Episode Transcript
The Finance Ghost: Welcome to episode 213 of Magic Markets. We've had a really interesting couple of weeks. Two weeks ago we had Dino Zuccollo on from Westbrooke. He talked to us about private markets and all the activity we're seeing in that space. If that's something that interests you, highly recommend you go back to episode 211 and go listen to that.
Then last week, we had Wandile Sihlobo join us. He's a really well-known agricultural economist and that was of course to deal with the pun - as we shamelessly called it, the bull case for South African agriculture. If you'd like to get the real story of what's happening in SA agri, go and listen to that show. We tried to do it as a way to just get away from some of the noise online around South Africa and our geopolitical relationship with the US obviously and everything that's going on there.
This week we're doing something completely different once again. Something you would have seen in the headlines a lot is Argentina. We're going to talk a little bit around the macro from that perspective and then Moe, I think we're going to talk a bit around sort of platform economics considering we've covered MercadoLibre in our Premium show this week.
Mohammed Nalla: Indeed, Ghost. I think it's quite nice because we've covered MercadoLibre, that's a Latin American-focused eCommerce and financial services giant and that's why the relevance to Argentina comes through. But it's not really that, Ghost. I'm going to share something with our listeners here. Just last week I was commenting about something on X and someone came to me and they said, you know, with DOGE going on in the United States with Elon Musk cutting and effectively telling government workers, hey, you're out of a job, cutting a lot of expense items, they said to me - I don't know if this is actually an insult or a compliment - they said, Moe, if South Africa were to have a DOGE, we think you're the guy to actually do it.
I chuckled a little bit at that, but that's where some of the relevance comes about, is because last week we had South Africa for the first time ever not hosting its budget speech. That's just not a good look. But at the same time, I understand some of the righteous anger out there when government's trying to actually push through a tax increase and at the same time there’s lots of wasteful expenditure, lots of corruption. You've got to actually get some of the nuts and bolts right in the underlying economy. That's why I started thinking about things like DOGE in the US.
What about Argentina? We've had Javier Milei and in the early days, people were so concerned. You know: “Milei is a complete nut job. He's waving around a chainsaw on the stage.” But if you look at the results, Argentina has actually bounced back really strongly. I was speaking to an Argentinian just about two weeks ago and I said, what's your view on Javier Milei? And surprisingly, she said to me I actually think he's done a lot of good stuff for Argentina, but then qualified it and said, we've got to get the economy right if we want to actually get society right. But at the same time, the pain that comes with some of those reforms is very damaging on a societal fabric perspective. You've got to understand that nuance.
I'm going to use that as the backdrop and I'm going to jump in because we've had just over a year of Javier Milei in Argentina, from waving around a chainsaw to actually grappling with the nuts and bolts of running a country. And just around two weeks ago, not a good look - he was out on social media touting some sort of meme coin out there. I think it was called Libra or something like that. Sounds a lot like Meta's Libra coin, but wasn't that. What happened is the value of this meme coin ratcheted up and then effectively fell through the floor as you're going to get on meme coins. He very quickly went and deleted the tweet where he had touted this thing.
There are now some calls for him to be impeached or be removed from power. I don't think that's going to gather any momentum. But it’s not a good look. It just shows - keep your eye on the ball in terms of what you actually want to do.
I'm going to jump in with what Milei has actually done. Because at the top of the list, he came in, he said, we're going to actually trim down government. We're actually going to remove the regulation. And he did that. When he came into office, he removed over 300 regulations across a range of items like rent controls, business licensing, state monopolies. This is important because you need less bureaucracy to encourage investment. But at the same time, and like I say, you've got to qualify it, it does remove worker protections, it increases market volatility in some instances. So mixed results on that particular one.
The one that has been really welcomed and which I think has some sort of play through to South Africa, and what probably needs to happen in some way or form, is that Milei went about cutting down the size of the state. He cut the number of ministries by half. He closed down a number of agencies. He fired over 40,000 public workers. Now, I'm not suggesting South Africa go and fire a whole bunch of civil servants. I'll tell you why I say that, is that South Africa relies a lot on the public sector for the job creation that's come through and there’s positive spillover into consumer spending and the tax base and so forth.
