Economic Observations from South Africa

After reading a great piece on Argentina, it inspired me to do the same for South Africa.

Here is the substack report from Argentina that I recommend, it is entertaining and informative.

Economic Observations from Argentina

For some background, I am French, and went to South Africa maybe 5-7 times between 2010 and covid. I went off the touristic areas, in what we call a township, and other areas. And there is a lot I could observe.

If you are from South Africa, you may notice some errors, however it will be interesting to see what is the perception of your country from a European.

The first thing that struck me was anxiety, because of all I read on the internet about the crime levels. Arriving at the Johannesburg airport and crossing the automatic doors of the airport felt like leaving the green zone in Baghdad and entering the danger zone. That feeling of course stopped with time. I am much more anxious about driving on the wrong side of the road with a new rental car straight out of the airport.

A LOT OF MONEY

Coming out of the airport at night, it was really a shock against my own stereotypes and pre conceived ideas. We quickly embarked on a ride in a Friends BMW M5, and rode the highways. There is a maze of highways around the airport. It is not a small back road like in the movies about Africa. But Johannesburg maybe isn’t typical Africa.

So my first vision of Africa was modern highways at night and I was amazed at the number of BMWs, Mercedes and SUVs taking the whole fast lane at large speed. I would see better cars than in Europe on average. On the topic of cars, they are really prized and of cultural importance. There is a huge car culture, the public transportation is not a liked way of moving around and is quite dangerous. So it could also reflect a higher investment in cars.

It did not stop here, and I saw better houses than in Europe and stayed in one. Bigger houses. And it was not even in a famous rich area but some random suburbs.

On the topic of houses, I can confirm that there is more luxury housing in South Africa than in Europe (at least France, Uk/Ireland and Spain) on average. Maybe not in Euro/Dollar terms with the exchange rate, but in physical attributes. This is also a shocking reality. The rich people there live in way richer luxury than our rich in Europe, and there seem to be a lot of rich people. Is it due to our European social redistribution, or due to lower cost of labour to build the houses and lower density? I do not have the answer.

@sadvalueinvestr has a whole lot of stories about the official exchange rate and the unofficial one, and the dollarisation of the Argentinian economy, as well as off peso settlements that are done in the underground economy. To put it simply, there is none of that in South Africa. You go there, you change your money to rands or withdraw rands at the ATM and that’s it. You pay with the credit card. it is like going to any normal country. Argentina is really something special.

The road infrastructure is top class. Sure some people complain, but I rode some highways and roads in the middle of nowhere that were pool tables. In the small neighborhoods, there are potholes. The rains are also torrential which does not make it easy.

The electricity is bad, with shutdowns on a regular basis. This is well documented and is a major obstacle to grow. Basically it is due to: demand growth, supply growth insufficient and bad maintenance. Things are slowly turning the corner thought.

A LOT OF POVERTY

Its not all fun and games. The poverty is immense. You see many people walking in the side of the roads, outside of urban centers, at all times of the day. You see people wearing very old clothes. You have beggars or sellers of small goods at every traffic light, walking between the cars to sell some small stuff maybe like sunglasses, car accessories, and other things I forgot. Some stop and do an artistic performance when the traffic light is red.

There are shacks and townships. The townships are not necessarily shacks but many are hard built houses of very simple construction without a basement or a top floor. Depending on the quality, people can have a decent housing there. The richest of the poor maintained and improved their township houses and they can become very nice. The poor ones have a township house that deteriorated with time, with distorted floor or ceiling and damaged wiring, doors that do not close right but that they try to lock anyway.

I stayed often in what is technically a township, but there are homes renovated, new homes built by the ones from the township who got richer, and poor homes. It evolved into a proper neighborhood, and it got more racially mixed as some other people moved in.

Where I was, the shacks areas were mostly full with foreigners. I did not venture there and nor did the locals from the township did. It’s two worlds close from each other but apart. So I don’t know how it is.

The problem with South Africa is that the minute it empties shacks and build houses, millions are willing to come down from Zimbabwe, Malawi, Zambia or Mozambique. It’s not like they do not build houses, it is that demand is unlimited.

The poorest people are majority black. Well, the country is majority black (80% +-). And the country attracts an immense number of poor foreigners from southern Africa, who are also black. You see them doing all the hard work, the early risers jobs, working kilometers away and going on foot, pulling big carts. These ones work very hard and for not much. They do not have a choice. You get to see a lot of white beggars too, at least in the areas where I was. It is not a novelty or a curious thing at all.

Poor there means really poor. It means shoes with holes and missing teeth, not due to addiction or fighting.

Cost of living: it is hard. wages are low. Prices in supermarkets are crazy. I once converted the Rands to Euros to compare the prices of things like Yoghurt, meat, porridge. It was higher in real terms in S.A. It is very hard for locals. Most have to limit their food consumption to local goods and reduce meat.

Inequality is strong

It’s an insider/outsider society. You get foreigners vs south africans, and this can be very very harsh. Poor foreigners are treated badly and ignored.

You got rich versus poor. Typically, I do not see white vs blacks, because now its all about money. Those who want to make it white vs black are ignorant journalists who visit for two weeks to make a biased media piece and then go to the next country, or populists who want votes, not unlike in the west.

South Africa retained a lot of British type rules. If you watch a movie about Victorian Britain and the places for the rich and for the poor, and the police protecting the rich only, it is like South Africa.

