News in South Africa 26th July:
1. The ‘real’ value of the rand:
The Economist has updated its Big Mac Index for mid-2022, showing how the rand continues to be one of the most undervalued currencies globally, relative to the US dollar.
The Big Mac Index is an initiative created by The Economist that aims to measure whether currencies are priced at their “correct” level.
It is based on the theory of purchasing-power-parity (PPP) – the notion that, in the long run, exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a Big Mac burger) in any two countries.
The Big Mac is selected for comparison as the popular fast-food meal is widely available and remains fairly consistent in pricing; however, it is by no means an exact measure.
According to The Economist, ‘Burgernomics’ was never intended as a precise gauge of currency misalignment but is merely a tool to make exchange-rate theory more digestible.
The index has, however, become a global standard, included in several economic textbooks, and is also the subject of at least 20 academic studies, the group noted.
The ‘real’ value of the rand in mid-2022
The Big Mac Index measures the real value of currencies by citing two methods – a direct measure of PPP using raw prices, and an adjusted index that takes into account local GDP data.
Using the raw data, a Big Mac costs R39.90 in South Africa and $5.15 in the United States. The implied exchange rate is R7.75 to the dollar.
The difference between this and the actual exchange rate – R17.04 to the dollar at the time of the report – suggests that the rand is undervalued by 54.5%, which is the fourth-most undervalued currency measured by the index in July.
The most undervalued currencies by this measure are the Venezuelan bolívar and the Romanian leu, which are undervalued by 65.8% and 55.7%, respectively. Russia has historically ranked as having one of the most undervalued currencies, but the war in Ukraine has caused McDonald’s to pull out of the country, leaving no comparison point.
GDP per capita
However, the raw index does not tell the full story of currency valuation.
Because many argue that, due to PPP, the cost to produce a Big Mac is cheaper in poorer countries, The Economist factors in another important indicator – GDP per capita – to draw a more accurate conclusion.
In PPP terms, a Big Mac costs 54.5% less in South Africa (US$2.34) than in the United States (US$5.15) at market exchange rates. Based on differences in GDP per person, a Big Mac should cost 21.4% less.
Based on differences in GDP per person, the index suggests the rand is 42.2% undervalued and should be at around R9.85 to the dollar.
2. Red tape roundabout:
Business groups in South Africa are set to reject a social compact and framework from the government, which asks them to commit to investment and employment targets while restricting retrenchment – in return, the government promises to cut red tape, improve the economy, and mop up state-owned companies.
Business groups say that the ask crosses many red lines and involves decisions informed by management and the business environment.
They noted previous social compacts with the government had delivered very little.
3. Travel fees spiking:
South African companies are unlikely to ditch business travel in favour of metaverse meetings, but rising fuel costs, making flights more expensive, will suppress the recovery of work-related trips.
International travel is recovering from two years of coronavirus-induced restrictions. This rebound is most noticeable within the leisure segment, where summer holidaymakers in Europe, for example, have returned to the skies en masse, creating chaos at short-staffed airports.
In South Africa, the recovery hasn’t been as swift. In the first quarter of 2022, international arrivals were at less than 40% of levels seen before the pandemic. Recovery in the domestic segment is also struggling, and by June, passenger activity at Johannesburg’s OR Tambo International was at 68% of pre-pandemic levels, according to Airports Company South Africa (ACSA).
Reluctance around business travel is one of the major factors behind the stunted recovery of passenger activity at OR Tambo and other main South Africa airports, explained ACSA CEO Mpumi Mpofu. Travel budgets, cut during the height of the pandemic, remain tight and virtual meetings, used extensively by companies during lockdown, still provide an affordable alternative to in-person conferences.
But trends are changing as offices reopen and employees rekindle personal connections with colleagues.
“We’re noticing a clear virtual and screen fatigue among South African corporates,” said Bonnie Smith, the general manager of FCM Travel South Africa, during a recent event on global travel.
“For two long years, they were forced to adopt virtual means of communicating. But it’s important to remember that this digital-first attitude was dictated by external circumstances. There was no cultural preference for being online instead of meeting in-person.”
While South African corporates are becoming more interested in the metaverse, travel experts believe replacing business trips with fully immersive virtual reality experiences is still a long way off. Widespread adoption of the metaverse is still at least a decade away.
“Digital has become a powerful tool to enhance meetings, trainings, and conferences. The metaverse will take these digital meetings to a further and better level, but it won’t replace in-person experiences,” said Smith.
“In fact, face-to-face meetings are more powerful now than ever before.”
And while the metaverse poses no significant risk, a far more imminent threat to business travel to, from, and within South Africa exists.
The price of jet fuel is 74% higher than it was a year ago, according to Platts, largely because of oil price volatility emanating from Russia’s conflict with Ukraine. Soaring global inflation coupled with fears of an economic recession has also done little to instil confidence in corporate travel budgets.
“Fuel prices are already affecting people personally, and there’s no doubt the rising cost of fuel will impact airlines, airfares, and in turn, decisions around business travel,” said Smith.
“For South Africans, and South African companies, it is going to be the biggest concern this year.”
4. Residential ‘squatter’ numbers up:
The number of residential tenants classified as ‘squatting’ has progressively increased in South Africa in the past decade.
Tenants classified as squatting are defined as having not paid three consecutive months of rent and continuing to occupy the property in the fourth month.
TPN Credit Bureau said although this trend is cause for concern for landlords, the total number of tenants classified as squatting – fewer than five out of 1 000 tenants – remains small when compared with the number of tenants who do meet their rental obligations.
However, TPN said the Covid-19 pandemic has resulted in some tenants “abusing the system to their advantage, creating fear and uncertainty with the property investment market”.
This is a reference to government regulations issued during the pandemic in terms of the Disaster Management Act, which prohibited the execution of any eviction, even if authorised by a court, for the duration of the lockdown.
This regulation was intended to protect tenants and consumers during the pandemic because of reduced and unstable income, which resulted from many companies forcing employees to make salary sacrifices, particularly during the hard lockdowns.
Tenants in good standing
TPN Credit Bureau also reported a deterioration in the number of tenants in good standing with their landlords in the first quarter of 2022.
Tenants in good standing dropped to 80.78% from 81.4% in the fourth quarter of 2021.
A tenant is considered in good standing when they have paid their rental account in full for the month, even if they paid late.
FNB property economist John Loos said on Monday that this is not surprising.
Loos said there was a good recovery in the percentage of tenants in good standing to above 80% following the dip during the pandemic, but since late last year interest rates and cost of living inflation started to increase and fuel prices were already rising, resulting in the consumer price index (CPI) accelerating.
“Higher inflation starts to squeeze tenants and higher interest rates as well.
“It’s still a reasonably good figure when it’s above 80% but I would expect some further weakening as the quarters go by this year because of interest rate hiking and inflation,” said Loos.
“However, I don’t think it will drop as badly as it did during the lockdown.”
The percentage of tenants in good standing dropped sharply to 73.5% in the second quarter of 2020, which was the quarter in which the hard Covid-19 lockdown was implemented in South Africa.
TPN believes landlords need to be aware that getting rental payments in on time is likely to be a challenge going forward, as inflation continues to place consumers under pressure and landlords are forced to escalate rentals.
5. Gupta extradition request:
The Justice and Correctional services department has submitted extradition applications to the United Arab Emirates to bring the Guptas to South Africa to face the courts.
The brothers, Atul and Ajay Gupta are wanted on charges of fraud and corruption related to the R29 million Nulane investment scam and the Estina dairy farm scam.
The brothers were denied bail in the UAE and remain behind bars while the extradition process plays out.