Calm down, the weaker rand is good for SA

Look forward to rand that remains weak in foreign exchange markets this year.

I know from experience that predictions about exchange rates are futile, but my intuition is that South Africa should learn to live with a rand-dollar exchange rate of R14 to R15.

As I write this, the dollar is around R16, a bit too weak perhaps, giving some room to recover. The trend of the rand has been downwards for the last 10 years, but it appears to have overshot the mark in its depreciation recently and could rebound. See Graph 1.

Graph 1 Rand10yearsGraph 1

Also, we tend to move in line with the Australian dollar, and the $/rand and the $/Aussie rates have diverged markedly, also recently. See graph 2.

Rand per US$ and Aussie $ per US $

Graph 2

But if the rand recovers, will it go back to R6 or R7 to the US dollar? I hope not.
Why I think the rand-dollar exchange rate should be at least $1 = R11 or so is simple: South African inflation is higher than that of our trading partners, including the US.
What is forgotten is that in the West for some time now inflation has been well under control. It is so low that it is not a matter for discussion. In fact it has dropped so low that the new fear is deflation, which is when a currency becomes stronger not weaker day by day. It’s buying power increases, so that buyers defer their purchases, leading to company closures, further buying power increases and so on in a deadly spiral.

South Africa on the other hand has struggled to contain inflation, which at times moved well out of the 3% to 6% target set by the SA Reserve Bank. We have no reason to fear deflation.

You can see how this would affect the exchange rate. If we have higher inflation than the US, our currency is worth relatively less and has to depreciate.
Take the following example. An American tourist visits South Africa in the year 2001 and pays R500 for a one-night stay at a bed and breakfast establishment. He returns towards the end of 2015 and wants once more to stay at the same establishment. Over the course of the 15 years South African prices have more than doubled. The have risen by 126%. US prices have risen too, but by a more modest 36% or so.

When our hypothetical tourist arrived in 2001 he got R7,57 for every dollar he exchanged (also hypothetically, since this is the rate recorded by the Reserve Bank, not the lower amount the bureaux de change offer). So he paid around $66 for his room.
If the dollar rand exchange rate had not fallen over the 15 years, the returning US tourist would exchange his dollars at the same rate of R7,57 and pay for the same room more than double the amount of dollars, $136 instead of $66, because SA inflation has boosted the cost of the room to R1 130.

Of course, his dollars are worth less than they used to be 15 years ago. US inflation means that $66 bought in 2001 needs around $91 to buy today, so perhaps our tourist would take that into account. He would still be paying for the room, in nominal dollars, more than double what he paid in 2001, and whatever way you look at this, it is not a bargain.
Remember that many other countries in the world are desperate for tourism dollars, including financially troubled Greece, and if their currencies don’t come to the rescue they have to take the pain of absorbing inflated costs and cut their prices.

What the B&B the tourist returns to should be doing is charging the equivalent of $66, which is what the room cost the first time round and a deep discount, adjusted for inflation. And that is almost exactly the amount the tourist will spend at the current weak rand.

By my calculations the exchange rate implied by the inflation differential between the US and South Africa should be R14,50 to the dollar. That’s quite a bit more uncomfortable for our iPad-toting lovers of imported food than R6 or R7 to the dollar. It is also the point: as all things Apple once more become unaffordable, we have to learn to live with hardware and software that isn’t the latest, try to buy cars that are not completely reliant on imported spares – some are supposedly assembled here with local content – and generally buy local.

It should spur import-substitution, where that is possible. A lot of the taste for foreign goods is probably snobbery. If South Africans can make Mercedes Benz cars and BMWs for export, I don’t see why we can’t make goods of a quality that we want to consume. I wouldn’t dream of buying foreign wine on a regular basis when good South African wines are available. And why we can’t farm enough chicken in a way that competes with US chicken imports, especially with a devalued rand making those chicken imports expensive, is beyond me and others.