So, blanket cuts across the board, maybe you need it in terms of just getting more efficiency out of your government, but you've got to do that very, very sensitively. I certainly know a lot of South Africans listening to this are not going to be unhappy if we cut down the number of ministries. We have such a bloated cabinet there, certainly with large blue light convoys and the rest. There's a lot of fat that could be trimmed and that was seen as a good move in Argentina. Arguably some of that could play through to South Africa.
Then other issues, he reformed their tax agency. I think SARS is reasonably well run by emerging market standards, so I don't really have concerns and I don't see the play through necessarily to South Africa. Could SARS get more efficient? Yes, absolutely. Every revenue agency can get a lot more efficient, a lot leaner. But I don't think that's really the focus area for South Africa.
Other issues that don't play through to South Africa is we don't have the same currency issues that Argentina had. With regards to Argentina, he removed capital controls, remember their currency had lots of manipulation in that space. South Africa doesn't have that problem. I'm not going to dwell on that.
South Africa also doesn't have the problem of a reserve that is in the pocket of politicians. I think South Africa has a credible and respected central bank. I don't see that filtering through to South Africa in terms of some of the reforms there.
Then something contentious, but I think with relevance to South Africa is the privatisation of state-owned enterprises. It's something that South Africa did early days. If you go back to when Trevor Manual was finance minister and Thabo Mbeki was the president, we actually privatised a lot of state-owned enterprises. Now it's contentious, the labour unions don't like that. They believe their job losses that come with privatization. But there's also efficiency that comes with privatisation where state-owned enterprises could just be run better.
The state is not an efficient operator of capital or of these enterprises. You see that in South Africa. You see it in energy, you see it in logistics. Those are the choke points to South African growth. It's why we're growing at around 1%, maybe sub 1% for 2024, which is very dismal when you're an emerging market.
And I think this serves two ends. One is that you get a more efficient operation of some of those state-owned enterprises if you bring in the private sector. But the one that's more important for me is that you actually liberate the sovereign's balance sheet by selling off some of these enterprises. By getting private capital involved - previously, maybe the private sector is being crowded out. By allowing the private sector in, you allow the private sector to leverage its balance sheet in order to grow your economy.
And then lastly, and I'm going to end on this point, just overall fiscal consolidation and debt management. This is what Javier Milei has really been focusing on. He's done aggressive spending cuts. He wants budget surplus. This does wonders for investor confidence and also reduces debt reliance. Why I say this is so important is South Africa – you know, we’ve got deep liquid capital markets, it's fine. I know the government's been hard at work, national treasury certainly in terms of creating a primary fiscal surplus. But at the end of the day, I feel as though we're just squandering all of these bullets that they might have.
Should we have a 2% VAT increase? Yes, it's going to raise the revenue. It's probably one of the less difficult revenue measures to get across the line. But you have to do that concurrent with expenditure control and then redirect that revenue into paying down the debt. Decreasing the debt service load. That is what South Africa is not doing as well as it could.
This is just a high level - some of the reforms that you can get coming through as an emerging market. It's had some positive results on Argentina. Whether that sticks or whether that actually fractures their social fabric needs to be seen. In this instance, it's maybe a good thing because let someone else experiment, see what works and then maybe bring that into South Africa without some of the ill-intended social side effects Ghost.
The Finance Ghost: Yeah, because the narrative that is not happening is, oh, how can we cut costs in order to balance this budget, right? It's all about: how can we raise taxes. If it's not VAT, then it's headlines around wealth, taxes, etc. You’ve got to love the, the push into that, right? It literally targets the poor. It's like the ANC has basically squeezed the middle class basically to death and now they're just going downstream. You know, who else can we hurt? It's just an incredible inability to read the room after an election in which they have to now basically share their house with a GNU partner and then they continue to try and pull taxes out. How different would the perception be right now? How different would people feel about paying their taxes, etc? It's just, it's hilarious that we're doing our provisional tax this week and it comes off the back of stage 6 loadshedding on Sunday, which definitely didn't affect you in Canada. But there was something mildly poetic when I was sitting and doing tax calculations, basically with four hours of no power. You just sit there and you're like, wow, this feels like the beginning of 2024. You know, how on earth did we get back here?
