Mines forced to overhaul their supply chains

Written by Ciaran Ryan. Posted in Journalism

Keeping six months’ stock of essential supplies, considered wasteful a year ago, now seems like a good idea. From Moneyweb.

Image: Shutterstock

The shutdown of the deep level and non-essential mines to stop the spread of the Covid-19 virus last month has forced mines to re-examine their supply chains.

Last week, in response to the 21-day lockdown, Anglo American and AngloGold Ashanti issued a statement clarifying their business survival strategy. “In general, we are targeting inventories of three to six months on primary consumables, while recognising we have the support of strategic partnerships with key suppliers who themselves are maintaining inventories in the respective regions for many critical items.”

While everyone is hoping the lockdown lasts just three weeks, it now seems prudent to plan for much longer periods. Hence, holding three to six months’ worth of inventory may become the new normal.

The next issue to be confronted is where to source supplies to avoid an over-reliance on a single producer, such as China.

Research by Accenture shows 94% of Fortune 1000 companies anticipating supply chain disruption as a result of Covid-19. Well, that’s already happened.

Risk Planning 101

Companies’ risk assessments cater for all sorts of potentialities such as drastic changes in exchange rates and commodity prices, even political upheaval, but few anticipated a pandemic of the kind unleashed on the world three months ago.

The staggering disruption caused by the global lockdown will require far greater supply chain resilience against future disruptions, which essentially means having a plausible Plan B and Plan C. This might be easier said than done, given China’s massive pricing advantage over other countries, an advantage that is likely to be extended as China powers up its factories at a time of reduced global demand. Instead of price gouging, hefty discounts will likely be on offer in the months ahead.

Much of SA’s mineral production finds its way to China. Kumba sells more than half its iron ore output to China, with most of the rest going to Japan, South Korea and Europe. In February, chief executive Themba Mkhwanazi said the coronavirus outbreak in China forced a halt to steel production, prompting “proactive discussions” with customers in China and elsewhere to minimise the impact on sales. That was before other countries went into lockdown.

The Covid-19 lesson is clear: spread your customers as well as your suppliers to avoid over-reliance on a single country or market. This is Risk Planning 101, but many companies seem to have forgotten it.

Sibanye Stillwater’s senior vice-president for investor relations, James Wellsted, says the group sources most of its supplies locally, so it suffered little disruption from the Chinese economic shutdown. This is partly a legacy of apartheid-era sanctions which spawned a muscular local mining supply sector.

Lockdown extension risk

Perhaps the biggest risk facing SA is the government deciding to extend the lockdown, even in some relaxed form which would allow mines and factories to slowly ramp up production.

The Minerals Council has warned of irreparable damage to the mining industry if the lockdown is not lifted on April 16. Mines say they are able to pay workers’ salaries for the duration of the lockdown, including contributions to medical aids and pension funds, but that arrangement becomes less certain should there be any extension of the lockdown.

Last week Impala Platinum issued force majeure letters to all contractors and consultants, legally notifying them that their contracts had been suspended. Similar letters had been issued to suppliers, while offtake agreements to refine concentrate on behalf of other mining partners had also been suspended.

For thousands of mining supply businesses and contractors that rely on the big mining houses, these are worrying times. Mines’ first duty is to their employees and payment of their salaries, which leaves contractors and suppliers wondering whether their services will be required once the lockdown is lifted.

Coping strategies

Those mining groups that managed to build cash war chests and reduce debt in recent years are better prepared to withstand the lockdown crisis.

Gold Fields reduced its debt from about $1,7 billion to $1.33 billion since late 2018, and expects to reduce it further this year by $300 million to $400 million. It has about $600 million in cash and more than $1.5 billion in undrawn debt facilities. “As a result, management believes that the Group has sufficient liquidity to withstand an interruption to our operations for a considerable period of time, but that notwithstanding, we will continue to work towards minimising the impact of Covid-19 on our employees, mines and offices,” says CEO Nick Holland in the latest annual report.