The rather panicky coverage of the fall of the rand should not surprise us. It doesn’t help that there is panic in the air globally, with overseas analysts warning of a replay of the global financial crisis. If this is so, the floating exchange rate is playing the role intended, which is to act as a shock absorber for economic crisis.

A weaker rand does mean that higher inflation is certain, at last in part because our oligopolistic economy ensures that imported inflation is passed on the consumer, and in part because we have not psychologically accepted that inflation is an evil and that informal indexing makes it impossible to drive inflation down to the level of two or three percent.

Higher inflation means higher interest rates, but not as high as they would have to be to decisively protect the foreign exchange value of the rand, as in the Asian crisis of the late 1990s. Truly high rates would kill off inflation too, along with the economy, so the South African Reserve Bank will not be too ambitious.

The South African economy has been through worse, although its travails were self-inflicted in previous decades under apartheid. This time round the country is not having to live with the immediate aftermath of having pursued war on its borders and having expensively Balkanised the country into corrupt homelands.

*An important caveat: none of this is financial advice, nor should it be understood as such. I am an economics journalist, not a financial adviser and these are simply ideas.

The rand’s fall – it’s deja vu all over again

rand dollar etc

At around R13 to the dollar now, our exports must be quite competitive. They could get quite a lot more competitive soon. At the same time as being a temporary boon for the mines, a weaker currency should boost the trade balance because we’ll all have to cut back on imports. A weaker currency also means higher inflation, and higher interest rates, so pay off debt now.

I believe the rand will weaken further before it recovers, at some stage. However, guessing even medium-term foreign exchange rates is a mug’s game, as was shown when the rand dramatically reversed against the dollar in 2002 after careering downhill in 2001. Many South Africans who had shifted as much money as they could out of the country and into underperforming foreign assets must have felt sheepish as the rand inexorably strengthened and the value of their foreign holdings fell.

The rand went from a low of around R13 to the dollar – with lots of forecasts that it would fall to R20 to the dollar – up to the R6 mark.

Then, as now, hysteria about the decline of the currency rose in tandem with the currency’s decline, even leading to a commission of inquiry about a conspiracy of speculators benefiting from the rand’s fall. The inquiry was interesting but inconclusive. No smoking gun was found.

Almost the only person who forecast a reversal at the time was an economist called Jos Gerson, who based his idea on the similarity between the commodity dependence of the South African economy and the Australian economy, and what had happened to both currencies.

Based on a purchasing power parity comparison of the rand and the Aussie Dollar against the US dollar Gerson reckoned the rand was undervalued, forecast that the rand would strengthen, and it did.

So what is the position now? The graph shows an uncanny similarity in the movements of three currencies of three resource-dependent countries: Canada, Australia and South Africa, with the rand plotted on the right axis, simply for comparison.

Comparisons are misleading, however. Over the period of five years that this chart measures our Commonwealth cousins need only around 24-25% more of their currency to get a dollar: we need around 75% more. Using The Economist magazine’s Bic Mac Index as a very rough guide, the rand is undervalued by between 30% to 56%.

It must be mentioned that if consumer price inflation is used to adjust the rand and the dollar, the R13 of 2001 would be equal to around R21 now. So the currency has further to fall to get the lows of 2001.

A number of other things have changed since the rand plummeted all those years ago. Chiefly the commodity super cycle seems to have turned against us decisively. I say seems, because over the years I have become aware of how perilous forecasting is.

As an example I recently found a 2008 article that posed the question: are the days of cheap oil over forever? Oil prices at the time were said to be heading towards levels that would be damaging to the world economy. Some even spoke of $200 a barrel. Then the global financial crisis hit, and obsession with oil prices evaporated as the market adjusted first to lower demand and then to much higher supply.

