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  • “Cadre employment must stop and an effective civil service must be built up by appointing  competent people.

  • My last column two weeks ago painted a bleak picture of SA’s 2019/2020 agricultural outlook, highlighting prospects of drought in some regions of the country. Lately, conditions have improved notably, and farmers managed to plant the area they intended.

  • Widespread rain is expected over the summer rainfall region during the next few days. The area of expected above-normal rainfall for this time of the year should include the entire maize-production region.

  • The history of cannabis in South Africa contains two particular trajectories that were sometimes in direct contradiction with one another.

  • TLU SA hopes that the decline in farm attacks and farm murders during January 2020, in comparison to statistics of a year ago, will continue for the rest of the year.

  • Profitability is slowly returning to the wine industry after years of decline.

  • The Quarterly Labour Force Survey data for the fourth quarter of 2019 show that South Africa’s primary agricultural employment increased by 4.2% (or 36 000 jobs) from the corresponding period last year to 885 000 . The notable job gains were mainly in the Western Cape, KwaZulu-Natal, Free State and Limpopo. This was largely in the horticulture, field crops and livestock subsectors. These activities, however, were not evenly spread across all provinces. We believe that the Western Cape, Limpopo and KwaZulu-Natal job gains were mainly in horticulture and field crops (specifically winter crops). While the slight improvement in the livestock subsector employment could be in the Free State.

     Other provinces, namely the Eastern Cape, Northern Cape, North West, Gauteng and Mpumalanga experienced a reduction in agricultural employment over the observed period (see Exhibit 2 in the attached file). But this was overshadowed by the improvement in the aforementioned provinces, hence, on balance, South Africa’s primary agriculture sector registered employment net gains from the corresponding period in 2018.

     Near-term view

     We are generally optimistic about the near-term agricultural jobs outlook. The potential improvement in summer crop production, following an 8% expansion in area plantings, coupled with the expected increase in wine grape production and other fruits could lead to an increase in employment, albeit some of this is likely to be seasonal. We doubt the livestock sector could contribute notably to employment in the near term. The recent outbreak of another foot-and-mouth disease which has resulted in a ban on the export of livestock products has added negative pressure on farmers' finances.

     Medium-to-long term view

    Aside from the aforementioned near-term factors influencing the agricultural jobs market, the outlook for the medium-to-long term hinges on the level of investment in the sector, agricultural productivity, expansion of export markets, promotion of labour-intensive agriculture subsectors, investment in irrigation and an increase in the area farmed where possible.

     The potential for the expansion in productive farmland lies in the underutilised land in the former homelands and underperforming land reform farms. By labour-intensive subsectors, we are specifically referring to the horticulture and field crop subsectors which currently employ two-thirds of the primary agricultural labour force of 885 000.  The other subsector – livestock – can also be prioritised, specifically in areas where environmental factors do not permit horticulture and field crops. This could all happen at a time where there is a growing demand for horticultural, and protein-rich diets in the global market which is underpinned by the changing consumer patterns towards high protein and healthier diets.

     The provinces containing former homelands that still have tracts of underutilised, arable land that can be prioritised for agricultural expansion are KwaZulu-Natal, the Eastern Cape and Limpopo. These provinces collectively have between 1.6 million to 1.8 million hectares of underutilised land, according to a 2015 study by McKinsey Global Institute.

     The focus for provinces that already have extensive farming could be on increasing productivity on restituted and redistributed farms and ensuring that there are export markets for products being produced. South Africa has already advanced on this end, as nearly half of the domestic agricultural products, in value terms, are exported.  As we highlighted at the end of 2019, this export drive should include a focus on ensuring that ports infrastructure is up to date and efficient -- an issue that has proven to be a challenge in the recent past, particularly in 2019.

      On the investment front, the outlook hinges on the broader policy direction of the agricultural sector, notably land reform and water rights. There are a number of developments on both policies at the moment, but the final land policy direction will be critical. We hope that it can be released in the coming months when the Ad Hoc Committee on Section 25 finalises its work and reports to the National Assembly. This will be an important determinant of the direction that South Africa’s agricultural sector will be taking.

  • The Banking Association of South Africa (Basa) has warned that land expropriation without compensation could have a significant impact on property rights in South Africa.

