Posts Tagged ‘BRICS News’

South African Budget aims to revive growth by addressing Eskom woes

“This is a Budget that plants a seed for renewal and growth.” Tito Mboweni

Should Ramaphosa establish a Growth Commission? [GCIS]

In his maiden budget in February 2019, Tito Titus Mboweni, the current Minister of Finance, said he was planting a new seed as he walked a tight rope between what the ratings agencies would allow before a downgrade and what was needed to provide policy certainty.

There was no way that the Treasury would be able to provide R100bn in debt relief to Eskom in one go, so instead he provided R69bn spread over three years.

To fund this he would not increase tax brackets to compensate for higher salaries, as well as reducing expenditure by R50bn by reducing the public sector wage bill.

In a nod to his esteemed predecessor Trevor Manuel, who had been the longest serving Finance Minister from 1996 to 2007 and provided plums to the media at the February 2003 Budget, he brought a seed of the aloe ferox, which he said was resilient, sturdy and drought resistant.

Today, I bring you a seed to prove that if we plant anew, we can return to those plum times,” he said in his speech.

Mboweni said the Budget was built on six fundamental prescripts:

Achieving a higher rate of economic growth; Increasing tax collection; Reasonable, affordable expenditure; Stabilising and reducing debt; Re-configuring state-owned enterprises; and Managing the public sector wage bill.

Treasury has forecast GDP growth rising to 1.5 per cent this year from an estimate of 0.7 per cent last year. Growth then accelerates gradually to 1.7 per cent in 2020 and 2.1 per cent in 2021.

This is however lower than the forecasts given in October’s Medium Term Budget Policy Statement (MTBPS) which were 1.7 per cent for 2019, 2.1 per cent for 2020 and 2.3 per cent for 2021.

It was this downgrade in the growth trajectory that initially resulted in a selloff in the foreign exchange market to R14.37/US$1 from R14.14/US$1 before the speech, but once the foreign exchange traders realised that the Budget was in fact aimed at structural reforms and addressed the issue of debt relief for Eskom in a sustainable way, then the traders reversed direction and the rand ended stronger below R14/US$1.

2003 was a watershed year when the South African economy moved from the fiscal austerity of the Growth Employment and Redistribution (GEAR) policy introduced in 1996 to a higher growth path.

Both Treasury and the Reuters consensus forecast consistently under-forecast GDP growth in the years 2004 to 2007 and Mboweni will be hoping that in a similar manner, 2019 has the same kind of watershed effect as the government provides regulatory certainty and a conducive investment climate.

In his February 7 State of the Nation Address President Cyril Ramaphosa set a target of getting South Africa to a ranking of 50 by 2022 in the World Bank’s Ease of Doing Business from a current 82.

Treasury said South Africa’s slide in competitiveness reflects both a failure to implement key reforms domestically, and the speed at which peer nations such as Kenya, Mauritius and Rwanda have implemented their own reforms.

The deterioration is also in response to corporate scandals, auditing firm failures, widespread corruption in both the public and private sectors, and the perceived erosion of government’s commitment to macroeconomic stability.

In terms of improving tax collection, Mboweni said the Large Business Unit would be relaunched in April 2019, while an Illicit Economy Unit, which was launched in August 2018, will combat the trade in the multi-billion rand illicit trade in cigarettes.

In terms of expenditure, the baseline expenditure has been adjusted downwards by R50.3bn, but this saving was offset by providing debt relief to Eskom of R23bn per year for the next three years, so the net effect is a R16bn increase in the expenditure ceiling.

He quoted Charles Dickens’ Oliver Twist when he said the State-owned Enterprises (SOE) kept coming to him and saying: “Please Sir, may I have some more”, and to cater for this there is a small increase to R13bn in the contingency reserve from zero in this fiscal year.

Treasury will help SOEs to be reconfigured, but the quid pro quo is that if they ask for money, then Treasury will appoint a Chief Reorganisation Officer or CRO. In that respect, Eskom will be the guinea pig and I expect an announcement shortly.

In terms of stabilising debt, the Budget projects that it will not exceed 60 per cent of GDP in the next three years. In October 2015 the debt to GDP ratio had been expected to stabilise below 46 per cent.

The public sector wage will be reduced by offering early retirement to public servants. Ordinary public servants can take early retirement at age 55, while teachers can take early retirement at age 45. That is likely to reduce the public sector head count by some 30,000.