Mohammed Nalla: I'm chuckling, right, Ghost? And the reason I'm chuckling is not because I have electricity up here in Canada. I'm chuckling because I have a tinfoil hat theory, which is that we tried the tax increase, it didn't work. We're going to hold a gun to your head and lo and behold, there's no electricity. I mean, that's my tinfoil hat theory. I know a lot of people out there probably subscribe to that.
I'm going to put an unpopular view out there and that is the fact that I actually support the VAT increase. It's not because I'm not in South Africa and I'm not going to be paying that effectively. I'm down in South Africa every now and then, you do pay that. I'll tell you why I support it, is that you can actually blunt the effect on the poor by widening the zero rating. Remember, basics are zero rated, like food. If you do that, you mitigate some of the impact on the poor. And the reason I say this is not a bad idea, is that if you're going to be raising revenue, and I say this with a big caveat, right, you've got to do this along with expenditure control. That's the big if and but here, you've got to do it alongside.
But the reason it's not a bad idea in terms of pulling this particular VAT lever is that wealth taxes would serve to potentially disincentivise capital creation. And South Africa needs capital creation and investment in order to spur economic growth. What I will say, Ghost, that concerns me, is I was speaking about the potential for a VAT increase over six years ago. I was still down in South Africa speaking at an S&P conference. We were speaking about fiscal sustainability. I had big risk flags, concerns around South Africa's fiscal sustainability. And I said - back then VAT was still at 14%, so this was before they moved it up, right? I said South Africa should use that lever once and you actually align to the lower end of where VAT is globally or GSTs are globally, that's around 18 to 21%. I said move from 14% to 18%, do it in one hit. Yes, it's going to hurt in a savage way, it's going to hurt, right? But if you then derive all of this revenue and use that to pay down the debt, get onto a sustainable debt trajectory, guess what?
Government doesn't listen. It didn't happen. They then pulled off a VAT increase, they moved it up to 15%. Now they're trying to pull it off again and it's without those expenditure safeguards. That's the concern. And the last concern is that remember this is a VAT increase before they actually operationalize NHI, which is going to be devastatingly expensive if they actually get it across the line in a full scale. And so where do they go then for their fiscal levers? Where do they go for the revenue raising? It's a catastrophe simply because the eyes only on the revenue line, not on the cost line.
The Finance Ghost: I was thinking now when you said, oh, they can expand the number of zero-rated goods, I thought back to all those pandemic rules and I'm imagining a whole thing coming out that says now open-toed shoes are zero rated but also chickens at Woolworths, but then not chickens from anyone else. And these are just horrible, horrible memories.
I've got to tell you, I don't share your bullishness or enthusiasm for that to get implemented correctly. I mean, the CIPC website hardly works. I went and had that experience today.
So it is a bit tricky. I would just far prefer it if we would just cut some expenses in the fiscus and actually unleash some money that way and actually just stop spending so much, especially the wasteful expenditure. That's by far the worst part.
But anyway, it seems to be a thing that governments across the world are very good at. It's definitely not just South Africa. There's going to be a lot of fallout from DOGE. There's some stuff that they've identified that is clearly just nonsensical spending and there's obviously going to be stuff that a lot of people would maybe say, well, actually the US government should be supporting initiatives like this, as the biggest and scariest economy in the West.
But that's what Musk does, right? He, he removes things until something breaks. I mean, that's literally his exact way of doing things. It's what he did at Twitter, now X. You know, you just cut, cut, cut, cut, cut until you realise, hang on, I've gone too far and then start adding back. That's how DOGE works. And there's no political capital for that in South Africa. There's no willingness to do that.
Mohammed Nalla: Yeah, Ghost, a quick point on DOGE, right? I mean, Musk does that. He cuts, he breaks. My concern at the end of the day is that you can erode institutional stability in those instances. There's a much bigger discussion here. The US exerts or has exerted soft power over decades. I think the current administration doesn't understand that. I'm not going to get sidetracked on that.
