The Minister of Finance and Anglo American Ltd., that venerable JSE mining company that has added so much wealth to this country over the years, both reported on February 20th.
As I was listening to Minister Tito Mboweni’s budget speech, I noticed that the JSE was holding its own, even a bit firmer. A good friend who is a clever institutional investor, commented that the JSE’s resilience seemed to have more to do with Anglo’s solid results and positive earnings outlook, than any positive surprises in the national budget.
Yet the budget also seemed to calm some anxious investors. The Rand, which is sometimes referred to as the share price of South Africa, even managed to strengthen 3.7% from worst intraday levels of budget day – and Anglo was up about 3%. Grizzled investors remember the days when Anglo’s doing well meant South Africa Inc. would thrive too. Let’s hope that’s the case now.
Much has been said about the budget, so I’m not going to bore you with the details in this article. Yes, it was a stealth-take budget, with bracket creep and inflation doing the most damage to tax payers. Sin taxes and sugar taxes have increased; there is also the pain of extra taxes on fuel, all low-hanging fruit that government just couldn’t resist. The fuel tax hurts the economy: all prices eventually rise, with the overtaxed earner feeling it now and later. Another concern is that carbon taxes are due to add costs to embattled producers and manufacturers from April, with the biggest environmental culprit being Eskom. The budget also left many questions about costs and growth unanswered.
We know that the country is in an economic crisis and we certainly experience the social pressures that come along with it. Yet, let’s focus in this article on factors that give cause for hope and maybe some gentle optimism that we are starting to create a window for turnaround in South Africa.
While at a conference at the London Stock Exchange two weeks ago, an interesting fund manager who assesses company strategies and success prospects, mentioned that Anglo had appeared on their radar screen when management finally stopped blaming a difficult resource environment and stopped making excuses. I remember the shock in 2016 when Anglo subjected its investors to an unimaginable tough love strategy, choosing not to pay a dividend after decades of doing so, whether earnings were up or down.
Between 2013 and 2016 they owned up to the mess they were in, changed management and refocused their energy on rebuilding their business to its once proud position. The share price bottomed in 2016 at R51, but has recovered some 729% to where it is now at around R370. The company remains primarily a powerful, globally-diversified mining resource company, with 60% of its earnings (EBITDA) coming from outside of South Africa.
The point is that management faced up to their problems, fixed many of them, and have done some really good work in the last few years, despite still being in a difficult resource environment. According to one estimate, Anglo’s managed to bring its debt down by 37% and the company is paying regular dividends again.
So, how does this relate to South Africa? Minister Mboweni delivered some hard messages in his speech. Given that the ANC has shied away from confronting some difficult facts in the last decade, this was a bold move, particularly in the light of the looming election. For instance, ahead of the budget, many an analyst believed that government would take on all of Eskom’s debt. The comment from the Minister was that: “National Treasury is unwilling to take on the debt as it believes it would incentivise the wrong behaviour.” This is a good thing.
Yes, government is going to help Eskom with some handouts – R22 billion to start with, and more to come. We don’t yet know how dividing Eskom in three will turn the business model around, but there is an active search for solutions.
We also need to remember that the ratings agencies already view government and state- owned enterprises, including Eskom, as the same debt problem for taxpayers to carry. But the positive takeaway is that some in government are starting to face facts and do something, as opposed to ignoring the problem.
National Treasury has also been consulting the ratings agencies, with a new note of transparency coming through. There also seems to be a desire to include top business leaders and past advisors like Roelf Meyer and Sir Mick Davis in the process. Moody’s has noted that Eskom needs to produce a credible plan, with immediate cost-reductions – and one that indicates that government and Treasury will involve business.
Other pointers that perhaps give hope:
- President Zuma was removed and the corruption charges against him were reinstated.
- There was a cabinet reshuffle, removing twelve corruption-implicated ministers. We now have a Minister of Finance who is internationally well- respected.
- The heads of the National Prosecuting Authority (NPA) and SARS have been suspended and a new NPA head has been appointed.
- There have been substantial changes at board level at the SOEs (Eskom, Transnet, Denel, SA Express and Prasa).
- Fifty billion Dollars in Foreign Direct Investment have been secured in relation to the goal of $100bn over 5 years.
- The public sector wage increase agreement has been settled at 6% – 7% for the next three years. This is the lowest increase in recent years. Minister Mboweni also mentioned that government employees would be encouraged to take early retirement.
- There was an announcement of a R50bn package to reprioritise labour- intensive sectors.
Yes, there is more to be done and for every silver lining we know there is another problem. Yet, it seems that like Anglo, government has reassessed its strategy. It’s a positive indicator that they are focussing more on accountability, deliverables, skills development and cost reduction, to take advantage of growth opportunities.
This is by no means a recommendation to buy Anglo shares now. That’s a subject for another time. Yet management turned a losing company into a winner. This provides encouragement to people of goodwill to do more of the right things and to hold onto some hope for South Africa. With the Rand at current levels, evaluate whether your portfolio is correctly diversified on a global basis. The ride is not going to be easy.