This, for a latin, is against our culture. We are about bending rules. The British like system of values in S.A is very much like this. You could starve to death next to a resort with restaurants and you would not get a free potato chip. At least that is my feeling.

You can have this nice park or venue, if you do not pay, you are out. More places seem to filter by an entrance fee than in Europe, and for some people a 170 ZAR or 10 Euro fee is more excluding than a 10 Euro fee for europeans, because it is not affordable.

And the very interesting thing is that, if, as a white European, I go to the wrong place, they will be as harsh and strict as with the poor Black. I had the harsh treatment for parking in the wrong place or entering the wrong place by accident.

For them exclusion is not meant to be by colour but by wallet. Applying the rule equally to everyone makes them forget what they refuse to see:

The wallet exclusion is a de-facto racial exclusion, that is a convenient neutral one. The neighborhood around your venue could be 99% black people who cannot afford your venue.

Note that the employees doing the de-facto racial exclusion are usually black employees who probably cannot afford the place themselves. There would also be rich black people from outside the area coming with large cars to the venue. This is why it is complex and not black and white.

When you have all of this, you can sympathise with even the followers of populist and racist political leader Julius Malema. I can understand that people subject to exclusion from the consumption society, and in material poverty, while working at serving this same society (security, maids, customer service), get envious and want to take over the system. Let’s be honest: they will never rise through the ranks with their jobs and join the consumption society. We cannot judge this from the comfort of our own lives.

Despite this, I never felt anyone being unfriendly or bad to me. The locals of all colours are great people, for sure it would be better if they were more united.

Business

There is populism by Julius Malema, coming from a real problem with inequality that I do not want to dismiss. He raises a real problem but makes it about race or nationalisation, which is a false solution. Despite this, the society as a whole is very attached to keeping a working economy and to staying away from populism. If we had that much poverty in France, the country would be rioting. The society is very resilient, anti populism and patient.

I have some experience with business, but very limited. The system is very British to me. Everything is on paper, fair and square, and well documented. Banks are very modern and process based. I had limited exposure to business so I cannot say how it is to have a proper company in S.A. I am sure that there is corruption. However I do not think it hurts the small business much. It looks to me that it is more directly stealing from state coffers through contracts and tenders.

Minorities people are largely excluded from base employment by quotas. I heard from many Indian and Coloured people that now it’s just like apartheid, but for the blacks instead of for the whites, or some say that they preferred the old days of apartheid. The bad management by the ANC is really upsetting the minorities.

They have two ways around it as far as I know.

1-if they come from a family with money, invest in higher education, get some experience, maybe abroad or in a very specialised sector, and get employed anyway due to special skills. (Money selection)

2-create their own business. They excel at creating their own business. The Indians that I saw most, all the rich ones are entrepreneurs. And it’s not the metaverse or the cloud. Its drinks, cars, construction, chemical products. (Also a form of money selection, capital helps to create capital).

The other problem is that affirmative action is only getting entry level jobs to the blacks. So they get a job, but it is not life changing. Sure they can become supervisors. These jobs are a gift and a curse. The minorities who end up being entrepreneurs due to affirmative action get much richer than the blacks who got the jobs. Many entrepreneurs fail I suppose, but the ones who succeed turn these business into family business and probably employ the ones who fail or help them out. In the end the black working class is not getting richer. The black entrepreneurs are the ones getting wealthy.

The business people I met had absolutely thriving businesses and are wealthy by any standard. They are mostly about cars and real estate. So for a struggling economy, there is huge demand. I do not understand the dichotomy of the GDP numbers versus these businesses thriving.

Investment

I talked to these guys and they are so good at what they do that they prefer to invest more in garages/retail stores/ or real estate than in the stock market. They do not know or trust the stock markets, but are experts in real estate or their lines of business and have expanding empires.

The ones with good jobs are more financially educated. There is a very developed financial industry with funds and an active local stock market, so they invest there and are pretty good, using a passive approach most of the time.

There isn’t much of a concern with the value of the Rand much like in Argentina or Turkey. People distrust the rand as a saving mechanism and have jokes about it, but are not especially concerned. Maybe because the Rand has some commodity backing. The entrepreneurs think about pieces of real estate, stores, garages, and the investors about funds and shares. People know that wealth is real assets and are really focused on it.

Conclusion

It is a very unequal society with very rich and very poor.

There is money. I don’t know where it is, but it seems to me that there is more money than what the GDP numbers tell us (just like in the Argentina article by frontiermarketideas.substack.com), looking at the cars, the infrastructure, the spending and construction going on.

Going down there from Europe does not feel like going to a poorer country. Quite the opposite. Everything is bigger, newer, but there are oceans of poverty in between.

Is it investable? I think yes. You have great entrepreneurs, good demand, and stable rule of law.

But I don’t think it is a growth investment. Growth is still uncertain. It is a value investment when the country equities are very cheap. At the moment, it has recovered a lot from covid lows and I do not view South African stocks as value priced.

What the society needs most is pacific redistribution of wealth, and wealth creation on the other side. There is a lot of unmet demand from poor people because they cannot afford some goods and services, this is why the economy can grow many folds.

But the middle class must be developed to unleash that demand, and in my opinion, it sounds socialist, but only when the richest class will share some of that wealth, will a middle class economy, buying more yoghurts, fish, sports equipment, cars, home equipment, leisure, emerge fully.