The other issue is that there's no point in destroying something then to rebuild it because arguably the cost of rebuilding could be higher than if you had actually just done your cutting exercise in a more prudent manner. I think South Africa would learn from actually executing on structural reforms, but doing that in a rules-based way. The fact is that they've just been slow on it.
I don't want to get sidetracked in terms of this because there's another whole argument, another side of this entire discussion that I want to get into: the benefits around structural reform and what that unlocks in an economy. We covered that this week with MercadoLibre. I'm not going to give away a lot of the underlying – obviously, we don't want to prejudice our paying subscribers.
But the important point is that structural reforms are aimed at getting the dynamism back into an economy. And that's what's missing in South Africa. I'm still surprised by how strong the retail story has actually been in South Africa. I think there's a large informal economy, lots of that at play. But structural reforms do two things. They actually boost investor confidence and the flow through from that is when you boost investor confidence, you spur investment and that starts to get the growth wheel moving. Growth then creates jobs. Job creation creates spend and you get a positive fiscal multiplier.
That's what South Africa hasn't had, as a last macro point maybe, is that South Africa's fiscal multiplier hasn't been fantastic. They literally could have printed the money, set it on fire and that would have yielded better results than some of the spending that's out there. I ran some back of the napkin calculations. If you just cancel the deputy ministers and the motor convoys, you could build hundreds if not thousands of RDP houses. That's just a sense of the scale of what can be done.
South Africa needs that investment to catalyse growth because running at 1% is not going to address the unemployment story. Growth is arguably the only way South Africa can get out of the debt trap that it's finding itself in. That said, South African consumers are remarkably resilient and Ghost, I'd just be keen to know from a business perspective, from an investment perspective, could we see an opportunity set materialise in South Africa? Because a lot of the features are similar in Latin America. Financial services are under-penetrated. South Africa I think has got reasonable penetration, but there's still some room for growth there. eCommerce is a massive opportunity. I've seen it up here in North America - eCommerce is phenomenal. You see it in Walmart, you see it in a lot of the big players. Amazon. South Africa is not there yet.
The Finance Ghost: Yeah, I've got to say, Moe, it's been quite quiet in terms of Amazon's launch in South Africa. I actually haven't really seen too much, which is quite interesting. But you know, I'm glad we're actually moving on from the political stuff and talking about some of the more platform-type stuff that we want to get to because we have covered MercadoLibre this week in our Premium show. And it really is a great company. It shows you what happens when you go and build a coherent ecosystem, right? They've got this whole eCommerce business and then they've got a big fintech piece that sits around that and it includes all sorts of things.
They're actually on their way to becoming a fully-fledged bank, which is quite a thing. I mean, I've got to say, I look at a business like Takealot and I just don't really see anywhere near that level of ambition in them locally. They are part of that broader Naspers group and maybe they've been a bit lucky to have balance sheet of that size. It feels like MercadoLibre has had to really push very, very hard in South America. It's actually that research that triggered the thought around, how Argentina is doing. And then in turn that typical sort of DOGE cutting of expenses, that whole story.
What's happening at Mercado Libre is that the recent results out of Argentina are actually getting a lot better and that's just good to see, that maybe some of the stuff is finally filtering down into consumer spending because that's what happens if you get it right at a fiscal level, you end up with more economic growth. If you have more economic growth and you have more consumer spending, it's just better for every consumer facing business in a country. Perhaps that's something that can lead to more adoption of some of these platforms, for want of a better description, some of these eCommerce plays, because that type of business model is still quite poorly understood in South Africa.
We saw it in the market reaction to Naspers and Prosus announcing the acquisition of Just Eat Takeaway.com in Europe. The market absolutely panicked, right? They dropped the Prosus share price by like 6%, which if you go and look at Prosus’ market cap is basically saying all the money that you're going to spend on that acquisition is now worthless. The market cap dropped by more than they're going to spend on the deal! It's such an odd response to something like this and it just shows you why these big tech companies are listed in somewhere like the US as opposed to on the JSE. You announce a deal like that in the US and your share price is going to go up. It's not going to go down, the market's not going to say oh my gosh, look at you allocating capital. The Americans will go, oh wow, look at this, an exciting new growth opportunity, right?