  • The southern African citrus industry has shown considerable growth over the past ten years – doubling export volumes to two million tonnes.

  • Looking at the current maize conditions, the country may have an above average crop

  • President Cyril Ramaphosa  announced on Thursday that the government will  in 2020 open up and regulate the commercial use of hemp products, providing opportunities for small-scale farmers; and formulate policy on the use of cannabis products for medicinal purposes.

  • A strong Budget will come down to simple action and hard choices taken now for the long-term benefit of the country, says Citadel portfolio manager Mike van der Westhuizen.

    Finance minister, Tito Mboweni will deliver the 2020 National Budget Speech on 26 February, to announce how the government plans to spend its budget, while also collecting money.


    “The main thing to look at, given that the Moody’s is watching closely, is the need to rein in the budget deficit, which is starting to spiral even more out of control,” he said.

    In the 2019 Medium Term Budget Policy Statement (MTBPS) the Treasury projected a consolidated Budget deficit of 5.9% of GDP, averaging 6.2% of GDP over the next three years.

    A low growth, low inflation environment also affects the debt-to-GDP trajectory, the sustainability of which minister Mboweni has already warned about.

    As a proportion of South Africa’s GDP, the MTBPS notes a hike in gross debt from 56.7% in 2018-19, to 60.8% in 2020-2021 and 71.3% in 2022-23 if the status quo does not change, something the rating agencies are understandably concerned about.

    “These numbers show that the previous goal of fiscal consolidation is currently not on target,” said Van der Westhuizen. “Although it must be said that while Treasury appears to be doing everything in its power to stop the slow bleed, it’s a cooperation issue with the rest of government and other influential stakeholders.”

    This disconnect between what needs to happen and the disinclination within government to act is likely to come through on Budget day.


    Revenue under pressure

    Distilling the multiple issues at play, Van der Westhuizen said that “government needs to find about R150 billion in savings over the medium-term expenditure framework, being the next three years. So that’s essentially R50 billion a year in savings that needs to come through.”

    But how can this be achieved?

    Treasury could look, once again, to the taxpayer. But, said Van der Westhuizen, “with the taxpayer already squeezed, options are increasingly limited. In prior years, we’ve seen personal income tax hikes and last year a VAT hike”.

    “Easy wins are fuel levies and sin taxes that rise every year, as well as bracket creep, i.e. not adjusting the tax brackets for inflation. Other potential tax avenues could include a new upper tax bracket, wealth tax, estate duties or even changes to capital gains tax or dividend tax. Although helpful, these don’t really do the heavy lifting.”

    There has been talk that the only really effective lever left to pull could be to raise VAT by one percentage point to 16%, which would inject between R20 billion and R35 billion in revenue. Although it would be a particularly unpopular move politically, it is increasingly possible, said Van der Westhuizen.


    Expenditure in the crosshairs

    Given the revenue constraints, Van der Westhuizen believes all the hard work should be done on the expenditure side. But, again, taking steps to contain and curb expenditure will come down to political will.

    “The big line items here are public sector wages (about 34% of expenditure), debt service costs (10%) and social grants (10%). Interest payments and social grants are essentially fixed, leaving the wage bill as the main lever.

    “This is a bit tricky at this stage since multi-year wage negotiations are still in process and will only conclude around March 2021, so we will watch this carefully,” said Van der Westhuizen.

    “The government tried a voluntary resignation and natural attrition approach to reduce the wage bill, but that hasn’t been effective. Maybe the lower inflation outlook from the Reserve Bank and pinning of inflation expectations might help in negotiating lower wage hikes, but that is unlikely to be enough.”

    “Even if government took a firm stance of CPI less 2%, which would have the trade unions baying at its feet, it would only save about R105 billion over three years, leaving us some R45 billion short. The point is that even a drastic decline in wage growth doesn’t result in sufficient scaling back in spending,” Van der Westhuizen said.


    The SOE drag continues

    Despite this constrained picture, there is still bound to be more budgetary support doled out for state-owned enterprises (SOEs) and this issue will loom large over Mboweni’s speech, said Citadel.