AngloGold Ashanti is responding to the lockdown crisis by implementing cash conservation measures, such as prioritising capital spending and reducing non-essential expenditure. At the end of 2019, it had $463 million in cash, $2 billion in debt and revolving credit facilities. It says it is well positioned to weather the current market uncertainty.

Similarly, South32 is reducing controllable costs, such as its ongoing share0buyback scheme. Several groups have suspended exploration and capital projects to conserve cash. For Harmony Gold, cash preservation is key, which means it has suspended its exploration and capital projects for the time being.

African Rainbow Minerals’ (ARM) joint venture, Assmang, has received authorisation from government to operate its stations at Khumani and Beeshoek mines in the Northern Cape for shipment to Saldanha Bay. Transnet has reactivated the rail and port export system from the Northern Cape to the port of Saldanha, allowing for the export of about 40% of usual volumes.

Coal and iron exports are vital for the generation of foreign currency, which explains why many of the mines in these sectors are able to continue producing.

If there’s any silver lining in all this, it is that our creaky national infrastructure suddenly looks up to the task: no power outages, and seemingly abundant rail and road capacity.

All it needed was for the economy to be shut down.

Look who’s winning during lockdown

Written by Ciaran Ryan. Posted in Journalism

Netflix, of course. Also teleconferencing provider Zoom, toilet paper makers – and gold. From Moneyweb.

Entertainment aside, the longer the virus threat remains, the more companies and training institutions will ditch rental office space in favour of online alternatives. Image: Shutterstock
Entertainment aside, the longer the virus threat remains, the more companies and training institutions will ditch rental office space in favour of online alternatives. Image: Shutterstock

It seems just about everyone has watched (and enjoyed) Tiger King on Netflix: a quirky tale of big cat collectors and breeders in the US. Viewership figures were bumped by the launch of the series coinciding with a global lockdown.

Forced to stay at home, millions have turned to online content providers such as Netflix, Prime View and Disney+ to stave off boredom. It got so bad the European Union asked Netflix to throttle its bandwidth usage to medium rather than high definition.

But if this recession deepens, discretionary spending such as Netflix subscriptions could be among the first to be ditched.

Needham & Co says Netflix could suffer a 6% drop in streaming revenue in the US and as high as 28% elsewhere.

Online retailer Amazon has fared better than most, with its stock price falling just 12% during the coronavirus pandemic – a far smaller decline than other content providers such as Disney and Comcast have experienced.

Amazon’s stock price drop was cushioned by its Prime Video content streaming service, and Amazon Web Services (AWS), its fastest growing division. AWS will be launched this year in SA, bringing reduced latency and advanced technologies such as artificial intelligence and machine learning to sub-Saharan Africa. Ironically, Amazon has maintained a strong presence in Cape Town since 2004 where developers worked on new networking technologies and customer support.

Other companies surfing the lockdown wave are teleconferencing startup Zoom, which allows people to host virtual meetings. It signed up more than two million new users in the first two months of 2020, more than the whole of 2019, and its free app topped the most downloaded list on Apple and Google mobile app stores in recent weeks.

Thousands of SA companies are taking to Zoom, Google Hangouts and other products as we enter what may be a prolonged period of remote meetings. The longer the coronavirus threat remains, the more businesses, training colleges and clubs are going to ditch rental office space and replace it with virtual offices and online meeting rooms such as Zoom.

Read: SA Reits want tax relief from Covid-19 fallout

Some SA companies were already well positioned for the transition to virtual training. SA Accounting Academy provides continuous professional development for accountants and for years has used webinars to deliver training. It started putting some of its content on YouTube to make it freely available to the public, and this is pulling in scores of new users.

“Online training made sense, even before the outbreak of the coronavirus,” says the academy’s CEO, Rob Murray. “It allows you to reach people anywhere in the country, or indeed the world, provided they have an online connection. There’s no doubt this crisis is forcing everyone to relook at their business models to see how online delivery and customer service can be offered remotely. There is no doubt this is a big market going forward because we don’t know how long the pandemic will last or if there will be another one.”