Mohammed Nalla: Indeed. Ghost. We won't go into the history of the track record of the management team. I know there's been a lot of changes at Naspers and Prosus. I thought the market was giving them benefit of the doubt in this instance. Certainly not. When your share price actually falls by that extent and it wipes out the value of the deal, it's telling you there's still a degree of skepticism that comes through there. Potentially that’s also coming through as a bit of an overhang.
The other thing quite simply is that the South African market is such a small market, we know we're about what, 60 million people down there, but if you actually drill that down in terms of people with disposable income, number of taxpayers, South Africa is a tiny market. I remember on an investor trip to China a while ago and I was speaking to the equivalent of Chinese Google, right? And they were saying, well, what's the size of South African market? I ran them through that and even at 60 million, even if you took the entire population, he said, well, that's like a mid-tier city in China! So when you frame this in the context of global alternatives that exist from a marketplace perspective or from an investment perspective, realise that the world is a big place.
This is why it's even more important for South Africa to focus on building the economy and building a resilient middle class, something that I think we've actually failed to do. Because if you look at what's categorised as middle class in South Africa, that's still pretty much lower income when compared to other emerging markets or effectively the developed markets as well.
The Finance Ghost: And that's why if you speak to venture capitalists in South Africa, they all say the same thing, which is they are willing to invest in tech plays with a global ambition because the South African market is just too small to scale into. The economics of the platform just don't really work. You can't actually get big enough to reach the sort of scale economics that you're enjoying in the US and to a lesser extent Europe or certainly South America if you build something like a MercadoLibre.
This is the whole point around government efficiency and not squeezing every last bit you can get out of your populace because that is not actually growing the country, it is not doing it any long-term favours. If there are tons and tons of wasteful expenditure - it's like in a business, if you're taking the revenue you earn and you're wasting it and that's why your profits are not so good, and then you sit at the end of the year and you say, oh, our profits were really bad this year. You know what we should do? Just increase our prices, just be more expensive - that'll fix it! Because that'll have no impact on demand whatsoever. People will still buy our stuff, they'll just pay more, we'll have more money. Problem solved.
Guess what? Next year there was less demand and that extra money was wasted anyway. And then the same conversation happens. It feels like that's the conversation that's been happening for I don't know how many years. Until we get past that, we're going to really struggle to see MercadoLibre-size businesses existing in South Africa, coming out of South Africa, earning that sort of money in South Africa.
It's frustrating and it's why our businesses need to look abroad for these sort of acquisition opportunities. And then the market goes, oh, no, that looks too risky, we'd rather prefer you to do stuff closer to home. It's just an interesting observation on the South African investor community, I guess.
Mohammed Nalla: Indeed, Ghost. It's also why we've built our entire business in Magic Markets Premium around the global investment narrative, is that there are destinations for your money where there's significant TAM or total addressable market. That could be emerging markets, it could be developed economies and quite often international companies have exposure to that. Not limiting your subset to just South Africa would do wonders for your portfolio from a diversification perspective and from a growth perspective.
Ghost, unfortunately, that's all we have time for. I could go down an entire rabbit hole in terms of some of the investments I'm looking at in the unlisted space up here in North America, in the tech space, data centres, lots of exciting stuff going on. If there's anyone listening to this, if you're interested, reach out to me, I'm happy to share some details.
But Ghost, I think that's where we're going to leave it this week. To our listeners, let us know what you thought of the show. Hit us up on social media. It's @MagicMarketsPod, @FinanceGhost, @MohammedNalla, all on X or go find us on LinkedIn. Pop us a note on there. We hope you've enjoyed this.
If South Africa has a DOGE, maybe I should throw my name in the hat. Let's see what good we could do there. Ghost, until next week, same time, same place. Thanks and cheers!
The Finance Ghost: Ciao.
This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
