Month: March 2013

New vehicle sales: A good but slower pace of sales in February

New unit vehicle sales fell off the torrid pace set in January 2013. On a seasonally adjusted basis, unit sales fell back from the 57 834 units sold in January to 52 760 units sold in February. We had suggested that January sales may have been boosted by pre-emptive buying in response to rand weakness.

As we show in the chart below, unit sales (seasonally adjusted and smoothed) remain on an upward tack. If current trends are maintained, the distributors of new cars in SA could be looking to monthly sales (seasonally adjusted) of 59 000 units by this time next year. This would take the industry almost back to the record levels of sales achieved in 2006. It is instructive to notice how little growth in vehicle sales volumes occurred between 1990 and 2002, but also how sales took off in the boom years (2003- 2007) before the recession knocked them back again. That sales are again approaching boom time volumes should be regarded as very good news about the resilience of the SA consumer.

While sales in the local market are satisfactory, even as their growth may have slowed, the motor manufacturers and component suppliers will be well pleased with fast growing export volumes. New vehicle exports numbered 27 011 units, or 5 057 more units than exported a year ago, a gain of 22.4%. It will be appreciated that vehicle exports are now running at a fraction more than 50% of domestic sales. This boost to exports will be particularly appreciated by the authorities and the currency traders worried about the slow pace of exports and the large trade deficit recorded in January 2013. Clearly vehicle sales have been encouraged by low interest rates and available bank credit. The low interest rates and banks eager to lend are very likely to continue to add impetus to the vehicle market. The weaker rand however, will make it harder for the dealers to compete on the price front – not only with other dealers but with all other goods and services that compete for a share of the household budget. Brian Kantor

Money and credit: No signs of a pickup in growth rates

Money supply and credit numbers for January 2013 show that while the supply of money (broadly defined as M3) continues to increase, the pace of growth remains subdued at about the 6.5% to 7 % year on year rate. The asset side of the bank’s balance sheet, represented by credit granted to the private sector, has been growing at a slightly faster rate, closer to a 9%.

There would however appear little evidence of any pickup in growth in bank lending or in the broadly defined money supply. Mortgage lending, which is usually a large component of credit supplied by the banks, about 50% of all bank credit provided to the private sector, continues to grow very slowly. Clearly house price gains and thus growth in mortgage lending are increasing very slowly, with the rate of growth slowing down.

These money supply and credit trends, as well as the very subdued trend in house prices, make the case for lower interest rates. Until such time as these trends move strongly in a higher direction, short term interest rates in SA will remain on hold – though given these money and credit trends the economy could well have done with lower interest rates. Brian Kantor

Labour relations, the elephant in the room of the 2013 Budget

Pretence about wages and employment harms the SA economy and the poor

There is a politically convenient illusion at the heart of SA’s dysfunctional labour market, which is well demonstrated in the balancing act forced upon the Minister of Finance in his 2013 Budget proposals.

The dysfunction is the large and ever growing gap between the potential supply of labour and the demand for labour by formal sector employers. The formal economy has become ever less labour intensive, while the real wages of those in formal employment have grown significantly. The gap between real GDP and formal employment has grown consistently over the years. And competition between labour unions to represent the increasingly well paid formal sector workers has intensified, leading to unprotected strikes and the disruption of production. The figure included in the 2013 Budget Review makes the essential point: it show how the growth in GDP, or value added, has consistently exceeded the growth in the numbers employed. These are dangerous trends, crocodile jaws that might well eat up the economy unless this gap can be closed.

Employers in SA have been forced to pay higher wages by unions capable of disrupting production. Higher minimum wages and limited normal hours of work have added to the costs of hiring labour. The rights of employers and their rights of dismissal for unsatisfactory work have become highly attenuated and have added to the risks and costs of providing employment.

What is not appreciated by many in government and in the unions is that employers, sometimes to the obvious frustration of the unions and the politicians, retain the right to decide how many workers to employ. And private sector employers, with their own or their shareholders savings (capital) at risk, have responded by employing fewer workers whom they pay higher real wages but reinforce with more and superior quality machinery.

The reality for the average formal sector business is that capital has become relatively cheaper and equipment more productive while employing labour has become more expensive and maybe even less productive, when the contribution of capital to output is factored into their production functions – hence a smaller proportion of workers with formal sector jobs. And with fewer workers formally employed this means many more employed outside the formal sector, unemployed or discouraged from seeking employment.

The gains made by the formally employed have come at the expense of those who have found it so difficult to break into the ranks of the better off formally employed. Their frustrations are highly understandable but they appear to have had much less political support than the unionised workers, protected against lower wage competition. These labour market outsiders are not the only parties disadvantaged by these trends in the labour market. Artificially expensive labour is to the disadvantage of formal business as well, since they might have grown faster had they been encouraged to employ more labour. Labour intensive entrepreneurs able to compete with the established, capital intensive firms are thin on the ground.