Read: The best free online courses to do during lockdown

Perhaps the most astonishing beneficiary of the virus is Microsoft Teams, a collaborative tool allowing teams to work together and share information in a common space. It added 44 million new users in recent weeks, doubling its user base in a matter of three months. Its competitor Slack, though much smaller, is also reporting a rush of new customers.

Health stores appear to be doing a decent trade. The share prices of Dis-chem and Clicks have held up well so far this year, though it’s unknown whether sales have been impacted by the lockdown. Byron Yan of Yan Health in Bedfordview, Johannesburg, says his store remains open during lockdown and, though sales are lower than usual, people are stocking up on immune boosters, sanitisers and other essentials. At times like these, health is uppermost in everyone’s mind.

Gold

Turning to the local bourse, gold shares such as DRDGold, Gold Fields and AngloGold Ashanti have largely shrugged off the coronavirus panic, assisted by a weak rand and a relatively steady gold price. The gold bulls are out in force, propelled by news of ten million newly unemployed people in the US and a rapidly deteriorating global economy.

BNP Paribas sees a gold price of around $1 675 an ounce in the second quarter of the year, declining to $1 550/oz in the further quarter, based on a progressive return to normal economic conditions in 2021.

Gold price per ounce

Source: ShareMagic

Not everyone sees it this way. United Overseas Bank (UOB) is forecasting a gold price of $1 800/oz by the first quarter of 2021, as central banks drive interest rates to the floor and embark on massive quantitative easing programmes.

“These significant stimuli bode well for gold and will be the fuel for gold’s rally once the USD funding crunch abates across Q2,” according to UOB’s head of markets strategy Heng Koon.

The longer interest rates remain low, the better it is for gold.

There’s little certainty around the impact on global gold production of Covid-related mine closures in SA, Quebec, Peru and Argentina, though mines in Australia, Russia and the US are still operating normally. Metals Focus says total gold production for 2020 is likely to be significantly lower than the 3 541 tons it projected at the start of this year, which could add a bit more zing to the price in the coming months.

Other SA shares holding reasonably firm are Naspers, kept aloft by its substantial shareholding in Tencent, retailer Clicks, and British American Tobacco, which got a boost with news that smokers in the Western Cape can again buy cigarettes. Metrofile has held up well, but probably because it is in the midst of being bought out by the Housatonic Consortium.

For most of the rest, it’s blood everywhere.

Could Covid-19 be the biggest evidence fiasco of the century?

Written by Ciaran Ryan. Posted in Journalism

If so, the alarmists must be held to account. From Accounting Weekly.

Douglas County confirms fourth coronavirus case
Something terribly wrong with the fatality figures

I’m going out on a limb here. There’s something terribly wrong with the reported numbers of deaths from Covid-19. Let’s just call it the virus, since it’s the only one being talked about.

My social media is ringing non-stop with dire forebodings of the holocaust that is about to befall us. Then there are those who say this is mass insanity.

This is vitally important because the country’s economy has been shut down and will take years to recover. Just looking at the restaurants and hotels, most of the 270,000 people who work in this sector have lost their incomes and don’t know if they will have a job when the crisis is over. People are in a panic, fearing for their lives, their children, their parents and their jobs. We better make sure we are making the right decisions based on unimpeachable data.

Let’s start with South Africa, where there are 1,380 reported Covid-19 cases and five deaths – a fatality rate of 0.003%. That, of course, may change, but let’s stick with the figures we have so far.

We just don’t know how many people have the virus and have not been tested. Is it double the number of reported cases, or 100 times? Or is it just 1,380?

The average death rate for South Africans from all causes is 9.5 per 1,000 per year – slightly less than 1%. Is Covid-19 going to jolt this needle, even slightly? It could be argued that the quick action taken by the government to impose a lockdown may have saved thousands of lives, but that’s pure guess work.

The three leading causes of natural deaths in SA are listed as tuberculosis, diabetes and cerebrovascular diseases, according to government health stats.

Those in favour of an aggressive lockdown point to Italy, where the fatality rate appears to be a staggering 8-10% of cases testing positive. Rather be safe than sorry, they say.

