merchant Bank (RMB) said yesterday.

The bank's business confidence index, compiled by the Bureau for Economic Research (BER), fell by 19 index points to 48, from 67 in the fourth quarter of last year -- its biggest single drop between successive quarters in 24 years.

The drop means that fewer than half of respondents were comfortable with the prevailing business conditions, compared with more than two-thirds being satisfied only four months ago.

The index paints a gloomy picture.

High inflation and rising interest rates were the usual suspects. They squeezed consumer spending and also dampened private sector fixed investment.

But the quarter also suffered from the hangover of the African National Congress leadership change, while the Eskom crisis further blackened the mood.

Apart from the gloom at home, international prospects augmented the misery.

Surging oil prices, equity market volatility, huge losses by international banks in the subprime crisis and fears of a looming recession in the US, the world's largest economy, further rattled business.

"The environment contains all the elements of the perfect storm. There is the bleak international picture. Then the cyclical downturn has been with us for a while, and now the political situation and the power crisis have been stirred into the pot," said BER economist Pieter Laubscher.

The drop in confidence undoubtedly translated into a drop in output, Laubscher said.

"There is a close correlation between business confidence and GDP growth. The growth rate was 5,1% last year and on the basis of a decline in the index last year we had already tempered growth expectations to 3,4%. With the latest results we're inclined to lower expectations to 3%."

According to RMB the sharp fall in business confidence reflects a deepening slowdown in business volumes.

Profitability is coming under pressure as producers are unable to fully pass on higher input costs to consumers in an environment of weaker demand.

Adding to the sombre mood were growing jitters about political uncertainty. This was the first survey of business confidence since Jacob Zuma replaced Thabo Mbeki as leader of the African National Congress in December.

Concerns about possible changes in economic policy were reflected in the survey, with the proportion of manufacturers rating the political climate as a constraint rising from 34% in the fourth quarter to 49% now.

The survey covered 2980 business enterprises in five sectors -- manufacturing, retail trade, wholesale trade, new vehicle trade and building.

Confidence remained strong-est in the economy's second- biggest sector, the building industry, but still fell from 83 to 69. As the fieldwork for the survey was completed before Eskom announced it would delay the issuing of electricity certificates for large new building projects, confidence in this sector could decline sharply in the next survey.

In other sectors, manufacturing has dropped below the median level of 50, plunging from 69 to 46.

Among new vehicle dealers, whose confidence had already dropped below 50 last year, confidence declined further from 34 to 30, while retail confidence plummeted from 71 to 52.

But Laubscher cautioned against an alarmist view.

"Confidence did take a knock and investment prospects are lower, but much will depend on how the power crisis is handled and how the politics play out."

End of article.

Comment: The mood of businesses and consumers is "dark", as they say in the classics. But, it'll probably get darker still in coming months. For decades SA consumers have propped up their living standard by borrowing against their homes. This was OK as long as house prices rose. (As it was OK in the USA as long as house prices rose there.) In the current environment, there is a real chance that SA house prices might finally stop rising. SA banks already sit with a big number of "repossessed" houses on their hands. This problem will, no doubt, grow in the next months.

Many negative factors are impacting the property market presently, such as the prospect that the SA government will soon "regulate" foreign buying of SA property, the continuing weakness of the rand (which is making foreign owners of SA property nervous about their investment in SA), the uncertainty caused by the Zuma/Mbeki "power struggle", the Eskom shortages and continuing high crime level. And, of course, the international financial markets crisis.

Thrown together in the mixing bowl, these factors might even push nominal prices of SA property down in the next year or two to three. Should prices drop two or three years in a row, it'll suffice to burst "the consumer bubble", ie. stop consumers from propping up their living standards artificially by borrowing against their properties.

When that happens, and (mostly white) consumers realize to what extent their living standards have ACTUALLY (without the property crutch) dropped since 1994, the mood will REALLY get dark.

That's the bubble I talked about in the first paragraph - the unrealistic world created by ever-rising home prices and over-accommodating banks.
13.3.08 13:51

Was this Trevor's worst Budget?

A month is a long time in the life of a National Government South Africa.

What looked solid and realistic then, looks very shaky now. I'm talking about Trevor Manuel's Budget numbers. These were based on, among others, an exchange rate, an inflation rate and a GDP growth assumption, which seemed (for most economists) realistic at the time, but seem rather unrealistic today.

At the time Trevor said inflation will be edging below 6% in the second half of the Budget period from around 9% at the time of delivering his Budget speech. Today the opposite seems likely - inflation might edge higher later this year. If the following interview is anything to go by...

(What follows is a Radio 702 interview, published on and shortened by me here.)