It is not an accident that employment by government agencies has grown significantly while employment conditions have improved considerably, both in real terms and also in comparison with benefits provided in the private sector. Taxpayers have proved remarkably generous in their treatment of government employees. We cannot be definitive due to inconsistencies in the Statistics SA data, but private sector employment declined by around 1 million between 1994 and 2012 whereas government employment grew by around 1.5 million over the same period. At any rate, the public sector now employs 2.83 million people or nearly 1 in 4 formal sector workers.

This no doubt has encouraged the belief that neither wages nor the productivity of labour has anything to do with employment opportunities in the public sector, ie it is not economics but politics that determines who earns what.

The illusion is also that all employers can and should provide decent jobs with good pay. The unfortunate reality is that many South Africans and most of those without formal employment do not possess the skills to command so called decent (well paid) jobs. Therefore even when those without valuable skills manage to find work they will not easily escape poverty. Unfortunately low wage employment is the only realistic alternative to unemployment. Presumably, for many actively seeking work, low paid work would be preferred to no work at all. Given the quality of the SA labour force, and given the inadequacy of the education and training provided many South Africans during and after apartheid, the choices in the labour market are unfortunately limited to low paid work or no work.

It is this illusion that has led recently to a 50% increase in the minimum wage for agricultural workers, to a countrywide R105 per day. This is despite very different supply and demand conditions around the country. It is also despite the fact that employment in agriculture, hunting, forestry and fishing (according to the Quarterly Labour Force Survey) fell precipitously from 1.362 million in September 2000 to a reported 624 000 in September 2011. The presumption must surely be that minimum wages and other regulations applied to agriculture have had a major influence on this outcome and that the higher minimum wages will lead to further losses in employment. This is so even though the higher minimum wage of R105 per day, will not enable these farm workers and their families to escape poverty.

There is a great divide between those South Africans in what may well be described as “decent jobs” and those many more who stand outside the gates and are understandably anxious to enter the more comfortable world of formal employment. The outsiders may be unemployed – actively looking for work and able to accept a job offer at short notice – or they may be working, usually for lesser benefits in the informal sector, or they may well have withdrawn from the labour market. A definitive account of the unemployed or discouraged workers as well as those working part time or full time informally is not available. We have to rely on surveys and the responses of the sample of households surveyed for evidence of employment status (which may not be reliable).

The 2011 census estimated the unemployment rate, narrowly defined as the percentage of active work seekers in the labour force as 29.8%, with the labour force being defined as the sum of the employed and unemployed. The absorption rate of the economy, that is the numbers employed as a percentage of the working age population, makes even grimmer reading: it averaged only 39.7% while the labour force participation rate (the labour force, employed and unemployed) as a percentage of the working age population was only 56.5%.

These rates varied widely by racial group and gender with black South Africans and black women the least likely to be employed or to participate in the labour force. The absorption rate for black men was estimated at 40.8% while that for black women was much lower at 28.8%. The percentage of white men of working age absorbed into employment was 75.7% while that of white women was 62.5%. The reality is that the real incomes of those in work have been rising significantly, while the numbers employed in the formal private sector have moved significantly in the other direction since the Labour Relations Act was introduced in 1995, even while the adult population and the potential supply of workers to the formal sector has grown significantly. Supply and demand for labour has not been allowed to work as it might have done with less interference.

The harsh truth is that for many South Africans unable to gain entry to formal employment, it will continue to be a choice between low pay determined by the realities of the supply and demand for labour or no pay at all. Migration from the regions of slow growth to seek work in the faster growing cities may be the only alternative to not working. Their opportunity set could however be widened significantly were the rules that govern employment opportunities to be relaxed.

It is high time, in other words, to restrain the power of the trade union movement that has been so enhanced in recent years by regulation and legislation . We can do so in several practical ways, all of which are consistent with Article 23.1 of the Universal Declaration of Human Rights, the so-called “right to work” as Loane Sharp of Adcorp has detailed (Business Day, 25 May 2012: http://www.bdlive.co.za/articles/2012/05/25/loane-sharp-sa-s-trade-unions-the-biggest-obstacle-to-job-creation#).