Crude oil was trading below $50 a barrel at the time of writing. I would never have predicted this fall, though some reflection might have reminded me that when prices surge, supply often appears as swiftly as magic. Oil’s sudden fall, like the depth of the financial crisis, took me and almost everyone else by surprise. Uncertainty now stalks the markets, so I am definitely not predicting what will happen to the rand dollar rate, despite all the signs that further falls are inevitable.

Ignore the hysteria about Windows 8

Two big myths about Windows 8 are doing the rounds.

Firstly, there is the idea that Windows 8 is so different from Windows 7 it is putting potential customers for the new version of Microsoft’s operating system off. It has even been described as Microsoft’s “New Coke” moment.

Windows 8 isn’t that different. Apart from the pretty tiled interface and the lack of the Start button, little seems actually to have changed from Windows 7.

True, some changes are not intuitive and need getting used to. And using the same OS for tablets and PCs is ambitious. But users always complain when popular software changes, even when the changes are mild.

Windows has had truly disastrous Windows versions in its history: Windows ME and Vista spring to mind. Vista was marred by some truly irritating features on release, but many of these were fixed later.

The reason Windows 8 may struggle is that Windows 7 is so good that there is little reason to change, unlike the move from Windows 98 to XP, or XP to Windows 7.

Secondly, the argument is that the computing market has changed so radically that people are not buying PCs, and not buying Windows tablets, so Windows will lose out.

Leave aside the tablet market for a moment. People may be buying fewer PCs but they are still buying PCs, though different PCs. Consumers may tend to contemplate buying notebooks rather than desktop PCs now, because these have come down in price substantially. But in the end if you want computing power at a reasonable price, you need some version of a desktop PC. Desktop PCs are still more easily upgradeable and more adaptable and notebooks and tablets are hard to use for many work purposes. I struggle to use my iPad for spreadsheet work and intense writing projects. I do use it for media consumption and some creative work. It tends to occupy the fun part of my life, and I’m happy to leave it that way.

Whether you use a notebook PC or a desktop PC you have limited choice in operating systems. Three operating systems jostle for your attention. Windows, Apple’s X OS, or Linux.

I would dearly love to adopt Linux and ditch Office. I haven’t yet had the courage. The big problem is that Linux users cannot easily run iTunes, all the Office applications, and many other Windows-based programs.

You can get Office for the Apple. Adopting Apple’s OS, however, means you have to change your hardware and buy into an expensive Apple ecosystem. Not all of us want to spend so much money, especially in South Africa, where Apple products command a bigger premium than in the US.

That leaves Windows, which reached a level of excellence with Version 7 that I admire. It is stable and user friendly. Microsoft has also made Windows less vulnerable to malware and viruses, and made available its own free anti-virus software, saving us all money and effort.

The success of Windows 7 will delay the adoption of Windows 8 by businesses, who might also have delayed the switch to Windows 7 from XP. In tough economic times, business have even more incentive to delay the adoption of Windows 8.

Microsoft is offering attractive pricing for people wanting to upgrade, especially since you can upgrade from XP or Vista.

I expect the noise about Windows 8 will die down after a while.

Of more concern is Microsoft’s new pricing model for Office. But that is another story.

How to be a colonial: 10 tips

1. Constantly compare your country, its people, its practices, its food, drink, scenery and products to the overseas version and always find the local version wanting.
2. Ignore the cynicism and spiritual poverty of nations who have seen better days.
3. Have no faith in home-grown solutions. Always look for international or European or US best practice.
4. Strive always to be “world-class”, whatever that is.
5. Hold in your heart a deep-frozen vision of country your ancestors came from, and foster a nostalgia for a time and place that never really existed, except in some books.
6. Travel thousands of kilometers to see second-rate musical theatre.
7. Venerate a political system founded on global exploitation of the natives.
8. Build houses and buildings better suited to the chilly, sunless Northern hemisphere than the sun-abundant South.
9. Fulminate against corruption of developing countries and not against the rich Northern companies that do the corrupting.
10. Never be happy with where you are.