In Spain, the fatality rate is 5-6%.

A closer look at Italian fatalities

Taking a closer look at Italy, we learn it has the second highest old age population in the world, where some 87% of those dying are over the age of 70, and of those dying more than 90% have other complicating diseases.

Prof Walter Ricciardi, scientific adviser to Italy’s minister of health, puts it this way: “The way in which we code deaths in our country is very generous in the sense that all the people who die in hospitals with the coronavirus are deemed to be dying of the coronavirus.”

Link: https://www.telegraph.co.uk/global-health/science-and-disease/have-many-coronavirus-patients-died-italy/

In fact, just 12% of reported Covid-19 deaths in Italy had coronavirus listed as the cause of death. Eighty percent had at least two other diseases. Only 1.4% had no other diseases. This is according to the Italian government’s own report.

Link: https://www.epicentro.iss.it/coronavirus/bollettino/Report-COVID-2019_24_marzo_eng.pdf

In other words, those dying who test positive for coronavirus are assumed to have died from coronavirus, ignoring other pre-existing illnesses. Which means Italy’s Covid-19 fatality rate could be a massive over-count. Adjust for this – as some have suggested should be done – and Italy falls into line with fatality rates elsewhere in the world.

It’s a similar pattern in Spain.

Captured by alarmists

Has the world been captured by alarmist virologists who have the ears of presidents and lawmakers everywhere?

If so, they must be held to account for the damage they have unleashed on the world. Because there will surely be other “coronavirus” epidemics in the future. Can the world sustain much more of this?

The University of Oxford’s Our World in Data group has stopped using data from the World Health Organisation (WHO) because its figures cannot be trusted. “The lack of good data available during the coronavirus outbreak has been a major source of frustration for economists, statisticians, scientists, and public policy professionals.

“A Stanford University epidemiologist and professor of medicine, in a widely circulated Stat article, recently said the COVID-19 pandemic could end up being “a once-in-a-century evidence fiasco.”

Author of the Stat article, Professor John Ioannidis, says data on how many people are infected and how the epidemic is evolving are utterly unreliable. “We don’t know if we are failing to capture infections by a factor of three or 300. Three months after the outbreak emerged, most countries, including the U.S., lack the ability to test a large number of people and no countries have reliable data on the prevalence of the virus in a representative random sample of the general population.”

This evidence fiasco creates tremendous uncertainty about the risk of dying from Covid-19. Reported case fatality rates, like the official 3.4% rate from WHO, cause horror — and are meaningless, adds Ioannidis.

Patients who have been tested for the virus are disproportionately those with severe symptoms and bad outcomes. As most health systems have limited testing capacity, selection bias may even worsen in the near future.

The one situation where an entire, closed population was tested was the Diamond Princess cruise ship and its quarantine passengers, where 700 passengers were infected and seven died. The case fatality rate there was 1%, but this was a largely elderly population, in which the death rate from Covid-19 is much higher. Assuming a more equally distributed population age, the case fatality ratio could range from 0.05% to 1%.

A population-wide case fatality rate of 0.05% is lower than seasonal influenza. German physician and member of the Bundestag, Dr. Wolfgang Wodarg, points to a Glasgow study showing coronavirus (of which there are many strains) accounting for nearly one-in-five common cases in of flu. Ioannidis adds that these “mild” coronaviruses may be implicated in several thousands of deaths every year worldwide, though the vast majority of them are not documented with precise testing. “Instead, they are lost as noise among 60 million deaths from various causes every year.”

UK epidemiologist Neil Ferguson, who has Covid-19 himself, recently slashed his original projections of 500,000 UK Covid-19 deaths to less than 20,000 and expects the crisis to peak in 2-3 weeks. This reduction in estimates is based on evidence that the virus moves much quicker than was originally thought. Oxford University researchers have suggested potentially half the UK population may have been infected, in which case the fatality rate is far, far lower than reported.

