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Bruce Whitfield's Business Week, business without the boring bits. And on the podcast this week, the only way is up. How the Reserve Bank Governor is squaring up for the next MPC meeting in 3 weeks' time. Shoprite buying Vida e Caffè. And now, how will Sixty60 deliver a hot brew without spilling it? That's going to be its next biggest challenge. And of course, markets are going to make it a lot harder for governments and ultimately you to borrow money. All of that on this week's podcast.
Let's kick off with the brutal biz quiz this week. Before becoming a household name, which technology firm was founded under the code name BackRub? That answer coming in a bit.
Let's kick off the podcast with Helena Wasserman. Helena is the business editor at News24. Lots of results out this week, Helena. Lots of really interesting insights as to how the country is evolving and shaping up, and quite a few retail results and some interesting results particularly from The Foschini Group and Woolies.
Yeah, I mean the new sheriff in town, the new CEO Sam Ngumeni, came in in June, guns blazing. I mean 3 weeks later, the head of fashion, beauty, and home was out. There were big executive changes. He continued with that yesterday. Results came out. It was decent. Big slowdown in the last six months of the year. But from his statements yesterday, I mean, it's clear the CEO is not a big fashion fan. It's very clear the focus will be on food. That's where the investments will be. He was of course head of food previously. So, they're planning to make their money especially through food services, restaurants, coffee stations. They want to double their outlets at Engen forecourts. Big push on food deliveries via Uber Eats. He was very frank about the shortcomings of Woolies' own online platform. And you have to wonder about the future of its Australian clothing business, which again underperformed.
Australia also really biting TFG, the owner of Foschini, @home, and Coricraft reported results, and the Australian business really put them down and under in Down Under. Sales were down 5% for the past few months. They own a couple of menswear clothing retailers there. South Africa TFG sales not looking too bad. Online sales via its Bash platform up more than 50%. And this of course I think is informing the decision to close about 280 stores over the next two to three years. I mean Foschini is currently trading at around 50 rand, from above 100 rand a year ago.
It's astounding, isn't it? And we haven't yet begun to see the beginning of the end of retail as we know it in South Africa because online has been so slow to take hold and because visiting malls is still a national sport. The retailers have been able to see that, but not enough people carry enough bags out of the malls; it's more entertainment than it is a shopping experience. And more and more when you go into retailers and you say, "Oh, I'd like a pair of those in that size, please," they say, "Oh, can you go onto the app or can you go to the site and you can order it? It'll get delivered." And you say, you're talking yourself out of a job, guys. We're catching up with that part of the world.
Anyway, talk to me about Eskom. And I mean it's the world's best case study on a business being brought back from the dead. From sitting on too little electricity and now sitting on a whole bunch of cash. Is this the same Eskom?
Yeah, it's crazy. I mean just imagine going back to like 2023 where we were all sitting in the dark waiting for grid collapse, you know, and as you say, in less than a few years Eskom is generating almost too much electricity. It turned a profit of 30 billion rand, results announced this week, sitting on 125 billion rand in cash. That's of course due to the massive solar build in South Africa, but also because we are paying so much more for electricity. I mean those electricity rates have been throttling, but we're also paying another cost and that's Eskom's pollution levels, nearly triple its own target, a third higher than the year before. So you know, on paper it's a very good turnaround story, but we're all paying the price.
Yeah. I mean they can't fix everything at once, and I'm guessing the environmental stuff has been pushed literally to the back burner because they had to save the business first. But yeah, it's got to take a really serious focus. Air quality is a fundamental thing. Talking about pollution and air quality and issues around that, Sasol is often vilified for its own emissions, but good news for them finally as well. They've had years of bad news. What's the good news?
Yeah, I mean the good news is that they are sitting in the pound seats. Profit up 9%, almost 25 billion rand, doubling in refining margins. Net debt falling 11% to $3.3 billion. I think that's the lowest debt level they've had in more than a decade. That's of course all due to surging fuel prices courtesy of the Iran war. But they also saw a higher output at Natref, for example, fuel sales volumes up, production surging. As you mentioned, Secunda also, you know, output looking better at Secunda. That's the world's biggest single-point emitter of climate warming gases. A new study came out this week: a thousand deaths a year due to pollution linked to Secunda. But you know, you can't believe it. I mean last year was trading at 65 rand; it's close to 200 rand at the moment. So quite a stunning turnaround. Will it last though?
Well, it depends on how long the Strait of Hormuz stays closed, of course, if we get a bit of hope on the oil price. You know, we've gone from 60 to 120, now around the sort of mid-90s I think at this moment. A breakthrough there will change the fortunes of Sasol as well. It is hugely exposed and vulnerable to input cost of oil.
Helena Wasserman, the business editor at News24.