In that respect the ratings agencies and everybody else will be watching closely as to how the government manages the Eskom reconfiguration, as that will be top of mind for the next few months.

Once Eskom achieves an Energy Availability Factor near 80 per cent from the current 63 per cent, then the focus will shift to the regulatory reforms needed to make it easier to do business.

Helmo Preuss in Pretoria, South Africa for The BRICS Post

Russia: No new Syria offensive

The presidents of Iran, Russia and Turkey have met several times in a bid to preserve Syrian sovereignty [PPIO]

The leaders of Iran, Russia and Turkey have signed a 17-point final communique outlining their trilateral approach to stabilizing Syria but Moscow says there will be no new offensive in the north.

Presidents Hassan Rouhani, Vladimir Putin and Recep Tayyip Erdogan said they were committed to “the sovereignty, independence, unity and territorial integrity of the Syrian Arab Republic”.

Meeting in the Black Sea resort of Sochi in southern Russia, the three leaders also said that a US withdrawal of military forces from Syria would be a step toward stabilizing the war-torn country.

The three leaders, who have met several times in the past few years to discuss the security situation in Syria, also said they would continue to coordinate to create de-escalation zones to ensure security and safety for the country. In particular, they will focus on strengthening the de-escalation in the northern Syrian province of Idlib.

Iran said it was in favor of a new offensive to drive Islamist extremist forces like Daesh and Jabhat Al Nusra from Idlib, but Russia said that was not in the plans for now, and instead pointed to unspecified measures.

“We should not put up with the presence of terrorist groups in Idlib. That’s why I propose we consider practical concrete steps that Russia, Turkey and Iran can take to completely destroy this hotbed of terrorists.”

More importantly, they reaffirmed the need for a political solution to the Syrian crisis, including constitutional reform in tandem with UN efforts to reach a diplomatic breakthrough between the government and opposition forces.

The three countries all have military forces in Syria; Iran and Russia are backing Syrian President Bashar Assad’s hold on power, while Turkey would like to see him removed from power.

This has often bred tension between the three countries, particularly with the announcement that US forces may pull out.

At issue are safe zones which Turkey wants to establish without Assad’s consent.

The three leaders agreed to hold their next trilateral summit in Turkey.

The BRICS Post with inputs from Agencies

Mining Indaba participants are moving from inaction to action

Greater regulatory certainty has unleashed the “animal spirits”.

An example of this move from inaction to action is the decision by diamond mining giant De Beers to restart exploration after a two year hiatus, caused by the unilateral imposition by the South African government of the third iteration of the Mining Charter in 2017, which wiped out more than R50 billion off the market capitalisation of South African mining companies.

The new Minister of Mineral Resources, Gwede Mantashe, has by contrast consulted widely and promulgated the new Mining Charter in December 2018 and has promised an open door policy to addressing the challenges facing the mining industry.

Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities,” the economist John Maynard Keynes wrote.

Mantashe told the 14th Annual Southern African Coal Conference that he aims to raise the contribution of mining to the South African economy to 10 per cent within five years from the current 7 per cent.

“For years people have been talking mining down, expecting something nice to replace mining. My view is however that we should talk mining up and my mission is to raise the share of mining to 10 per cent within five years from the current 7 per cent. If you are silent in the face of the negative narrative, then that narrative will predominate,” Mantashe said.

He pointed out that mining was the largest contributor to South Africa’s foreign exchange earnings with a 40 per cent share and within mining, the coal sector was the largest revenue generator outweighing the gold and platinum mining sectors. The South African coal industry mines 260 million tons annually of which some 73 million tons is exported and employs more than 86,000 miners who get R25 billion in salaries.

Two of the reasons why Mantashe is bullish on increasing the share of mining are the Springbok Flats coal field which has coals seam 10 meters thick and the deepsea drilling for oil and gas off the South African coast.

“I am going to an offshore drilling rig to see for myself what the prospects are. If the initial reports prove to be a reality then this could be a game changer for our country,” he added.

Garrett Soden, Africa Energy’s President and CEO, has said the Brulpadda-1AX exploration well is a world-class, basin-opening opportunity in one of the last under-explored regions offshore Africa. Block 11B/12B is located in the Outeniqua Basin approximately 175 kilometers off the southern coast of South Africa.

