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Delphine Govender: Well done on Excon, but where’s new ideas, Mr Minister

One of SA’s smartest investment brains, Perpetua’s founder and CIO Delphine Govender, shares her thoughts on Budget 2015. While celebrating the effective ending of Exchange Control and introduction of tax free savings account, she’s circumspect on other issues. Especially economic growth. Where, she says, solutions are obvious, but a lack of political will and new ideas is condemning SA to labour under structural growth constraints. AH

This podcast was made possible by BrightRock, the company that introduced the first ever need-matched life insurance.  The Founder and Chief Investment Officer of Perpetua, Delphine Govender is with us on the line from Cape Town.  Delphine, there was actually, quite a bit in the Budget for the financial community, apart from the fact that we’re all going to pay more for petrol.  There was a discussion of how hedge funds and other financial services (businesses that our currently outside of the net) are going to be more closely focused.

Correct, Alec.  The Budget has quite far-reaching consequences, even if you look at it from a savings perspective or on the exchange control side.  Typically, they’re not generally huge surprises but yes, we’ve been hearing for some time about more regulation and more focus on elements within the wider investment space that these were included.

It’s interesting that you mention exchange control.  That wasn’t in the speech but it was in the documentation following and the change are quite significant.

It’s true and it’s quite ironic.  I say ‘ironic’ because it’s something we’ve been talking about ad nauseum, in terms of ‘when will we’ll relax and how this will happen’ and quite interestingly, it almost happened in terms of exchange controls.  Not necessarily, at the full Retirement Fund, but definitely that the individual would now increase to ten million (at an individual level) and I think its 20 million at a family level.  Interestingly, I’ve always thought that at times extremes in the currency (an extremely strong currency or an extremely weak currency) it’s probably the best time.  I’m not necessarily saying the country’s extremely weak.  It’s probably slightly oversold.  In that sense, it make sense to relax exchange controls.  Typically, investors don’t necessarily behave in the way one would expect them to, so it’s not as though everybody’s rushing to take their money out now, which is often the fear when one relaxes exchange controls.

The big news – good news, indeed – was on the tax-free accounts that’s coming our on the 1st of March.  Again, it’s not new.  It was just reiterated in the budget.  You’re running your own investment company now.  Are you going to be bringing in any product to attract investors?

One definitely needs to consider something like that.  The first operators in that space would definitely be the banks.  In fact, you’ve probably already heard from that on that score.  The next level would definitely be anybody operating in the pooling of capital space.  In the immediate term, we haven’t yet thought about it because obviously, this is something we need to consider.  Often, you would find firms such as ourselves…the products that we’re going to launch would need to be something that would need to have an enduring nature as opposed to something that would need to have many little products.  Again, I think the banks would be the first ones to react on this thing.

All right.  Let’s talk about the broader issues.  Economic growth.  Two years ago, one-point-nine.  Last year, one-point-five.  This year, an optimistic two percent, perhaps.  It’s likely to come even lower.  If we have three years of sub-two percent growth, that is really poor in the environment that the world is in now.

It is very poor.  It’ a very low number.  The question one needs to ask is ‘why’.  What are these constraints of growth in our economy?  There’s no magic wand, which one can just wave and say ‘growth will occur’.  One needs to understand why this is not occurring and what we can do to reduce or eliminate these constraints.  We have some very deep-rooted constraints.  We have issue that are currently in the fore, such as electricity and the inability to deliver that in a consistent manner, the competitiveness of our labour force, the skill gap, and the level of unemployment (and I think skills is a particularly important one).  Many of these issues cannot be fixed overnight.  Until we do address them, one can’t see that growth simply, just turning.

If you take those three (firstly, electricity).  We saw in the State of the Nation Address and reiterated again in the Budget.  You let the private sector in and magic happens.  The second one – labour competitiveness: you let people into the workforce, i.e. free up labour legislation and again, the magic will happen once you have experiential learning.   Finally, the skills gap.  How do you close the skills if you actually, aren’t given a chance to get a job in the first place?  It’s almost as though we know the solutions but politically, they aren’t palatable.

That’s exactly the point.  As investments professionals, we sit down and we discuss these things, as you and I are discussing it right now.  None of this is something of which, most people don’t have a clear awareness.  We have this clear awareness for some time now so the issue is now is really one of execution.  How does one fix this problem?  For me, as an investor having been in the market for the last decade-and-a-half or more, it’s fascinating to see that one looks at our economy, what really should drive growth, what has driven growth in the past, and how that might be changing.  South Africa has always been this commodity-producing export nation and what we’ve seen in the last several years (particularly post the GFC’s), that our competitiveness there has declined significantly.  What does South Africa has as a transmission mechanism for growth?  Some real introspection and external policy needs to come that actually, focuses and targets these specific areas.

New ideas seem to be fairly lacking in this Budget.

If anything, I was slightly disappointed in that.  Minister Nene came out strongly at the medium-term Budget Policy statement in October.  There was a big focus on fiscal consolidation and really, about reducing the deficit, capping the debt quantum, and to some extent, it seems as though he did the very bare minimum in this Budget, in my opinion in terms of trying achieve and pursue that physical consolidation in voters.  What we wished we could have seen more of was more detail.  The actual Budget was quite light on the detail about many of the initiatives that need to be taken to remove the growth constraints in our economy.

There is plenty of detail if you want to go through all the documentation of Treasury.  Winners and loser: if you look at the way this has all panned out, we’ve now had a chance (a day later) to maybe, absorb some of the messages there.  From an investor’s perspective, would the winners be those companies that offshore-focused and not as vulnerable to further Rand weakness?  Would that be the case?  Who’d be the loser?

It’s a tricky one because one looks at the base as well and the base that we’ve had for the last couple of years is that really, the winners have been, exactly, those companies.  The multinational, non-commodity type, Rand hedge companies who don’t derive all their revenue from South Africa, but have diversified sources.  This is the question.  From this point on, do they still share disproportionately?  If you look at it within the detail, this is the first large tax hike in 20 years.  That should be marginally negative for the consumer and consumer-type companies that are geared in this environment.   For the balance of it, there was little to say that it was clearly in favour of one sector or clearly against another.  Perhaps, the two sectors that we know well have been the most negatively impacted in the last five to seven years has been the construction sector and the mining sector.  We don’t really see much by way of any appeasement for their fortunes in the very near term.

Delphine Govender is the chief investment officer at Perpetua and this podcast was made possible by BrightRock, the company that introduced the first ever needs-matched life insurance.

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