The Johannesburg Stock Exchange (JSE) explained that it was an exchange value chain that involved horizontal and vertical integration. The horizontal aspects were the products that the JSE mostly traded namely equities, equity derivatives, and commodity derivatives such as maize wheat corn, oil and gas and interest rate products. The JSE also regulated their markets. They had to ensure that there was no insider trading or market manipulation. The Financial Services Board (FSB) regulated the regulatory performance of the JSE. The Securities Services Act was going to be replaced by the Financial Markets Bill. The JSE was highly ranked. The JSE was ranked first for the second year in a row in terms of its securities market regulation according to the World Economic Forum (WEF) Global Competitiveness Report. The JSE was a long-term member of the World Federation of Exchanges. More than R2 billion had been spent in the last 10 years in upgrading the JSE technology. Consistently the JSE had to raise the bar. The JSE had never been funded by anyone or any institution. In terms of staff profile, the JSE had a total staff complement of 440 that had an average age of 37. In terms of percentages, 55% were Blacks and 45% were White; 51% were male and 45% were female. The JSE had a division that dealt with investor education. They used 11 different languages to raise awareness from stokvels to churches talking about savings, exchanges and money trading. They also had a Socially Responsible Investment Index. This index measured the performance of companies in socially responsible activities. This included HIV/AIDS policies and staff profiles. There was a need to link the 24 exchanges on the African continent to each other into a single African exchange but this was currently unlikely. The JSE spent time with other African exchanges discussing how to work together to increase the sophistication of African markets and how to increase access.
Members were concerned about how vulnerable the JSE was to manipulation by JSE's own employees, what were the main sources of risk domestically that discouraged foreign investment, what the JSE did with their profits and what was the view of the JSE on the salaries and fat bonuses of CEOs.
The International Monetary Fund presentation highlighted the key messages from the Article IV consultations that were held with the government. South Africa's recovery has been markedly slower that in other comparable countries. The slow recovery was particularly seen in exports and in employment. There were a number of reasons that could be attributed to such growth such as the global shocks in 2007-2009 and in 2010, monetary, fiscal and exchange rate policies and institutions such as labour markets and product markets. South Africa's current predicament was as a result of a number of shocks that the country faced. However the inefficiency of product and labour markets might have exacerbated the impact of the shocks. It would be critical to address the structural problems in order to enhance competition, make economic growth more labour intensive and raise potential growth.
Members asked whether the appeal against the Walmart/Massmart merger could be construed as limiting the South African product market competition, whether the debates on nationalization and appropriation of property and land without compensation affected investor confidence and whether the IMF engaged with policy makers in government.
The Chairperson said that Committee had invited the Johannesburg Stock Exchange, a very important institution in the economic life of country, as there was need to understand how the JSE operated and then make suggestions on how the JSE could improve on its day to day and strategic issues that impacted the ordinary people of the country.
Johannesburg Stock Exchange briefing
Ms Nicky Newton-King, Deputy Chief Executive Officer, Johannesburg Stock Exchange, said that there was a lot that the JSE could do and wanted to do in the country’s future endeavours. The JSE cherished the stability of the institution. The JSE was 124 years old and they had changed to a completely electronic market that was a big change from the trading floor. The JSE markets traded electronically from 9am to 5pm every day. It was an exchange value chain that involved horizontal and vertical integration. The horizontal aspects were the products that the JSE mostly traded, namely, equities, equity derivatives, and commodity derivatives such as maize wheat corn, oil and gas and interest rate products. The JSE had to ensure firstly that the products were of good quality so as to be listed on the JSE. If products were not listed with the JSE, it meant that the products had not gone through the regulatory review process as such they could not be traded. There were just over 400 companies that had been listed on the JSE. The companies would be cleared after they were listed. This involved the seller providing security to the buyer once the buyer paid the money. Settlement would follow thereafter. The JSE would then sell the data. Some exchanges were only horizontal such as the London Stock Exchange as opposed to the JSE that was both horizontal and vertical. The JSE believed fundamentally in the horizontal and vertical model. The JSE also regulated their markets. They had to ensure that there was no insider trading or market manipulation. The Financial Services Board (FSB) regulated the regulatory performance of the JSE. The Securities Services Act was going to be replaced by the Financial Markets Bill. Settlement in South Africa was electronic both for equities and interest rate products. The electronic settlement house was STRATE (Share Transactions Totally Electronic). The JSE owned about 45% of STRATE and the balance was owned by a different number of banks. The JSE guaranteed any equity trade done in their central order book. There were no fail trades in the history of JSE moving to electronic settlement. Even on the derivative side when Lehman Brothers failed, the JSE managed to close down all of Lehman positions in two days; as such no clients lost any money. The JSE sold data in order to ensure that South African markets were seen all over the world. There were about 30 000 computer screens that paid to see JSE data everyday. The JSE provided back office technology. This technology was used by all of the JSE equity members. This enabled the JSE to see real time to client level and see who was trading in their market. This also helped the JSE to deal with questions of market conduct. JSE was ranked highly when it came to regulatory performance. The JSE was a listed company. A number of South African institutions owned the JSE. This included the Government Employee Pension Fund that was the largest shareholder in the JSE. As such, it could be argued that the people owned the JSE.