The cost of losing Graham’s name

Fri, 25 Jan, 2013

Reg Rumney
The Grahamstown name-change saga prompts me to consider the political and economic cost of such a move.

Economists are wont to separate economic and political considerations. In practice, it is difficult to do so.

So an argument could be made that changing Grahamstown’s name has no tangible economic benefit and that even if the cost is low the money could be better spent elsewhere.

The argument would be that the symbolic value of ditching “Grahamstown” is outweighed by economic considerations, such as changing marketing materials, signage, the loss of a well-known tourist brand – and more importantly the cost of changing legal documentation.

At the outset let’s realise that any cost argument may not convince the proponents of a name change to stop calling for one.

Though there has been stiff opposition from Afrikaner groups to the proposed change of name from Pretoria to Tshwane, mayor Kgosientso Ramokgopa in November last year vowed to change the name whatever the cost or opposition.

Costs can be disputed, and a retreat from a position is defeat.

My first guess was that the direct cost of changing Grahamstown’s name would not be great, involving a few name boards and some stationery and marketing material.

Yet if the Lowveld Chamber of Business and Tourism’s concerns about the name change of Nelspruit, the capital city of Mpumalanga, are correct the cost of a name change is much higher.

According to a City Press report last year the chamber estimated the cost of changing the name of Nelspruit to Mbombela to be around R350 million.

A chamber spokesperson Linda Grimbeek pointed out that not only name boards will have to change, but also items like stationery for local businesses.

The biggest cost to be borne by the municipality however, would be changing “general plans, title deeds and registered bonds on the deeds”.

This would make up most of the R350m cost.

If a name change is going to cost Nelspruit this much, how much will it cost Makana to change Grahamstown’s name?

And has a proper cost-benefit analysis been done?

I find it hard to ascertain the value of the Grahamstown brand. I reckon that the Garden Route, the surrounding game farms, the National Arts Festival and university affect tourist receipts, specifically B&B and other accommodation income, more than any historical meaning of Grahamstown.

Aside from hard figures, there is always the emotional price attached to any major change in the environment in which people live as opposed to the possible benefit.

Many Grahamstown residents will find a change an emotional cost, hard to quantify but nonetheless real. Names evoke nostalgia as well as resentment, and not everybody knows the history of Colonel Graham well enough, or cares enough to want to see part of their personal history vanish.

I suppose that since the people who oppose a name change are considered to be largely white and opponents of the ANC, any resentment at the process is a plus because a name change is then a political victory.

In politics, it has been noted, it is not enough for you to succeed: your opponents must fail.

The political cost for the majority party in the council then is minimal: upsetting people who will not necessarily vote for you. The political benefit is positive, pleasing the members of the party at local and national levels.

Moreover, it’s an easy win.

A name can be changed with much less effort than distributing resources, or erasing other legacies of apartheid and colonialism.

This should be another lesson we draw from the debate.

When the name is changed, the residents of this city can get on with the urgent task of improving the reality that the city name represents.

If this does not happen, the name change will be a bitter reminder of unfulfilled promises of a better life for all.

Moreover, marketing a city as a tourist destination is more useful if the quality of the experience enhances the chance of a repeat visit.

A name change might not even be up for discussion if national politics didn’t dominate local politics.

Local politics might dictate that much more urgent, non-symbolic problems be fixed first, such as the lack of a regular supply of good quality water, and the inefficient collection of rates and taxes.

Finally, there is a cost that isn’t considered, and that is losing the spark for historical memory.

I fear that the very enormity of the colonial conquest of the Eastern Cape that Colonel Graham represented will be forgotten once Grahamstown’s name changes.

I don’t think we should forget or gloss over the brutal reality of colonialism he represents, and his specific crimes against the Xhosa people.

In memory of Marjorie Dawn Rumney August 7 1926 – November 9 2012

I have said my final goodbye to my mother at the Braamfontein Crematorium.

