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THERE was once a humorous conversation between former US president George W Bush during his presidency and a successful cattle rancher on the subject of the service economy.
At the time Bush was pushing for the US to focus on growth in the service sector, in a not so different strategy to what we are still witnessing in that country today.
The rancher wryly said to the president that the only service economy he knows of is when he takes a stud to service a mare.
Without horsing around, the problem facing the US and South African manufacturing sectors are quite similar in the singular factor of uncompetitive labour costs.
In both countries the panacea for expensive labour is to move up the value chain into industries where labour is more productive vis-à-vis the service sector.
The US is pinning its hopes on sectors such as digital healthcare, green energy and cheap shale gas among others and with its entrepreneurial clusters and culture, one would be foolish to bet against it succeeding.
Backing this sentiment, in an interesting paper on the role of services for competitiveness in manufacturing published this week by the Organisation for Economic Cooperation and Development, a think tank, researchers found that better services contribute to moving up the value chain in industries where a country already has technological capacity and comparative advantage.
This bodes well for the US; however, panning back over the Atlantic to the Cape of Africa, we are faced with less obvious candidate industries where we possess both technological capacity and comparative advantage.
I would like to be so bold as to suggest that mining and resources will be one such industry - but quite frankly I haven’t the cajones to make such a claim.
In an effort not to get lost down a rabbit hole on this subject, I will refrain from discussing the millions of lifelong liabilities on the fiscus in the never-will-be-skilled labour category, and focus on solvable problems instead.
So wherein lies South Africa’s service sector bonanza?
A good place to start is by focusing on the Brics alliance.
Many are critical of South Africa’s ambitions to host a regional bank for the Brics nations (Brazil, Russia, India, China and South Africa). There are those who highlight that South Africa shouldn’t even be in the alliance, based on any metric - but to be so shortsighted is to err in making perfection the enemy of good enough.
My argument is that this level of chutzpah is exactly what South Africa needs more of - and if we are fortunate enough to be lumped with the global tigers and elephants, we need to capitalise on that good fortune.
I do however believe that hosting the Brics bank is underwhelming and unambitious.
South Africa has a great banking sector by global standards and fails to find a worthy data point for comparison on the continent, so why are our ambitions limited to hosting a development bank that will do mega-infrastructural deals and create a few jobs and fill a few hotel rooms?
Why is South Africa not aiming to be the London or Hong Kong of Africa?
I submit that this should indeed be the goal of South Africa, and believe that the data supports such an ambition.
AfriX for Africa
As a thought exercise, allow me to introduce the All-Africa Stock Exchange; let’s call it AfriX for short.
AfriX would have a simple mandate - that of creating a unique equity market for sub-Saharan African countries.
The integration would aim to develop the African capital market through the integration of sub-Saharan African countries, by giving investors a greater supply of securities and issuers larger sources of funding.
Creating such a platform would be technically very challenging.
However, innovation and progress seldom pander to the luddites among us and there is ample precedent for similar endeavours such as the MILA or Mercado Integrado Latinoamericano, which is an integrated stock exchange for Chile, Columbia and Peru.
Drilling down into why South Africa is the perfect candidate for AfriX reveals an analytics fairy tale.
Let us begin by looking at the World Bank’s data.
Stock exchanges are punching below their weights
If you tally the 16 African stock exchanges, their market capitalisation is $1 trillion, which equates to 86% of their combined gross domestic product (GDP). This looks pretty good so far.
Remove Morocco and Egypt from the picture since they’re not part of sub-Saharan Africa and things look even rosier, with market cap rising to 106%.
Since this exercise is aimed at identifying South Africa’s sweet spot as a regional power house, let us remove South Africa from the picture. This changes things considerably, as the market cap now nosedives to a paltry 21%.
Take Nigeria out of the picture and the remaining stock markets constitute a whopping 5% of sub-Saharan Africa’s GDP, not very remarkable.
So it is clear that the massive growth anticipated in Africa could definitely present an opportunity, but how big is this beast really?
How about for argument's sake, we posit that the countries of sub-Saharan Africa on average could reach the same composition of publicly traded companies of Uganda at 48% of GDP?
Based on an unambitious continent-wide growth rate of 4.8%, GDP should over the next 10 years rise to $3.3 trillion.
Using our Uganda assumption, that translates to a $1.5 trillion continent-wide market cap - or over $600bn of investment grade assets coming into play over the coming decade.
Searching for Sugar Man
We need to bear in mind that this growth is anticipated on a business as usual basis without increased access to capital markets, so the zeros become mind-boggling once catalytic factors are introduced to the forecasts.
Are these figures bankable?
Unequivocally, no.
Are they indicative?
Unequivocally, yes.
The opportunity is clear - it is South Africa’s to lose.
Internationally, Africa is viewed as a country by many institutional investors. Instead of cringing when geographically challenged business folk refer to the continent as a single entity, why not capitalise on this sentiment and offer the world a slice of Africa, a slice of AfriX?
South African Airways has a great slogan that should be adopted by the promoters of AfriX in whichever incarnation it transpires: bringing the world to Africa and taking Africa to the world.
- Fin24
*Jarred Myers is a resources strategist and can be followed on Twitter on @JarredMyers. Opinions expressed are his own.