March 27

Bruce Whitfield (Interviewer of Radio 702):

Worse than expected producer price inflation number today. It came in quite a lot higher than expected in February and by the way in which it is worked out that has changed a little bit and maybe it is not all bad news or am I being overly optimistic? Chris Hart, the chief economist at Investment Solutions, am I being overly optimistic when I see producer price inflation at 11.2 percent, based on a new calculation or is it as bad as it looks?

Chris Hart:

It is almost as bad as it looks. I think the key thing is that inflation is experiencing another surge, we had PPI peaking early last year at about 13.2 percent that was April and May last year and it came down below 10 percent and now is rising quite strongly again. Obviously there are different bases and it is clearly the important component, fuel is the obvious candidate with the weaker rand and higher international food prices. I think what was encouraging is that the domestic component was not as bad if that is any consolation, so it does mean that it is externalities and it also, to me, says that your interest rates are not really having much effect on your inflation rate at all.

Bruce Whitfield:

We should be seen PPI coming under control but that imported PPI number, it is close to 16 percent, that is very scary considering the trade deficit and with the currency as weak as it is, it does add additional pressure into the overall economy.

Chris Hart:

That adds a huge amount of pressure and I think that the pipeline pressure that is going to go in the next few months, where is that going to end or where is consumer inflation going to end and I suspect that your CPIX may well breach the double digit area and in the absence of any other measures to fight inflation with Eskom coming on with a potential huge increase there, your municipal charges looking quite scary, in addition you have got the change to the rates that is taking place, the consumer is under a huge amount of pressure but your inflation may well rise above that 10 percent level and tempt the monetary policy committee to hike rates. I suspect they are going to hold off now but by June, they may be tempted to hike rates.

Bruce Whitfield:

Chris Hart, thanks very much indeed, the chief economist at Investment Solutions.

End of article.

So, four weeks after delivering the Budget speech it already looks like the numbers are going to be way off the mark. All because the rand forecast was wrong, which made the inflation forecast wrong, which made the average interest rate forecast for the period wrong, which made the GDP growth rate for the period wrong, which (in turn) made Trevor's guess of his tax income wrong.

But, we haven't seen the last of it. If the rand doesn't stabilize soon (which it probably won't), the 2008/09 Budget could turn out to be one of Trevor's worst on record (as far as the credibility of the numbers are concerned).

And all of this just four weeks into the new fiscal year...
28.3.08 12:42

Trevor's inflation forecast: A rejoinder

While we're at it (Trevor-bashing, that is), here's another observation...

To set the scene, here is a paragraph from Trevor's Budget speech on 20 February this year:

"The steps taken by the Reserve Bank to bring down inflation are working. Inflation is projected to fall within the target range by the end of this year and to average 4.9 percent in 2009."

Now, read the extract below and then ask yourself: Did Trevor not know Eskom was about to lobby government for a 60% hike in electricity prices at the time he delivered his Budget (end-February)? (Had he known this, he would not have said inflation will drop below 6% later this year.)

Safe to say, he didn't know what was brewing at Eskom - with one of the most important government-determined prices in the economy - when he finalized his Budget numbers.

This much he did know (and say) on Budget day (20 February):

"Now that Eskom once again has a major investment programme to finance, its capital should again mainly be raised through debt, and paid for by users over the course of time through appropriately structured tariffs. "

Read the sentence again, and you'll see that he prepared the people for increases in electricity rates. But, 60%? I don't think he had that in mind when he spoke about "appropriately structured tariffs".

So, what will happen to inflation, if electricity tariffs (together with petrol prices arguably the most important prices in SA) rose by 60%?

Here is what the economists at Lehman Brothers thought would happen (extract of article published by yesterday):

"We now expect CPIX inflation to peak at 9.8 percent in March, with inflation not entering the target range of 3% to 6% until Q2 next year.

"The risks would seem to remain to the upside, especially given demands from Eskom, the electricity monopoly, to hike prices by 60 percent this year," said the analysts.

The economists said a 60 percent hike this year, followed by a large hike next year, would push inflation up just over 2 percentage points from their baseline forecast and may result in inflation staying above 6% for the next two years.

End of quote.


So, Trevor might have underestimated the financial crisis at Eskom. (Or, is this another, unexpected place for the government's inflation lie to surface? For more on this "lie" read articles below.)

Come to think of it, in the same article the Lehman Brothers economists said central bank governor Tito Mboweni made a mistake in January by not increasing interest rates at the time.

My, the mistakes are coming thick and fast. First Mbeki said Cabinet must take the blame for the electricity debacle, then Trevor got a range of central assumptions in his Budget wrong, ignored an upcoming Eskom tariff hike in his inflation estimates and relaxed the forex regulations amidst a mini-crisis for the rand and then Tito called the markets wrong and failed to increase rates in January.

It's clearly tough at the top.

Another jab: Also read my article "Only if the rand doesn't drop..." of 31 January 2008.
29.3.08 18:57


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