The newly renovated crematorium is in the grounds of the leafy Braamfontein Cemetery, the long home of many of the city’s early residents. It is fitting that she departed from this world in that suburb, because my mother grew up in a one-bedroom dwelling in Braamfontein, and I spent some years there as a child and later as a student at the University of the Witwatersrand.

Taped to the side of the coffin was a certificate allowing the cremation of Marjorie Dawn Rumney nee Roux, and describing my mother’s occupation as “housewife”. This struck an odd note, even on an official form. What relevance did my mother’s occupation have to her cremation?

My mother died in her bed on Friday November 9 at the age of 86 at Fleming House, Randjes Estate in Johannesburg. Her death was unexpectedly swift and she died with her mind intact, and having seen her two grand children grow to adulthood.

As I try to make sense of the passing of someone who was so much part of my life, a flood of memories has come to me about my mother, and it is true that my mother was indeed a housewife, though she helped my father in his business for many years.

And she was apolitical, having been concerned with more homely things than politics, but one of the things I remember about my mother is how she was responsible at an early age for my political awareness, an awareness of social injustice.

I was around seven, having just started school, and I was with my mother in the centre of town near the building in which my father had his workshop.

We were observing a queue of black parents around the block at Juta’s bookstore, at the corner of Loveday and Pritchard Streets. They were buying school textbooks, then provided free to all white school pupils, including me.

“It’s not right,” my mother said sadly.

I remember that moment, and it must have shaped the way I saw the system subsequently, because when I arrived at Wits around a decade later, I was ready to receive the message that the system of racial separateness was anything but fair or equal. So I became of the ‘betogers’ regularly protesting against Apartheid on Jan Smuts Avenue, outside the University.

Later I went to work for the only truly liberal newspaper at the time, The Rand Daily Mail. She was proud of my success in journalism, and in general seemed a little surprised by what I did. I remember that she once excitedly told me she had seen me on TV, “saying something”.

From her I learned a certain uneasiness at the effortlessness with which some white people assumed the role of boss or officer class. The other saying my mother was fond of was, “Six feet of earth makes us all equal.”

She bore the scars of poor white poverty all her life, but the one thing she did not suffer from was a sense of class inferiority or superiority. However, the poverty in which my mother and father grew up affected their whole lives. Throughout her life, my mother was careful with money and avoided extravagance.

Her indulgences were dolls, and the cheap ornaments the arrival of goods from the Far East allowed her to buy. She also threw nothing away, and we were astonished to find the first time she had to move from the centre of town after my father died in 1985, packets of spices with Sixties-style branding, and soap so old it had lost its fragrance.

Much of what my mother collected was collected for the sake of collecting, and to try to preserve memories. She was not materialistic in the usual sense, and loved animals, particularly the birds we kept in the flats in which we lived. They were the only pets I knew when growing up.

She was simple in her lifestyle and her tastes, and she befriended people quite easily. She was not judgmental, and treated people, black and white, as people. She was, in a sense, quite childlike. Having been short her whole life, and only having graduated with a Standard Six education, she was I think often looked down on literally and figuratively.

My mother was proof of the reality of genetics in determining length of life. She came from a generation that smoked, drank and did no exercise. And she believed that old age began at 40, and for some reason that she would not live into old age. It was ironic that the biggest blow she endured was living far longer than my father did.

As an only child, I was very close to my mother, and I gained from her, I think, an ability to empathise with people, to see that people were just people and not English or Afrikaans or black or white, and an appreciation of music and art, though my love of reading my father encouraged. She saw to it that I had what I needed as a child; in fact as an only child, I was quite lucky to have all the resources of the family devoted to me. My mother may have only had a Standard Six education, but she longed for more out of life, certainly for more than working in a factory, which was her first job.

She had a sense of humour. I remember her telling me the story of a new arrival at the old age home, who was talking to another more settled resident. The new woman said, “I’ve come here to die.” Her companion responded, “Oh, what colour?”

