Who are the World's Best Farmers....?
The South African Reserve Bank frustrated everyone on Thursday by deciding to keep interest rates unchanged at 6.75% (repo rate). Twenty out of 24 economists surveyed by Bloomberg were expecting a rate cut, with at least one expecting a half a percentage point cut. The JSE and bond markets fell, while the rand strengthened. Half of the monetary policy committee wanted to cut rates by 0.25 percentage points, but the SARB cited inflation concerns and the rand (a weaker rand pushes inflation up by making imports more expensive) as reasons to keep rates unchanged. This is clearly an attempt by the SARB to prop up the rand as major central banks prepare to start raising rates (see the US decision below). Yes, we understand the textbooks say that cutting interest rates causes your currency to fall. But, in our opinion trying to manipulate your currency in the face of global financial forces and whatever the US Fed decides to do is a little bit like blowing your vuvuzela in a thunderstorm.
Inflation, no growth and persistent high interest rates have kept the South African consumer on its knees. July was the first time in five years that the Reserve Bank cut interest rates. Before the latest announcement, financial markets were expecting a further 0.5% point reduction in interest rates by the middle of next year, but that now seems unlikely. In our opinion it would have been much better to cut interest rates, try and get some life back into the economy and give us a growth cushion ahead of the ANC elective conference later this year. Regarding “growth”, the Bank’s GDP forecast for 2017 is +0.6% (up from 0.5%) while it expects 1.2% growth in 2018 and 1.5% in 2019 (see the World Bank’s expectations below). Each of those numbers is tragic.
(South African Reserve Bank, Bloomberg)
On Tuesday South Africa issued US$ 1 billion worth of 10-year euro-denominated bonds at a yield 0f 4.85%. There was US$2.1 billion worth of demand for the bonds from investors, which is significantly less than the US$9 billion demand for bonds issued by the Ukraine (yes, the same place Russia invaded 3 years ago) and the US$ 3.1 billion demand bonds issued by Tajikistan (a landlocked former Soviet republic that regularly bans Facebook). The yield was also half a percentage point higher than longer dated debt issued a year ago (you can think of yield like interest, higher is worse if you’re a government that is borrowing money). The weaker demand and higher borrowing costs are clear indications of how political instability and allegations of state capture have tarnished SA in the eyes of foreign investors.
(Bloomberg, CNN, Radio Free Europe)
The World Bank has cut its growth expectations for South Africa and now expects real economic growth of 0.6% in 2017 and 1.1% in 2018 compared to global growth expectations of 2.7% in 2017 and 2.9% in 2018. Per capita GDP growth is likely to remain negative for the 3rd year running. Approximately 30.4 million South Africans now live on less than R1,131 per month and almost 80% of the population experienced poverty at some time between 2011 and 2015. The World Bank believes that Insufficient tax revenue and higher borrowing costs are limiting the government’s ability to support its economy and its citizens. South Africa is much less productive than it was before the global financial crisis. The country produced 6% less in 2016 than it did in 2007 using the same natural resources, capital and labour. Private research and development expenditures are 40% lower than in 2009. The Bank advocates fostering a business climate that is conducive to innovation, nurturing innovation ecosystems in cities, building the skills base, improving ICT infrastructure and enhancing the effectiveness of public programs and incentives for innovation. Those sound like good ideas.
The US Federal Reserve kept the target range for its key interest rate on hold at 1 - 1.25%. Policy makers maintained their forecasts of another rate rise later in the year and three further increases in 2018. The Fed called an end to quantitative easing, the unconventional stimulus program where over US$4 trillion of bonds and other financial assets were bought in an attempt to rescue the US economy after the 2008 global financial crisis. The US dollar strengthened and US government bonds weakened as a result of the news. Stock markets reacted well and the main US stock market indices closed at record highs.
(Financial Times, Guardian)
Egypt has overtaken South Africa as the number one place to invest in Africa according to Rand Merchant Bank. Morocco, Ethiopia and Ghana took positions three, four and five, while Nigeria failed to make the top 10. Egypt’s superior economic activity score allowed it to overtake South Africa, which has suffered from questions over institutional strength and governance and deteriorating growth rates over the last 7 years. Nigeria was affected by recessionary conditions.
The United States is the world’s largest exporter of food when measured by value. It is the world’s 4th largest country and has 9.2 million square kilometers of land. The world’s second largest exporter of food is … the Netherlands, the world’s 138th largest county with 34 thousand square kilometers of land! The US has 270x as much land as the Netherlands. Vertical farming, drones, driverless tractors and quadcopters are some of the components of “precision farming” that allow farms in the Netherlands to yield more than double to number of potatoes per acre than the global average. Greenhouses have helped farmers reduce their dependence on water for key crops by over 90% and almost completely eliminated the need for pesticides. More than a third of the global trade in vegetable seeds originates in the Netherlands. The key driver behind all of this innovation and progress is the world leading Wageningen University. Academics there believe that the fundamental problem for farming in Africa isn’t drought… its poor soil. Time to innovate.
(National Geographic, World by Map)