Brexit was a sharp shock for the United Kingdom (UK) – Africa will feel its shockwaves in time.
According to Irmgard Erasmus, Senior Financial Economist, NKC African Economics, the biggest impact will be on forex and financial markets.
“This will primarily filter through to the real economy via the indirect impact of global risk sentiment on commodity prices, impacting the balance of payments and the monetary system, and implying that the upside risks to inflation have increased on account of exchange rate pass-through,” says Erasmus.
According to Erasmus, the African currencies most at risk from external headwinds are the Zambian kwacha, the Angolan kwanza, and the Ghanaian cedi.
<img loading="lazy" decoding="async" class="alignleft size-medium wp-image-5116" src="/wp-content/uploads/2017/05/Brexit-005-200x300.jpg" alt="" width="200" height="300" />
“In turn, the CFA franc zone, under the two common monetary unions (the Central African Economic and Monetary Community, CEMAC, and the West African Economic and Monetary Union, WAEMU) is implicitly vulnerable to EU developments via the impact on the euro exchange rate. CEMAC and WAEMU peg their currencies to the euro at the same rate.”
On the markets, Brexit has been felt with share prices falling and investors rushing into safe-haven assets.
According to Rian le Roux, Chief Economist at Old Mutual Investment Group, South Africa is likely to be caught in the crossfire.
“South Africa will not escape the market or economic fallout of Brexit, although the full impact will likely only become clear over time. While our financial markets will pretty much echo global markets in the short term, the medium-term impact on South Africa will be determined by the extent to which commodity prices, South Africa’s export volumes, and capital flows to South Africa, are affected,” he says.
According to Le Roux, South Africa’s already poor growth prospects will be further undermined.
As far as the direct impact of a likely recession in the UK will have on South Africa, Le Roux estimates it would be relatively small, as the UK buys only about 4% of South Africa’s exports.
“However, one area that might be negatively affected is tourism, as the UK is responsible for about 18 percent of tourist arrivals from outside Africa,” he says.
However, Old Mutual Balanced Fund portfolio manager, Graham Tucker, says they expect their clients’ portfolios to be somewhat protected.
“Within our asset allocation funds, we have been positioned lighter than usual in South African equity and listed property (collectively known as growth assets), holding significantly more cash than normal in this volatile environment,” says Tucker.
While Old Mutual has been defensively positioned, they have holdings in counters that are attractively priced and have good fundamentals, but are exposed to Brexit risk. Within the Old Mutual Balanced Fund, these include Old Mutual, Investec and, more recently, UK property company, Intu.
“We remain comfortable with these positions on a longer-term view, but there is clearly downside risk in the short term as investors grapple with the implications of the Brexit referendum outcome.”
This fund holds about 12% in South African government bonds.
“These offer an attractive real yield and in our view should provide good medium-term returns. However, they could be impacted by a selloff in emerging market assets and currencies. The initial reaction of the bond market has however been relatively muted,” says Tucker.
According to Neil Wilson, market analyst at ETX Capital, fears that Brexit would kill off deals in the UK seems to have been overblown.
“Britain is very much open for business and the weak pound is key. A lot more British firms could become foreign-owned quite soon,” says Wilson.
Steven Gamble, a banking and finance lawyer at Norton Rose Fulbright, says given its historical trade relations with Africa, he is worried about the European Union’s (EU) instability after Brexit.
“Britain is the fifth largest economy in the world. Africa is not going to be immune to this. The UK is South Africa’s fourth largest export destination so it is important. The UK is also the largest investor in the South African economy which makes it critical,” says Gamble.
According to Gamble, Ghana is looking at short-term upsides in terms of gold and Kenya is stable.
“Every year, $21 billion is remitted from the UK to Nigeria. I am interested as to why there is a lot of anxiety there because the fact that the UK has come out of the EU shouldn’t have a direct impact on remittances,” he says.
Maybe we should take Old Mutual’s advice and take Brexit as an opportunity to put cash to work and gain exposure to quality assets that are indiscriminately sold off in the panic.