Because of her sense of humour and a kind of stoicism in the face of real adversity such as growing old imposes on us, my mother inspired affection in people, right into her last days. She had few regrets, and she simply wanted to get on with her cutting out of pictures from magazines in a kind of scrapbooking exercise, brightening up her room, getting back to knitting, which was another of her joys, and walking in the beautiful gardens of Randjes Estate.

She was increasingly uncomfortable in the last few years, though not in pain. When I took her home the last time I was in Johannesburg, she was shocked at her own inability to move without help. This was disconcerting for her, and frightening.

My mother’s death was swift, and for that mercy, I am grateful. She will live on in all our memories, but more than that, I hope that the spirit of human kindness she embodied will live on in us.

The Economist gets it wrong – again

It’s easy to satirise the kind of journalism that led to the now famous October 20th Cry the Beloved Country cover story of the Economist magazine.

There are two stories in the edition, a short ‘leader’ article and the main story. This is the intro of the main story in the magazine:

It has made progress since becoming a full democracy in 1994. But a failure of leadership means that in many ways, South Africa is now going backwards.

The magazine then lists a hodgepodge of new and old problems and economic indicators, including unemployment, inequality, and education.

It’s an easy kind of journalism: make up your mind about the story and then find the facts to fit.

Apply this approach the UK:

It has made progress since it stopped being an imperialist exploiter in the 1960s. But a failure of leadership means that in many ways, Britain is now going backwards. Unemployment, economic growth of zero or worse, increasing xenophobia, youth riots, a troubled coalition government running an unpopular austerity programme, house prices that make home ownership impossible for new entrants, an ageing population that puts a strain on the fiscus, etc spell bad news for the green and pleasant isle.

This is not to diminish our problems. They are real, and need fixing.

One that the Economist devotes some space to is the failure of education to give many ordinary people hope of breaking out of poverty. This is more than sad, it is enraging.

Yet many of the problems the Economist cites, such as inequality, will take more than ‘leadership,’ whatever that implies to solve. At least some of those who chortled with glee in South Africa at the renowned international magazine having a go at the ANC are unlikely to want to make the sacrifices that greater equality demands.

Solving inequality through massive, quick redistribution of wealth would arguably level down rather than up, so that those who could not flee would be left equally poor. It is a problem faced by other countries, such as Brazil. The Economist should know this, so why it harps on inequality is a puzzle.

It is the central tenet of the Economist’s leader article that is most specious: South Africa is fated to fall behind the fast-growing African countries to its north because it is becoming a one-party-state of the kind that used to be popular in Africa. Indeed, the Economist says that Nigeria’s economy could eclipse South Africa’s.

There is a farrago of fallacies here; they start with the notion that South Africa is in danger of becoming a one-party-system. There is no evidence of this. The ANC is in power because the majority of people voted for it in the last election.

The rest of Africa is growing fast, but even the Economist admits that this is often off a low base. Nearby Mozambique is a case in point. This used to be the poorest country in the world, and it is massively aid dependent. It will be some time before Mozambique can become a developed country.

True, both Nigeria and Angola have shown rapid, if erratic growth. Both have oil, which in an era of high oil prices is the explanation for that surge in growth. But Nigeria, though nothing like as grim as under the dictatorship of Abacha, has its own troubles, namely religious violence and corruption, while Angola’s enclave economy has yet to see real democracy and its inequality could outdo South Africa’s.

And the oil price may not stay high forever, just as it did not stay low forever when the Economist magazine famously ran a cover many years ago saying the price was too low. The Economist, which once ran a cover describing Africa as ‘The hopeless continent’, now appears to believe the opposite.

Most importantly, economic growth is not a race. If Nigeria and other African states see huge rates of growth, that is more likely to benefit South Africa than not. It seems to have escaped the Economist that the rest of Africa is our backyard. Our home-grown multinational MTN has its biggest investment in Nigeria. South African companies are present all over Africa. If they do well, so are we likely to do well.