The JSE was highly ranked. It was ranked first for the second year in a row in terms of its securities market regulation according to the World Economic Forum (WEF) Global Competitiveness Report. The JSE was also a long-term member of the World Federation of Exchanges. The JSE had recently hosted the Annual Meeting of the World Federation of Exchanges, with all the worlds exchanges present. In terms of governance and auditing standards, the JSE used the King Reports which were the benchmark of corporate governance and the JSE listing requirements. The JSE had world-class technology as more than R2 billion had been spent in the last 10 years in upgrading its technology. Consistently the JSE had to raise the bar. The JSE had never been funded by anyone or any institution. The JSE had no debt. They funded themselves through the fees they charged for a trade. The government fiscus received 25 basis points for every equity trade.
In terms of the staff profile, the JSE had a total staff complement of 440 staff that had an average age of 37; 55% were Black and 45% White; 51% were male and 45% were female. The JSE had a division that dealt with investor education. They used 11 different languages to raise awareness from stokvels to churches, talking about savings, exchanges and money trading. They also had a Socially Responsible Investment Index which measured the performance of companies in socially responsible activities. This included HIV/AIDS policies and staff profiles.
There were 24 exchanges on the African continent and out of that number only four exchanges were members of the World Federation of Exchanges (WFE). The WFE only admitted members that met certain criteria. The JSE was the elephant in the room on the continent. The average day’s trade on the JSE was more than the annual trade of Kenya and Mauritius combined. There was need to link the 24 exchanges to each other into a single African exchange but this was unlikely. The JSE spent time with other African exchanges discussing how to work together to increase the sophistication of African markets and how to increase access. There were a number of good opportunities on the African continent that needed to be harnessed.
In as much as the JSE was the largest exchange on the African continent, they were very small when compared to other global exchanges. It was not the number of companies that were listed on the JSE that was important but it was the number of times that the companies traded and increased liquidity. Mining constituted 25% in terms of the sectoral breakdown of the JSE market capitalization. Consumer goods and financials were equally important.
A reflection of the black ownership on the JSE was given. Foreigners owned 33% on the JSE while Black people directly owned 8%. In addition Blacks indirectly owned 9% on the JSE through mandated investment. In total 36% on the JSE was owned through pension funds.
The Chairperson said that the JSE presentation was one of the most important presentations that the Committee had received in light of what the world economy was going through. It was not just about numbers but also about the ability of Parliament and the Committee as a public institution to fundamentally address issues that affected society.
Mr D van Rooyen (ANC) welcomed the presentation. He asked how vulnerable the JSE was to the manipulation by JSE's own employees, what were the main sources of risk domestically that discouraged foreign investment, what was the role of the stock exchange on issues of economic integration. He noted that critics of the current exchange regime said that the regime was not helping to stabilise the currency. As a result there were a lot of uncertainties with regards to the investment environment in the country. He asked the JSE to comment on this.