Brexit Wrecks It

This year Lonmin, the world’s third largest platinum producer, will try to save its African business.
After a disastrous couple of years, the future of Lonmin hung in the balance in November as the platinum mining giant needed a $407-million bailout to keep going. It was the third capital raising in six years.
Wounded by declining platinum prices, electricity shortages, slow demand, and strikes, the company’s financial circumstances deteriorated sharply. To make matters worse, the company frittered away money.
“In the boom times around 2004 and 2005, Lonmin went and bought a ground in the Northern Province around the Plat Reef, a property called Akanani. Akanani was bought for almost a billion dollars. Today, in our books, it’s worth zero. So that billion dollars went down the drain,” admits Lonmin CEO, Ben Magara.
<img loading="lazy" decoding="async" class="alignleft size-medium wp-image-4358" src="/wp-content/uploads/2017/04/2014-Catalogue_Jay-Caboz-192-300x200.jpg" alt="" width="300" height="200" />
Magara says a further billion dollars was wasted when Lonmin embarked on a failed mechanization program. The rock was too hard and shafts too narrow.
“To try and reverse all those challenges has needed even more money,” says Magara.
On the morning of November 19, Lonmin went cap in hand to its shareholders for an emergency capital injection. Prior to the meeting, other shareholders sold out of Lonmin. The share price went down from $8 in December 2010, to just 16c in November just before the meeting.
In London, Lonmin offered shareholders a 94% discount as part of its rebuilding plan. The Public Investment Corporation (PIC) saved the day by increasing its stake in Lonmin by 23% from 7%.
Even though the bailout was successful, 6,000 job losses are expected by September. Paul Theron, the CEO of asset management company, Vestact, reckons Lonmin’s shareholders are growing tired of bailouts.
“It’s a bit like SAA (South African Airways) where they say ‘this is one last bailout please’, but unfortunately that is exactly what happened in the past. The management team has raised additional funding in order to increase equity and to pay down debt, but then proceeded to run business in a way that didn’t result in a sustainable profitable scenario,” says Theron.
“No one anticipated that we would see this level of oversupply in the industry and this level of self-demand and this level of poor prices. A lot of people assumed that once the supply side started to calm down, there would be an immediate response in terms of higher platinum prices.”
Lonmin is hoping upon hope it can save its 106-year-old African operations and more than 30,000 jobs.