Angola is a promising trade and investment destination. True democracy in any of our neighbours is to be celebrated, because it makes the region more attractive for investment, as well as preventing the kind of abuses ordinary Africans have suffered for so long, at the hands of colonial governments and then their own people. Let’s not forget who left the mess of underpopulated, illogically carved out, underdeveloped countries that Africa is.

And incidentally, can we can that now haggard cliché of crying the beloved country?

Grahamstown’s genteel poverty is legendary.

Sunday, 16 Sep, 2012

Reg Rumney

In Johannesburg, if someone is said to have money, people ask, “How much?” In Cape Town, they ask, “Ah, but is it new money or old money?” In Durban, they ask, “How much of it is offshore?”

In Grahamstown, they ask, “What’s money?”

Yet I am surprised when looking around Grahamstown at what seems to be reasonably high levels of conspicuous consumption. Granted, the number of SUVs and Mercs is outstripped by the number of daddy-bought entry-level cars and lecturer-owned skedonks. The SUVs and Mercs, and the fashionably fitted households do exist, however, and the people who inhabit them do not skimp on material goods.

The difference between those who appear to have money and those who don’t is, I am reliably informed by someone involved in finance in Grahamstown, often debt.

To be sure there are some debt-free people here who are wealthy by Grahamstown standards. But many of the luxury vehicle drivers who eat out all the time and wear expensive clothes simply have access to more credit than the rest of us. They are floating on a sea of debt.

Now at this stage you might expect some kind of jeremiad against the evils of debt, recalling the words of Polonius in Hamlet: “Neither a borrower nor a lender be.”

To be sure, the terrible events at Marikana have, among other things, raised the issue of the levels of debt in our society. It transpires that the earnings of some of the miners, low as they are, were further depleted by garnishee orders as a result of unpaid debt.

Some of my fellow journalists earnestly warn people against borrowing, or raise the spectre of the consequences for South Africa of high levels of household debt, or the perils to the economy of “unsecured lending”. The technical term for this is moral panic.

Debt is, indeed, a double-edged sword. Without it, however, societies find it hard to function. The role of banks is not, as some suppose, to keep our deposits safe but to lend the money out many times over to businesses and individuals so that they can function in this capitalist economy.

Individuals do not need as much debt as firms, but they also find it hard to build capital without it, in the simple area of residential property. When banks stop lending, property markets tend to collapse. A slump in residential property markets soon feeds into the broader economy through the “wealth effect”.

What this means is that homeowners who thought they possessed a goldmine find instead they have a house with all the costs that entails. This is especially so when houses have “negative equity”, which means that the house can be sold for less than the bond taken out to buy it.

Individuals also often need debt to buy the means of transport to and from work.

I have known a few people who have lived without any debt at all. Inherited wealth or some kind of windfall sometimes plays a role, enabling the purchase of a car or a house or both. Some, among the middle class and the poor, have incredible self-discipline.

Moreover, there is a good psychological reason to avoid debt. While some people happily ignore the credit fuelling their lifestyles, sometimes until it is too late, for many it is a constant mental weight.

Conversely, I seem to remember that having cash in the bank can be enormously mood-lightening.

We need to differentiate between careless or uninformed spending based on debt and the distress debt that also characterises our society.

Distress debt is that debt caused by, for example, the cost of a funeral, paying for hospital or other medical emergencies, and a host of other ills that befall ordinary people unexpectedly and for which money has to be urgently sought. For some middle-class families, the cost of rehab falls into this category, since medical aid schemes rarely pay this cost in full.

Many of the truly poor in South Africa, to summarise academic research, are not poor because they are in debt: they are in debt because they are poor.

In any case, if you have to use debt, here are few tips.

First, mortgage debt is the cheapest debt around. Using your mortgage to buy a car is the cheapest way of raising finance, though it delays that wonderful moment when your house is paid off.