Mr N Koonhof (COPE) had heard a remark that 52% of all the wealth in SA had been created since 1994. He asked whether the JSE had done any research on the issue. He asked what the JSE did with its profits and what was the view of the JSE on the salaries and fat bonuses of CEOs.
Dr Z Luyenge (ANC) asked if there was a retention strategy for JSE staff, whether there was a marketing strategy or public participation that the JSE was promoting which would ensure that members of the community participated in JSE activities. He asked how the JSE was structured, whether they had a Board, to whom where they accountable, and where they a member of the Financial Services Board. Did the JSE have a link with the Auditor-General, whether it was possible to have a smaller stock exchange in a city like Mthatha and what the impact was on the economic activities of the JSE?
Mr D George (DA) said that the presentation was very useful. If people understood how the stock exchange worked they would have been able to prevent some unhelpful debates on the economy especially on nationalization since the Government Employees Pension Fund (GEPF) owned a lot of shares on the JSE. He asked if there was a deadline set for the JSE in trying to determine who the Black owners were on the JSE. The Member raised an issue of Mr Allan Thompson who had been dismissed as a director of equities and asked how sure was the JSE that there were no winners and losers as a result of such conduct. Finally he asked whether it was better to have more companies listed on the JSE in order to increase competition.
Ms Z Dlamini-Dubazana (ANC) said that foreign companies distributed dividends in respect of the JSE listed shares but according to the dividends tax there was supposed to be 10% that had to be taxed. She asked if the dividend tax contributed towards the growth of the economy. She said that the foreign return of capital was unworkable. She asked if the JSE had a strategic plan to cushion South Africa against the global crisis and how many Africans were money brokers and how where they performing.
Ms Newton-King responded that from a regulatory perspective, the JSE had a back office that determined what trades had been done and for whom in real-time as opposed to other exchanges that could only track such information after the trades had been done. The reality was that JSE could not stop what people did but they had to monitor what was being done. Mr Thompson was not manipulative and he had not done insider trading. He had his own stock broking account unlike many other JSE staff. Mr Thompson decided to trade in a manner that would show client A that client A was not trading in the best interest of Client A's clients. As such he wanted to teach the client a lesson. When the JSE became aware of the trade they asked Mr Thompson to reverse the trade. The reason one suffered any loss was because the trade was reversed. The trade had not been authorised under the JSE rules. The client had not complained but the JSE felt that the issue was of such a nature that it was inconsistent with the JSE rules that prevented people from taking the law into their own hands.
When foreign investors came to South Africa and the JSE, they wanted to know about the rule of law, property rights and whether there was "certainty" that they would receive their shares if they paid for them. Africa had to work extremely hard to get people to invest in the continent. There were also additional issues such as certainty about the economic policy and if the environment, under which the companies they invested in, would be the same in a year's time. In short, investors wanted certainty. In terms of the role of exchanges on the regional level, the JSE was the largest on the continent. As such it would be fair to say that there was a lot of hot air around exchanges, the possible integration and productive use of exchanges to move capital in the region. Everyone wanted to do the right thing but it took time to do the right thing. The JSE was trying to help other African exchanges to do something productively. This could be achieved through the use of bilateral and multilateral agreements, only after people were comfortable that there were no imperialist agendas. The JSE never expressed a view on whether the exchange rate was supposed to be floating or fixed. Investors needed to believe that the monetary policy was in the right direction. The South African Rand was a highly traded currency so if the JSE started to interfere with the manner in which the Rand was traded, the country would find itself in much more bigger issues.
Ms Newton-King said that she did not have an answer to the question about how much wealth had been created since 1994 but she would not be surprised that there was a huge amount of wealth that had been created. There was a lot of economic activity that was going on. There was need to work on how to get growth that was equitable and also help people reinvest the profits in order to make the lives of ordinary South Africans better. The JSE was a listed company and their financial statements were published on their website. The JSE used their profits in order to ensure that they were sustainable and, in so doing, avoid going to the National Treasury to ask for money. There was a very delicate balance. The JSE had to make profit but they also had to continually make it cheaper for people to trade. If the JSE had the right products and if they continued to reduce the price of the products, more people would trade and this would increase the liquidity.
