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30 JANUARY 2016
Polish your Skoroko: The ride will be tough

by Andile Khumalo: Chartered Accountant (SA), former investment banker, investor and operator of businesses in media, marketing, communications, technology and financial services.

In the mid-80s, ‘Skororo’ hitmaker Condry Ziqubu released another catchy tune, which I was convinced, was about ‘Mello Yellow’, the popular soft drink launched in the same era.

This week, a friend reminded me that ‘Yellow Mealie Meal’ was written to highlight the plight of Black South Africans in the aftermath of the hard-hitting droughts of 1982.

The punchy lyrics open with: “Hey look. Up there. Sun is very hot. Hey look. Up there. No thunder, no lightening. God of rain. Your children are crying, There’s no rain. Everybody’s singing this song. Yellow, yellow, yellow mealie meal”.

Last year the reserve bank governor, Lesetja Kganyago stood in front of the nation and announced the central bank’s decision on interest rates and updated its forecasts on GDP growth. A number of South Africans, whether working class professionals or entrepreneurs may not fully appreciate the impact of the current state of affairs, and how they ought to react to it.

The governor summarised matters well when he said, “The key risks are a marked depreciation of the rand; worsening drought conditions and their likely impact on food prices and the possibility of additional electricity tariff adjustments. At the same time the economy remains weak.”

The comfort that rising interest rates are going to tame inflation, which is expected to breach the top end of the 3% - 6% range, have all but disappeared as the causes of real inflation have little to do with interest rates.

As the worst drought since Condry Ziqubu’s hit ravages us, we are likely to face serious headwinds on food prices in months to come. Climatologists say we should not take much comfort in the recent rains, as significant showers are only expected next March.

According to Grain SA, South Africa is expected to spend at least R2.2 billion on yellow maize imports of almost 1 million metric tons of from countries such as Argentina and Ukraine in the year through to the end of March 2016.

Recently, Eskom reported interim results that showed a 13% increase in power prices, which helped its net profit climb to R11.3 billion. These were bitter-sweet news. We all want a successful Eskom who has enough to spend on maintenance to avoid further blackouts, and a constructive hamstring to the economy. But this doesn’t come for free. South Africans have no choice but to brace themselves for additional electricity tariff hikes.

Add to this mix a weakening rand, the volatility around a potential US interest rates hike, the uncertainty of wage negotiations in early 2016, and an economy that is forecasted to grow by 1,5% in 2016, you soon appreciate the tricky terrain we have to navigate in the next 12 months.

As an individual the choices are relatively easier to understand, avoid debt, especially unproductive debt. You are likely to start earning less in real terms as your employer sees lower profits in an economy that grew by only 0,7% in Q3 of 2015. Those big salary increases and fat bonuses are likely to be a fond memory. Reality check: A 6% salary increase is essentially a 0% salary increase in 2016.

Dr. Adrian Saville, Chief Strategist at Citadel Wealth Management has one piece of advice for businesses in these times. “Our estimates now is that economic growth going into 2016 could actually be sub-1%, and therefore businesses will have pressure on the top line, which means that your competitors will be trying to get at you, by eating into their own middle line. In other words, not only are your revenues going to struggle but so are your margins, leaving less to trickle into the bottom line. So what can you do? The first rule in these times is to survive. It’s the same as South Pole expeditioning. It’s not about who gets to the South Pole or top of the mountain first. It’s who gets home.” says Saville

Now is the time for resilience. The only way you can enjoy an economic recovery is to be there. It is also time for prayer. Prayer for more rain. Otherwise, we will all be singing yellow mealie meal in our skorokos for longer than we wish.

This article first appeared in the Business Times

khumalo.co is the investment office of Andile Khumalo, a Chartered Accountant (SA), former investment banker, investor and operator of businesses in media, marketing, communications, technology and financial services. Visit our InfoCentre or website.

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