The area has a proven petroleum system from the nearby Sable and Oryx oil fields. The Brulpadda (“Bull Frog”) Prospect has gross prospective resources of more than 500 million barrels with an upside potential of some 1.5 billion barrels. The Brulpadda-1AX exploration well is being drilled in 1,432 meters of water by the Odfjell Drilling-owned Deepsea Stavanger semi-submersible rig to a total depth of 3,420 meters subsea.

The Minerals Council of South Africa, previously called the Chamber of Mines, surveyed its members towards the end of 2017 on what a more conducive regulatory environment would mean for fixed investment and job creation. The result was that the estimated capital spending in the mining sector (stretching over the next four years) amounted to more than R145 billion, but a more certain and conducive environment (covering at least another three years) would unlock an additional R122 billion or an 84 per cent increase.

Confidence in South Africa’s regulatory framework had all but vanished, so fixed investment in mining has been stagnant since 2009, while net investment has declined by 57 per cent since 2008 and it is has been outside investors such as India’s Vedanta that have invested in new projects such as Gamsberg.

The key benefit to exploring multi-commodity mineral deposits such as the Gamsberg is that these activities will feed the increasing industrial demand created by accelerating technological innovation in batteries. This demand is reflected in the ongoing upward trend in the so-called “battery minerals” prices of copper, cobalt, lithium, nickel and zinc.

This is anticipation of the electric vehicle (EV) revolution, which will have an impact on commodities form 2020 onwards, as that is when the mass market in EV will take off in China and the US, with Europe following in the subsequent years.

Commodities trading giant Glencore has for instance said that forecast EV-related metal demand will be significant from as early as 2020 – estimates are an additional 390,000 tons of copper; 85,000 tons of nickel and 24,000 tons of cobalt will be needed, yet major mines take at least a decade to move from project to producing mine.

Minerals Council South Africa Chief Executive Officer Roger Baxter said hope was in the air as there had been constructive engagement with government on a number of issues. He was addressing the media at the start of the 25th Investing in African Mining Indaba.

“Hope is in the air and the green shoots are reflected in the fact that we believe the mining industry outperformed the national economy in 2018 with our estimates showing 1.2 per cent growth compared with 0.7 per cent for the national economy,” he said.

He told The BRICS Post that South Africa currently has 1 per cent of global exploration spend, but it should be 5 per cent based on its resource base and he expected that to grow to 5 per cent within the next five to ten years.

Alex Grose, the managing director of Mining Indaba, told The BRICS Post that what stood out for him at this year’s event was the interest by investors in junior mining companies, which had previously been neglected by investors as they were seen as being too high risk.

One of the beneficiaries of this renewed interest was Orion Minerals, which is resurrecting the old Prieska mine zinc copper in the Northern Cape. Its share price has risen by more than 30 per cent in the past month.

Prieska was mined by AngloVaal for 20 years from 1971 to 1991 and produced some 1 million tonnes of zinc and 430,000 tonnes of copper from 46.8 million tonnes of sulphide ore milled. Below the worked-out area is a world-class orebody which is a top-30 global volcanogenic massive sulphide deposit with the probability of further reserves underlying this orebody. A 10-year, phase one project was outlined by the December 2018 scoping study and a bankable feasibility study is on track for completion in the second quarter, according to Orion.

Phase one would exploit the deep sulphide ore body of 28.7 million tonnes, which has a grade of 3.8 per cent zinc and 1.2 per cent copper. This will produce a concentrate that will be trucked to a railhead 40 kilometres away which can access either the Coega deep water port or the Saldanha deep water port. There would be an estimated AUD130 million annual free cash flow after-tax at steady-state with a payback period of less than three years from first production.

The upside potential is what has Orion says has it really excited as the company secured a large consolidated land package measuring 1,790 square kilometres in 2015. No major exploration activity on this land has taken place for past 30 years, but the application of modern exploration techniques presents a significant opportunity. In order to exploit this, Orion has a collaborative exploration agreement is in place with the Independence Group as the area is geologically similar to the Fraser Range in Western Australia.

There are several nickel sulphide deposits that seem to be attractive, but exploration on these targets have been put on hold as management is focused on getting Prieska into production within the next three years. Core samples from exploratory drilling that I saw on a mine site visit showed nickel content as high as 4 per cent, but far more drilling has to be undertaken to verify the extent and grade of the resource.

Helmo Preuss in Cape Town and Prieska, South Africa for the BRICS Post

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