She said companies had to be careful on how they remunerated CEOs. Remuneration was an art not a science and there was an element of judgement in the topic. Remuneration structures had to incentivise a team to grow the business in a sensible manner. There was need to prevent the area of remuneration from being overly penalized. The JSE remuneration committee spent an enormous time carefully balancing what the JSE staff had to be paid. South African CEOs were paid less compared to their global counterparts. The JSE was more like a shop window. They were the central part in the economy and they had many different stakeholders. They struggled hard to retain people but nonetheless they had a very low turnover rate. The JSE did not pay staff to stay in the event that staff were offered better paying jobs. People were encouraged to stay because they were inspired by what the JSE did. The JSE hired bright young people who could not get jobs anywhere else. The JSE had a Graduate Training Programme that absorbed young people. The JSE had not looked at staff retention from a global point of view. Community involvement was around education and going around the country talking to investors in 11 different languages and demystifying the JSE. From a business perspective the JSE was tying to make itself more accessible as opposed to “a scary place”. The JSE was a listed company and they had an independent board of directors. The JSE was accountable to the board and the board was accountable to the shareholders.
The Financial Services Board regulated the JSE. The idea of having multiple exchange rates in South Africa was a very bad idea because the JSE was too small to have multiple exchange platforms. The JSE did not have any link to the Auditor-General. In terms of BEE ownership deadline, she said that 12 million deadlines took time to update. There was no exact deadline that had been set. Liquidity was the key performance indicator in encouraging economic activity. The JSE had a role to play in this. What the JSE had to be careful about was that when companies came to the public forum, quality assurance levels were supposed to have been met. She clarified that 45% of foreigners owned the JSE Limited but only 33% of foreigners owned the JSE as a whole. She did not have an answer on the question of dividends tax that had been posed but it was good that foreign companies were paying dividends. National Treasury was relaxing the requirements on how foreign companies interacted with South African institutions and investors. This would enable more and more South African to buy foreign shares. The Euro zone crisis had a big impact on the South African economy because it was a major trading partner of South Africa. It would be an issue for South Africa if their major trading partner did not have enough disposable income to buy products from South Africa. From the JSE point of view, they looked at exposure to foreign assets and they placed premiums that people had to have in terms of capital when such people had foreign assets. There was a need to ensure that the South African processes and checks and balances were adequate enough to protect South African investors in a prudent manner. She said that she did not have the number of black owned broking firms.
Mr Geoff Rothschild, JSE Director: Government and International Division, said that visitors were welcome to the JSE. There were showcases on the investment side as well as lectures. The intention was to bring the public to the JSE and they encouraged brokers to do the same. The JSE was open to the public. He stressed that the JSE controlled listed companies but they did not run the companies. The opportunity to present before the Committee was invaluable and the JSE would value ongoing interaction and workshops. The Standing Committee on Finance was invited to the JSE.
The Chairperson said that the JSE had given the Members sufficient information. There was need to have more interaction with the JSE.
International Monetary Fund (IMF) presentation: South Africa: 2011 Article IV Consultations
Mr Abebe Aemro Selassie, IMF Assistant Director: African Department, said that he would be presenting the key messages from the Article IV consultations that were held with the government. South Africa's recovery has been markedly slower that in other comparable countries. The slow recovery was particularly seen in exports and in employment. There were a number of reasons that could be attributed to such growth such as the global shocks in 2007-2009 and in 2010, monetary, fiscal and exchange rate policies and institutions such as labour markets and product markets.