Lonmin Tries A Lazarus

Stars are still out as Dirk Schlebusch starts work at 4AM. It is the busiest time of day for him as truckloads of potatoes arrive at the Joburg Market. In the next few hours, they will be traded as commodities worth millions.
The market’s 10 halls, that span 64 hectares, are piled high with pallets of every kind of fruit and vegetable. This is the primary fresh produce exchange of South Africa as well as destinations across Africa. It is also the largest of its kind in the world.
Before noon, the dynamics of supply and demand, of middlemen’s mark-up and the whims of what nature offers up on the day, merge to determine the first price tag on fresh produce as it exits the market. Food price inflation and food security issues are becoming more and more important as population numbers explode and demand soars. It puts the links in the chain, like the passage of food through the market, under increasing scrutiny.
Schlebusch is a buyer with Wenpro, one of the most established agents at the market. They serve as middlemen between producers and buyers. He specializes in potatoes, like his father has done for 40 years.
Potatoes and onions are big sellers at the Joburg Market and together fill out their own hall. An average day sees around 1.4 million kilograms of potatoes traded.
Schlebusch has standard daily orders from big retail chains, wholesalers and the companies that process vegetables for frozen food products. He also sells to restaurants, hawkers and walk-in buyers.
“We have potatoes for everything and potatoes with every kind of price tag to suit whatever buyers are looking for.”
When determining a daily price, Schlebusch checks the quality of physical stock that arrived on the day, examining stats from previous days and pulling up stock sheets that detail the availability of potatoes throughout the market.
With fresh produce you don’t have the luxury of stockpiling for extended periods to influence the market in the hope of fetching a higher price. It’s too much of a gamble &#8211; fresh food perishes or loses quality and there’s no saying what hand nature will play.
Schlebusch says it’s ultimately down to supply and demand, the best produce still fetches the best prices and the highest bidder still wins. It’s how the market has functioned for 120 years, from the days of its origins in Newtown. The market is just a few years younger than when the city of Johannesburg itself was founded.
Schlebusch’s ear is glued to a phone, communicating with buyers and farmers throughout the day.
“It is about relationships. If you don’t give your farmers the service they expect they’ll go to another agent and if your buyers don’t get the produce at the prices they want they will also go somewhere else,” he says.
As he chats, a call comes through from an anxious farmer. A lorry has been delayed; it never made it to market on time to join the sample displays. It means an instant drop in price for the farmer as his potatoes become day-old stock.
It’s the middle of July, and at the market the bulk purchase price of Grade 1 bananas is worked out at around R4.45 a kilogram (R1=$0.10). They will end up in the mid-range supermarket upwards of R8.99 a kilo. The top-grade potatoes are selling at R46 for 10 kilograms. The price almost doubles at retailers.
The price gap from market to retail comes with everyone along the value chain taking their cut. Tracy Davids, an analyst at the Bureau for Food and Agricultural Policy (BFAP), says day to day market prices are more volatile than what end consumers see at retail level. The price hikes come from transport and labor costs, repackaging, labeling and operational and distribution overheads that retailers incur. Added to this is the rising fuel and electricity costs in South Africa.
<img loading="lazy" decoding="async" class="alignleft size-medium wp-image-3039" src="/wp-content/uploads/2017/04/DSCF7066-300x215.jpg" alt="" width="300" height="215" />
Davids says managing food inflation ultimately comes down to having a more robust economy.
“Food security will always be a critical issue and at the end of the day it’s the consumer who pays more and more as costs in the value chain increase, which is why we need effective value chains,” she says.
Piet van Zyl, who runs Wenpro’s fruit section, outlines some of the unique challenges of handling fresh produce. Although the value chain comes with mark-ups, disruptions can cause even more hikes. Wenpro has seven cold rooms, each runs at around $470 to $560 a month. It makes load shedding and power cuts his biggest nightmares. Agents are responsible for the upkeep of their own pallets and fleets of forklift trucks that criss-cross the halls in urgent beeps. Agents are also responsible for the health, safety and general cleanliness of their halls. It adds up to operating costs that run into the millions.
“Agents must perform and grow or the market will start taking away your floor space,” he says, waving his gloved hand, protected against the early morning chill, across the expanse of the hall that is Wenpro’s terrain.
Agents must be able to offload produce fast enough, retain the integrity of the product on the warehouse floor and sell as quickly as possible at the best price possible.
“Sometimes the agent’s buyers resort to salvage sale, it means they will make up the loss from their profits to make sure that the farmer still gets his base asking price. It keeps the farmer loyal to the agent and opens up floor space. Good buyers know where they can afford to take a loss and where they can make a profit,” says Van Zyl.
Agents take up to 7% on any deal, 4% goes directly to the agent’s buyers. The market takes a 5% cut.
It’s something that’s top of mind for Gugu Hadebe. She is the director of Egoly, the newest of the market’s three Black Economic Empowerment agents.
Hadebe says breaking into the market as a black woman was not easy. Her advantage is that she was previously employed by the Joburg Market. She understands the role of agents as well as the cultural, political and historical nuances attached to farming in South Africa. Another significant insight she had was to team up with old hands in the business, which plainly put, meant white males.
“I knew I had to have the right partners, people who have been in the game longer than I have been, people who have built relationships with farmers and buyers,” she says.
Egoly currently has eight sales staff. They concentrate on selling to hawkers rather than competing at this stage, with the likes of Wenpro, with its 350 staffers, who target bigger fish like retail giants.
“There is a big hawkers market out there that’s still growing in South Africa. People still buy from the [old lady] on the street where they pay less, where they may know the seller and they pick and choose as they like,” says Hadebe.
Each of the market’s 14 agents has to find its niche to deliver a value-add. Some do specialty items like sourcing exotic dragon fruit from South East Asia, or making sure there’s enough ginger for the explosion of sushi bars across the country. Others offer pre-packaged produce or some, like Egoly, target specific sectors within the pool of buyers.
“We don’t sell anything as a market. It is a free market system, we are just a platform where anyone can come here to sell through an agent or to buy from whomever they choose,” says Simangele Sekgobela, CEO of the Joburg Market.
Sekgobela adds that the market has had to respond to changing demands, like the key issues of traceability of produce and minimizing human handling of food.
“We’ve also had to adapt to meet international standards, which includes things like maintaining an unbroken cold chain and following standards for pesticide limits,” she says.
The adapt or die principle applies to the market, like it does to almost everything else.
“We have seen a decline in the stock that comes through the market in the past few years. Retailers are doing more direct sales from farmers and developing their own storage facilities. In the future, there will also be more virtual sales that will mean produce will not physically come through the market. It’s the reality of a free market, but you’ll never replace the market completely. You will still need the market for its facilities, its quality control and convenience of having everything under one roof,” says Sekgobela.

Tag: Prices

FORBES AFRICA SOCIAL MEDIA

Brexit Wrecks It

Lonmin Tries A Lazarus

Why We Pay Through The Nose For Food