At the time Bush was pushing for the US to focus on growth in the service sector, in a not so different strategy to what we are still witnessing in that country today.
The rancher wryly said to the president that the only service economy he knows of is when he takes a stud to service a mare.
Without horsing around, the problem facing the US and South African manufacturing sectors are quite similar in the singular factor of uncompetitive labour costs.
In both countries the panacea for expensive labour is to move up the value chain into industries where labour is more productive vis-à-vis the service sector.
The US is pinning its hopes on sectors such as digital healthcare, green energy and cheap shale gas among others and with its entrepreneurial clusters and culture, one would be foolish to bet against it succeeding.
Backing this sentiment, in an interesting paper on the role of services for competitiveness in manufacturing published this week by the Organisation for Economic Cooperation and Development, a think tank, researchers found that better services contribute to moving up the value chain in industries where a country already has technological capacity and comparative advantage.
This bodes well for the US; however, panning back over the Atlantic to the Cape of Africa, we are faced with less obvious candidate industries where we possess both technological capacity and comparative advantage.
I would like to be so bold as to suggest that mining and resources will be one such industry - but quite frankly I haven’t the cajones to make such a claim.
In an effort not to get lost down a rabbit hole on this subject, I will refrain from discussing the millions of lifelong liabilities on the fiscus in the never-will-be-skilled labour category, and focus on solvable problems instead.
So wherein lies South Africa’s service sector bonanza?
A good place to start is by focusing on the Brics alliance.
Many are critical of South Africa’s ambitions to host a regional bank for the Brics nations (Brazil, Russia, India, China and South Africa). There are those who highlight that South Africa shouldn’t even be in the alliance, based on any metric - but to be so shortsighted is to err in making perfection the enemy of good enough.
My argument is that this level of chutzpah is exactly what South Africa needs more of - and if we are fortunate enough to be lumped with the global tigers and elephants, we need to capitalise on that good fortune.
I do however believe that hosting the Brics bank is underwhelming and unambitious.
South Africa has a great banking sector by global standards and fails to find a worthy data point for comparison on the continent, so why are our ambitions limited to hosting a development bank that will do mega-infrastructural deals and create a few jobs and fill a few hotel rooms?
Why is South Africa not aiming to be the London or Hong Kong of Africa?
I submit that this should indeed be the goal of South Africa, and believe that the data supports such an ambition.
AfriX for Africa
As a thought exercise, allow me to introduce the All-Africa Stock Exchange; let’s call it AfriX for short.
AfriX would have a simple mandate - that of creating a unique equity market for sub-Saharan African countries.
The integration would aim to develop the African capital market through the integration of sub-Saharan African countries, by giving investors a greater supply of securities and issuers larger sources of funding.
Creating such a platform would be technically very challenging.
However, innovation and progress seldom pander to the luddites among us and there is ample precedent for similar endeavours such as the MILA or Mercado Integrado Latinoamericano, which is an integrated stock exchange for Chile, Columbia and Peru.
Drilling down into why South Africa is the perfect candidate for AfriX reveals an analytics fairy tale.
Let us begin by looking at the World Bank’s data.
Stock exchanges are punching below their weights
If you tally the 16 African stock exchanges, their market capitalisation is $1 trillion, which equates to 86% of their combined gross domestic product (GDP). This looks pretty good so far.
Remove Morocco and Egypt from the picture since they’re not part of sub-Saharan Africa and things look even rosier, with market cap rising to 106%.
Since this exercise is aimed at identifying South Africa’s sweet spot as a regional power house, let us remove South Africa from the picture. This changes things considerably, as the market cap now nosedives to a paltry 21%.
Take Nigeria out of the picture and the remaining stock markets constitute a whopping 5% of sub-Saharan Africa’s GDP, not very remarkable.
So it is clear that the massive growth anticipated in Africa could definitely present an opportunity, but how big is this beast really?
How about for argument's sake, we posit that the countries of sub-Saharan Africa on average could reach the same composition of publicly traded companies of Uganda at 48% of GDP?
Based on an unambitious continent-wide growth rate of 4.8%, GDP should over the next 10 years rise to $3.3 trillion.
Using our Uganda assumption, that translates to a $1.5 trillion continent-wide market cap - or over $600bn of investment grade assets coming into play over the coming decade.
Searching for Sugar Man
We need to bear in mind that this growth is anticipated on a business as usual basis without increased access to capital markets, so the zeros become mind-boggling once catalytic factors are introduced to the forecasts.
Are these figures bankable?
Unequivocally, no.
Are they indicative?
Unequivocally, yes.
The opportunity is clear - it is South Africa’s to lose.
Internationally, Africa is viewed as a country by many institutional investors. Instead of cringing when geographically challenged business folk refer to the continent as a single entity, why not capitalise on this sentiment and offer the world a slice of Africa, a slice of AfriX?
South African Airways has a great slogan that should be adopted by the promoters of AfriX in whichever incarnation it transpires: bringing the world to Africa and taking Africa to the world.
- Fin24
*Jarred Myers is a resources strategist and can be followed on Twitter on @JarredMyers. Opinions expressed are his own.