With regards to shock there were two rounds that hit South Africa from 2007-2009 and round 2 in 2010. South Africa experienced electricity shortages in 2007 and a spike in food and fuel prices in 2008/9. Inflation rose amid surging international commodity prices and with the onset of the global crisis, South Africa slipped into recession. In 2010 there were further shocks, not as sharp as the ones in 2007-2009. This was as a result of ebb and flow of portfolio capital and more recently, turmoil on global financial markets. During this period, portfolio flows were volatile and financial stress started to build up. Given that the country had been hit by a number of shocks, the question that had to be asked was whether policies responded accordingly to the shocks. There was a considerable widening in fiscal deficit and there was a change in structural balance. The key would be real spending growth, given the sharp increase in debt. In short the fiscal policy was very supportive as was expected. Monetary easing has been on par with other emerging markets and the South African Reserve Bank (SARB) managed to keep the monetary policy rate low in response to weaker recovery. The real exchange rate until recently had appreciated, reflecting nominal appreciation but also rising domestic product costs. The lost of competitiveness was attributed to the increase in the cost of production such as high electricity prices which were unavoidable. South Africa's reserve accumulation remained modest relative to the country’s peers. Product market competition was limited in South Africa, partly for policy-induced reasons. In addition there were wage increases way ahead of productivity increases in the labour market. In terms of the Organisation for Economic Cooperation and Development (OECD) product market regulation index, South Africa had more restrictive regulation.
In conclusion South Africa's current predicament was as a result of a number of shocks that the country faced. However the inefficiency of product and labour markets might have exacerbated the impact of the shocks. It would be critical to address the structural problems in order to enhance competition, make economic growth more labour intensive and raise potential growth.
Mr van Rooyen welcomed the presentation. He asked the IMF to comment on the effect of regulatory uncertainties as a source of risk to the economic growth of South Africa and if there was supposed to be a contingency plan in the event that the European crisis could not be resolved.
Mr Koonhof asked if the appeal against the Walmart/Massmart merger could be construed as limiting the SA product market competition, whether it was negative and if the warning sent by Moody’s to downgrade SA was valid.
Mr George said that the presentation was interesting. He asked if the debates on nationalization and appropriation of property and land without compensation affected investor confidence and if the IMF engaged with policy makers in government.
Dr Luyenge appreciated the elaborate presentation. He asked how best the IMF could ensure that there was assistance to government in terms of the economic downturn. What was the IMF’s opinion that the government had to borrow in order to deliver on infrastructure during times of economic downturn?
Mr Selassie responded that it was very difficult to say whether investor confidence could be affected. However the issue of mining licences might have played a role in the late investment in the mining sector. Any kind of uncertainty was detrimental to investments. The growth projections were made in 2010 against the background of two very strong quarters. The growth process slowed down dramatically and hence the IMF revised its growth figures. South Africa had to look at how open their markets were to foreign companies or countries and competition from domestic firms. Policies had remained the same over the past few years, nothing had changed hence he did not know why South Africa was going to be downgraded. Government fiscal policies had to be counter-cyclical and that was the advice that IMF gave to all countries. The best time to fix the roof was when it was sunny.
Dr Alfredo Cuevas, IMF Senior Resident Representative, added that the Walmart process was well managed. Securing investment was not free of controversy. The South African process was very clear and the Competition Tribunal issued a verdict based on its mandate.
The Chairperson said that the global economic challenges were supposed to be corrected by policies based on the old economic model. The IMF had not put forward any new ideas to address the problems. The statement that the growth rate was very sluggish was supposed to have been qualified. Expanding the fiscal deficit would bring unintended consequences. There was a need to address the remuneration issue in South Africa.
The meeting was adjourned.
Appendix 1: IMF Executive Board Concludes 2011 Article IV Consultation with South Africa
IMF Executive Board Concludes 2011 Article IV Consultation with South Africa
Public Information Notice (PIN) No. 11/115
On July 25, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with South Africa.1
Over the last two decades, South Africa has become increasingly integrated into the global economy, which has allowed output growth to converge to the world average level. But this integration has also exposed South Africa to global business cycles. Prudent countercyclical monetary and fiscal policies, together with a flexible exchange rate, have helped dampen the adverse effects of those global cycles; and sound financial supervision has guided financial institutions in managing the associated risks. And although transfer programs have lifted the most vulnerable from extreme poverty, progress in social indicators has lagged behind macroeconomic achievements.
Over the last year, South Africa’s has continued to recover from the 2008–09 recession led by solid consumption growth. Although its gross domestic product (GDP) now exceeds the pre-crisis peak, output remains below potential. Inflation has remained contained, partly reflecting the negative output gap, rand appreciation, and, until recently, moderate domestic food prices. The current account has strengthened on account of favorable terms of trade, which offset a faster recovery in import than in export volumes.