He suggests:

• Repealing the “closed shop” laws that compel job-seekers to join a trade union as a precondition for obtaining a job;
• Repealing the “agency shop” laws that compel workers to pay trade union membership fees whether they belong to a trade union or not;
• Requiring that trade unions ballot their members ahead of a strike, and further require that a two-thirds majority votes in favour of a strike;
• Prohibiting open ballots and requiring secret ballots, since open ballots lead to intimidation of union members who vote against a strike;
• Prohibiting employers’ collection of trade union dues on trade unions’ behalf;
• Prohibiting the automatic extension of bargaining council agreements to entire industries or sectors, so that these agreements are voluntary;
• On a nationwide basis, placing an upper limit on wage settlements, so that wage increases may not exceed labour’s marginal nominal productivity growth; and
• Making trade unions liable for the loss of company earnings that occurs during unprotected work stoppages.

The hope must be that over time increased spending on education and training will provide the entrant to the labour force with the skills that command good pay. The further hope is that the economy, helped by a much more flexible labour market, can grow fast enough to cause a shortage of unskilled labour relative to the availability of skilled labour, capital and natural resources. The competition for unskilled workers will then help in time to provide decent jobs for all. It can be much faster than trickle down – more like a torrent of real wage growth should the economy grow faster. It is certainly capable of doing this with the encouragement from a much more functional labour market. Brian Kantor

Electricity pricing: A shock for Eskom, a boost for the economy and a dilemma for the Treasury

The National Energy Regulator (Nersa) turned down the heat for the energy user, allowing Eskom to levy 8% annual increases for its electricity over the next five years, half the increases Eskom had applied for.

The most obvious beneficiaries are the large energy intensive users, the beneficiators of raw materials, who account of about 44% of the load. They contribute heavily to SA exports and they need all the help they can get with the trade balance under pressure form much stronger growth in imports than exports. Their viability would have been seriously compromised had Eskom had its way.

Property owners and their tenants, directly or indirectly paying more for electricity, will also be relieved, as will lighter industry and the ordinary household (though for them the electricity supplier is not Eskom but their local friendly municipalities).

When Eskom supplied artificially cheap electricity until recently – its charges have tripled over the past five years from about 20c per Kwh to the current 61c – the municipalities did not hesitate to use the monopoly power thay had to charge local users a whole lot more.

A new funding mechanism, the equitable share formula, introduced in the 2013 Budget, will give municipalities a grant of R275 for every household with income of less than R2 300 per month – this is estimated to mean more than 59% of all households in SA. This source of funding will hopefully take the pressure off the electricity tariffs that have been used as a very convenient tax. Using the broader tax base rather than electricity tariffs to help the poor is the right approach and should help encourage industrial and commercial users in the cities that generate jobs and incomes.

Nersa thinks the right price for Eskom’s electricity is the price that would give the utility a 3% real return on the capital it employs. This, as we have discovered, is very much in line with the global average. Listed utilities world wide seem to survive and even thrive with real returns on their large capital investments with returns on all capital employed of about 3-4%. They presumably also do a reasonable job of containing their costs than Eskom.

We have pointed out before that the less Eskom charges, the more debt it or the SA State will have to issue to fund its heavy and essential expansion programme, absent a willingness to sell off some of its generating capacity to private owners.

It would be a very good idea to have other managers running power stations so that useful comparative benchmarks on operational costs could be established for Eskom. Such partial privatisation might be judged essential should extra debt have to be issued.

In Eskom’s case for 16% annual increases it had estimated that some R350bn of debt would have to be issued by 2018. We have calculated that this debt would rise to over R500bn if price increases were confined to 8% and similar operational and capital costs were incurred. Nersa is of the view that these costs, as estimated by Eskom, should be better controlled. If Eskom achieves these cost controls, it would improve cash flow and reduce the volume of debt finance.

The SA Budget and borrowing plans have factored in about R330bn of Eskom debt. This will have to be revised higher. And with the extra government borrowing requirement now running at about R100bn a year, this additional debt of about R30bn a year for five years, will not be welcome to the Treasury or the bond market.

Listed electricity utilities are in practice the least risky activity of all – they realise the lowest betas on the US stock exchanges. They therefore can and should finance what are low risk operations with high ratios of debt (around 55% of assets on average). Furthermore a real return of 3% a year, if achieved, would allow Eskom to fund with debt and meet its interest and capital repayment obligations. After all, funding essential infrastructure with debt that supports economic growth, is very different to funding consumption spending by government (as the rating agencies should appreciate).

There is however an obvious alternative for government having to raise debt or taxes to fund infrastructure. This would be to sell off some of the valuable assets it owns. Privatisation may become a less dirty word when the after-Nersa realities are understood. The price to be realised by auctioning off an established power station on Eskom’s balance sheet (hopefully to be listed on the JSE) will be greatly enhanced by regulatory certainty. With its sensible target for electricity generators of a 3% real return, Nersa may well have provided this. Brian Kantor