Governor Lesetja Kganyago is with us. And we've seen American bond markets pushing up the cost of borrowing, the US national debt sitting at $40 trillion, there were trade wars, a damaging physical war in Iran pushing up energy prices for the rest of us, creating a potentially dangerous inflation cocktail. Governor, inflation spiked in South Africa at 5% in June. It seemed to soften off as the months have gone by, but you and other central bankers have been holding off on aggressive interest rate increases. The new Fed Governor Kevin Warsh on Friday, though, he is warning that inflation is still very much lurking in the global financial system. Would you concur?
Yes, inflation is still very much lurking in the global financial system. It's a very challenging period for central banks because normally you would experience a shock and you can look through that shock. When the shocks come one after the other and even overlap, it makes the decision-making process very difficult. So think of the 2022 aftermath. It was the supply chain constraints. Then you had the war on the Ukraine, and that also sparked the great inflation. And then now you have got this war in the Middle East and you have got the choke points with the strait. So it's not just the oil; it's the fertilizers. Then the war in the Ukraine, now they are attacking each other's infrastructure choke points with respect to wheat prices. I mean Ukraine and Russia account for 40% of global wheat output. That's significant, and that is going to feed itself through. So we are dealing with, for lack of a better word, what I would call a poly-shock. And that means that the decisions that we take are not that they were ever easy, but they have just become even more difficult.
I mean, I like him very much, but I don't like what he says. Wandile Sihlobo, the agricultural economist, warning us, of course, of a La Niña effect likely to have a huge impact on summertime temperatures in South Africa and also on rainfall. And we haven't had a big drought in some time, but if the forecasts on La Niña are correct for this season, that of course is another big inflation risk because of course we all need food, and if basic food prices start going up, that has a terrible impact. Are you concerned about that?
Yes. You mean El Niño, not La Niña. La Niña causes floods; El Niño causes drought.
You see, I'm just checking on you. You've been studying it up, you've been reading up on it, so it's good.
It is something that we are watching. It is in the horizon. And we, at one of our MPC meetings, we did put a scenario where you combine the current shock with an El Niño scenario. These things, as climatologists and meteorologists update their models, we will have a better understanding of what we are. But we have also seen that there are other developments here, namely that we have had our grain storage being higher than what it was at the previous El Niño. That might provide a cushion, but it will only provide a cushion in as far as supply is concerned. It will not cushion you against price because if the price rises, even the stock that you have in the silos reprices at that newer price.
So El Niño is a concern, and again it would add to that shock. So think of it: the war in the Ukraine is still on, the war in the Middle East is still on, the Strait of Hormuz is closed, there is a shock onto fertilizer prices. We had managed to escape this because the rise in fertilizer prices came after our planting season. But we are now in September, our planting season is setting in, and these fertilizer prices are elevated, and that poses a challenge for our farmers.
So you have got this multiplicity of shocks that central banks have to navigate. And in the past where we just said we will see through a shock and then respond to the aftereffects of the shock, if it is a multiplicity of shocks, then they reinforce each other and forces you to actually take a stance much earlier than you would have otherwise had taken. But there is also another aspect here, and it is that the starting point matters. The previous inflation shock in 2022 found us with inflation above target and with a policy rate that was negative in real terms. And this time around, this shock came in in February; it found that inflation was bang on target. So the starting point mattered, and the policy rate was positive in real terms, which meant that the manner in which we respond to the aftereffects of the shock can continue to be measured.
What is in no doubt is that the Reserve Bank is committed to getting inflation back on target. That's the commitment we make to the South Africans: we will bring inflation back to target. And as I had said, we are in a stronger position than we were when the previous shock took place.
And that's really good news. However, and you're not going to answer this question because it's an unfair question and it's a market-moving question, but we started the year in the hope that we get another interest rate cut or two because inflation was under control. And then everything blew up on the 28th of February, of course, adding to this polycrisis of uncertainty that you talk about. It feels unlikely that you're going to have any choice but to start raising rates at some point, if not this month, certainly soon.
Well, you know, in January when we held our policy meeting, our quarterly projection model had set out a path where by the first or second quarter of next year that the policy rate would have declined to 6%. This shock meant that that path had to be revisited. And you said that we would have to raise rates at some point. We actually did raise rates at the May meeting. So we did that. And here is my message to South Africans: we were able to take these baby steps with 25 basis points precisely because we have eaten our vegetables. We had taken the inflation target lower, we were on target, we had positive real interest rates, and that gave us the breathing room that we do not have to respond as aggressively as we had responded in the past. But rest assured, we will get inflation back to target.
Yeah. And I guess the answer to any question on the future of interest rates is it depends. It depends on whether America can get its act together quickly, whether Scott Bessent, who is worried about the bond market, can convince the bond market that somehow $40 trillion of debt is under control. It depends, I guess.
Like all other variables in economics.
The Reserve Bank Governor, Lesetja Kganyago, thanks for your time.
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