Having a paid-off house and a debt-free car is financial freedom. While mortgage debt is relatively low-cost, paying off mortgage debt is the best way of saving, because it is tax-free.

There is a lot more to using credit wisely, and Grocott’s reporters may well have more tips on this and other personal finance matters in future.

Audit report is a symptom

(Column originally published in Grocott’s Mail August 7 2012)

In reporting on municipal finances I wonder sometimes if we focus too much on the negative. Take the auditor general’s recent report to Parliament on municipal audits, which is a model of transparency.

News items on the auditor general’s 2010-11 general report on local government audit outcomes painted a picture of widespread failure, highlighting the fact that only 5% of municipalities were found to have “clean audits” i.e. they were accepted with the auditor general expressing absolutely no “qualifying” reservations or “findings” about them.

Reacting to the spate of alarming reports, Xolile George of the SA Local Government Association wrote in City Press to defend municipalities from what he saw as exaggerated picture of “virtual collapse of financial management in many local governments, including the major cities”.

George pointed out that there is not much difference between “clean” and “unqualified” audits: clean audits sail through the audit process. They have no “findings,” and are the ideal. But unqualified audits “with findings” still make the cut.

The problem is with audits that are “qualified”; those that attract “disclaimers” or “adverse opinion”; or those not submitted on time.

Around half of the audit reports are unqualified, with or without findings (45%). Around half don’t make the grade for the reasons listed (55%).

George is right, however, to point out that at almost half of the municipalities the “financial statements contain no material misstatements and there was full compliance with the law”. For that is what an unqualified audit means.

“Qualified” does not necessarily mean that all the municipalities with this audit status are corrupt and full of theft and fraud. It only means that some municipalities failed to do their books properly, some failed so dismally that the auditor cannot express an opinion, and some completely failed to make the deadline for reporting.

True, all this is serious. Not having proper financial records does open the door to corruption and misspending. That’s why there is an Auditor General and a system of auditing. And skills, leadership and accountability are needed to ensure the system works.

The AG found that key officials at more than 70% of those audited did not have “minimum competencies and skills required to perform their jobs”. And he wrote that at three quarters of the municipalities there seemed to be no accountability for non-performance. Moreover, went on to point the finger at mayors and councillors who are “not responsive” to issues identified by the audits and who brush off the AG’s recommendations.

Having a number of examples of proper auditing, however, where the AG does not have to intervene at all shows that it is not impossible to do the job. We need to find out why that is not the state of affairs at the remaining 55% of municipalities. For in all the reporting I did not see a single municipal voice. Is there something we are all missing? Could the reporting systems be simplified? Are the municipalities really getting enough help from provincial and central government?

Municipalities lean heavily on consultants to make sense of the accounting. On average, the 343 municipalities and municipal entities spent more than R1.2-million each on consultants, excluding consultants from government, And this was because of a lack of technical skills rather than vacant posts. It appears municipal employees are not learning much from the consultants, because the AG cannot forecast whether municipalities will rely consultants less in future.

From my point of view and probably for at least some people in municipalities, accounting is less important than managing, and I am not concerned if they seek outside help. I would not be as worried about audits at Makana municipality if I was confident that the city was being managed properly.

If all the roads were paved properly; the water quality good and the supply consistent for all residents; the sewage adequate for all residents; and complaints and problems promptly fixed, again for all residents, I guess audits would be less of a concern for us. But then if the municipality could do these things it could probably get its act together to submit proper accounts.

For any of this to happen, citizens must use their voting power to hold their elected politicians to their promises. As long as we are passive, there is no accountability. We can’t rely on the Auditor General to do the work of local democracy.

Lastly, the figure that should have featured more prominently in all municipal audits is capital underspending. If we are ever to begin to get rid of apartheid backlogs in services, the money supposed to be spent on doing that cannot be allowed to lie idle. In our particular audit report, as I have pointed out before, R27m or 28% of the capital budget was not spent. That for me is the true shame of Makana.