    “In late-January we saw the Development Bank of South Africa (DBSA) grant a loan to South African Airways (SAA) as part of its restructuring,” said Van der Westhuizen.

    “That represents a red flag in terms of the cross contamination of SOEs, with a well-performing SOE such as the DBSA bailing out a poor-performing one. Government cannot afford to use its balance sheet to rescue these SOEs, so it is rearranging the deck chairs.

    “Our concern is the strain this might put on the better-performing SOEs. For now it might not be a big issue given that the DBSA does have rules governing its lending, but the trend isn’t pleasing.”

    And Eskom is likely to remain both a concern and a drain. Clearly there is much in-fighting at the parastatal and disagreement about its turnaround direction coupled with bouts of load shedding, which indicates that South Africa is certainly not out of the woods. “Eskom will, again, be a massive issue to watch for in the Budget,” said Van der Westhuizen.

    “For at least the next few years, support will have to be pencilled in for the utility. If that number were to rise significantly or if there were further talk of taking Eskom debt on the government balance sheet, then we would be in deep trouble.”

    What could prove a fillip for the country would be positive developments around key issues such as power generation.

    “There has been much talk about mining companies, and other businesses, being permitted to generate their own electricity and for independent power producers to come onto the gird, but we are yet to see formal communication in this regard.

    “If something concrete is announced, even some compromise around public-private partnerships, then that would be very positive,” said Van der Westhuizen.


    The D-Day downgrade

    While the state fiddles, and South Africa’s economy burns, a downgrade in the country’s sovereign credit rating continues to hang over South Africa’s head. While the markets have long priced this in, the continued expectation that the axe will fall is, in itself, creating uncertainty and tension.

    On 28 January 2020 Moody’s Investors Service analysts noted that it was “a bit early” to judge the impact of both policy and structural reforms. Lucie Villa, Moody’s lead sovereign analyst for South Africa, told Bloomberg that while the data was not pointing to either a particularly positive or negative direction, that “there is nothing really to flag for the time being”.

    This indicates that Moody’s may well be prepared to give SA more leeway, but obviously, the credit rating agency will be keeping a close eye on Mboweni’s Budget.

    “Certainly, everyone expects this Budget to be poor,” said Van der Westhuizen, “but they might manage to demonstrate the will to cut expenditure and show just enough fiscal consolidation and, in that case, Moody’s might delay any decision until November, after the next MTBPS.”

    That said, while government might do enough to keep Moody’s at bay for the first half of this year, it remains Citadel’s view that the agency will downgrade South Africa in 2020. While this would put South Africa out of the World Government Bond Index, Van der Westhuizen believes it is time for the country to take its medicine.

    “Foreigners would come in and sell some of our bonds on index exclusion but, with some of the most attractive yields available, there would definitely be buyers stepping in,” he said.


    Reading the mood

    Citadel noted that anyone who follows Mboweni on Twitter will be keenly aware that the finance minister is getting significant pushback, making him increasingly despondent with the lack of progress. There appears to be considerable opposition to his plans, as laid out in the economic strategy document released in August 2019.

  • After reaching a record level of $10.6-billion in 2018, South Africa’s agricultural exports fell by 8% year-on-year (y/y) in 2019 to $9.8-billion.

  • Closing a bottle with cork significantly reduces the carbon footprint of wine packaging and helps sustain vital ecosystems.

  • South Africa’s food prices increased at a relatively slower pace in January 2020 compared to December 2019. The data released this morning by Statistics South Africa shows that the country’s food price inflation was at 3.7% y/y in January 2020, while the previous month was 3.8% y/y.

  • America's top diplomat on Wednesday asserted that South Africa's plan to allow expropriation of private property without compensation would be “disastrous” for the country's economy and its people.

  • Allowing dagga users to smoke a joint legally can yield more tax revenue than just medical use and hemp production, some cannabis users say…

  • More widespread rain and thundershowers are expected over the summer rainfall region during the next few days.

  • Last week, the US declassified SA as a developing country for the purposes of receiving certain special and differentiated treatment. The move sent ripples of alarm through the country, which claims preferential treatment on exports of R36bn to the US a year.

  • South African wine grape producers’ financial viability is looking up following a long downward cycle. However, a long road to sustainability still lies ahead.

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