Fiscal and monetary policies have remained supportive. In cyclically adjusted terms, the deficit swung from a surplus in fiscal year 2007/08 (April-March) to a deficit in 2009/10, and staff estimates the deficit at some 4 percent in 2010/11. Spending growth moderated in 2010, and became more tilted toward current spending, mainly reflecting above-budgeted increases in wages. Monetary policy provided additional stimulus, with a 150-basis-point cut in the policy rate in 2010. These cuts have brought the policy rate to 5.5 percent, its lowest level in more than 30 years.
With public debt at manageable levels and contained demand pressure, the authorities’ fiscal plans call for fairly gradual fiscal consolidation. This would result in gross national government debt peaking at around 43 percent of GDP in 2013/14. Although this path would not pose immediate risks to fiscal sustainability, it could constrain fiscal space to deal with future shocks. On monetary policy, although further interest rate cuts are no longer on the horizon and headline inflation has been picking up, the timing for starting the tightening cycle remains unclear because most of the increase in headline inflation reflects cost-push factors and uncertainty in the external environment is high.
Having come through the recession in reasonable shape, the financial sector is now contending with a period of low credit demand and rising costs. Banks have remained well capitalized and liquid, with well contained market risks. The move toward a “twin peaks” regulatory and supervisory framework over the next few years, which strives to concentrate prudential authority at one peak and market conduct authority at another, bodes well for further improving the consolidated supervision of financial groups.
The medium-term outlook envisages South Africa growing on par with the world economy. Growth should rise to 4 percent a year in 2011 and 2012, underpinned by solid domestic demand. Over the next 12 months, the output gap is set to close and there is a possibility that headline inflation will breach the top of the target range. The expected recovery in investment will likely cause the current account deficit to gradually further widen to about 5–6 percent over the medium term.
Executive Board Assessment
Executive Directors commended the authorities for the prudent macroeconomic policies which, together with a flexible exchange rate and sound financial sector, have mitigated the output drop during the global recession. Directors noted that the key challenges ahead are to support the ongoing recovery and raise growth to reduce high unemployment and inequality. In this regard, Directors welcomed the authorities’ New Growth Path which focuses on these priorities.
Directors supported a broadly neutral fiscal stance for 2011/12 and welcomed the prudent fiscal policy guidelines included in the 2011 budget. They agreed that, over the medium term, a tighter fiscal stance than currently contemplated would be useful to rebuild policy buffers and contain public debt at moderate levels. Directors encouraged the authorities to rebalance the composition of public spending to help support higher potential growth, and called for moderation in public wage growth.
Directors endorsed South Africa’s inflation targeting framework, noting that it has kept inflation expectations well anchored. While recognizing the difficulties in determining the precise timing for starting the tightening cycle in light of the uncertain global environment, Directors encouraged the authorities to remain vigilant about the pass through of high international food and fuel prices. In this context, they noted that a pronounced increase in wages or inflation expectations would call for policy tightening sooner than currently envisaged.
As a policy response to capital inflows, Directors supported continued exchange rate flexibility and further accumulation of international reserves, and a gradual recalibration in the fiscal-monetary policy mix over the medium term. Directors noted that, while capital flow management measures are an option, their costs and effectiveness should be carefully considered.
Directors stressed that increased product and labor market flexibility is critical to improve competitiveness and inequality. They encouraged the authorities to take decisive steps to improve the wage-bargaining framework to better align wages to productivity levels, and to contain public sector wage increases to avoid distortions in the private sector wage setting. They also supported more ambitious efforts to remove barriers to entry in key industries to facilitate greater product market competition.
Directors noted that the banking system remains sound, with banks being liquid and well capitalized. Nevertheless, continued vigilance would be important in light of the moderate impaired advances on bank balance sheets, the banks’ dependence on domestic short-term wholesale deposits, high household indebtedness, and the renewed tensions in the international financial markets. Directors agreed that the shift toward a “twin peaks” regulatory and supervisory framework envisaged over the next few years would further improve the consolidated supervision of financial groups and lift the status of market conduct regulation and supervision.
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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