If so, the much-maligned “herd immunity” (when enough people get the virus and build immunity) has already taken effect. As with previous epidemics such as Swine flu, the early prognostications of fatalities turn out to be wildly over-stated.

We better demand our government acts on correct data. Because when this blows over and South Africans survey the wreckage, they will look for someone to blame.

Even before the latest fatality stats, ETM Analytics economist Russell Lamberti questions whether the lockdown is proportionate to the threat from the virus. Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba) says the damage to the business sector will not be easily repaired: “We really need to be sure government is making the right decisions based on the right data. What comes after the virus is what is most worrying, because people will be hungry and many businesses will have folded.”

More mines declaring force majeure

Written by Ciaran Ryan. Posted in Journalism

Mines are being forced to declare force majeure, as production winds down due to the lockdown. From Moneyweb.

Image: Shutterstock

Anglo American Platinum (Amplats) was the first of local miners to declare force majeure, three weeks ago, after an explosion at a converter plant forced its hand.

A force majeure is where a company can’t fulfil its contracts, as a result of unforeseen circumstances.

The shutdown of the converter plant is expected to cut 2020 production by one million ounces of platinum group metals (PGMs). This had nothing to do with Covid-19.

Read:
It never rains but it pours: Sasol, coronavirus, and now Amplats
When the virus crisis is over, the legal battles begin

Then the virus struck.

This week, Impala Platinum announced that all consultants and contractors at its operations had been issued force majeure letters to legally suspend its obligations under those contracts.

Force majeure letters have also been issued in respect of offtake agreements with both group companies and third parties, as well as customer supply contracts, to legally suspend our obligations under these contracts,” says the Implats statement. “With respect to offtake agreements, deliveries from all parties to the smelter were suspended on 24 March 2020 to enable the smelting operations to prepare for an orderly shutdown. With respect to customer supply contracts, deliveries can resume once the force majeure is lifted, provided delivery logistics permit.”

ARM announced that its Two Rivers Mine received notice of force majeure from Implats, saying it could no longer take delivery of concentrate for processing until the lockdown was lifted.

Anglo American has moved the bulk of its operations to care and maintenance for the duration of lockdown. “As a result, we’ve unfortunately had to declare force majeure on certain supplier contracts for goods and services that fall outside the scope of approved essential services and the limited scaled-back operations we’re allowed to continue,” says a company statement.

Anglo American spokesperson Sibusiso Tshabalala says this is not a blanket force majeure, and applies only on certain supplier contracts. The good news is that employees will continue to receive basic salaries and housing allowances, as well as company contributions to medical and pension funds, throughout the 21-day lockdown period.

Sibanye Stillwater’s senior vice-president for investor relations, James Wellsted, says all companies that stop operations for an extended period will be stretched to meet contractual arrangements – both with customers and suppliers and contractors. “As will most of the SA mining companies who have been impacted by this lockdown, we have obviously given our partners force majeure notices.”

On Monday Gold Fields announced that its South Deep mine had been placed on care and maintenance for the current three-week lockdown period. Sven Lunsche, vice president of corporate affairs at Gold Fields, says 7% of the usual staff complement remain on site at South Deep, though it has been able to continue delivering product to the bullion banks. Apart from South Deep, the rest of the group’s production has been largely uninterrupted, though stricter regulations are being put in place by governments around the world, which poses a risk during the current financial year.

Royal Bafokeng Platinum has placed its operations on care and maintenance and told a large number of employees and contractors to stay at home.

Other mining groups supplying essential products, such as coal to Eskom, are likely to experience minimal interruptions due to the lockdown. The government is also desperate to get its hands on foreign currency over the coming weeks, and will want to see companies ramp up coal exports to the [greatest] extent possible. ARM Coal says its supply to Eskom will continue during the lockdown, though exports will need to be approved by the Department of Mineral Resources and Energy, and will be subject to the availability of rail capacity.

Likewise, coal producer Exxaro says it will be able to continue with its production activities “subject to the approval of an application that demonstrates that these activities are essential and that the necessary measures have been taken to prevent possible coronavirus infections.”

South32 says it is preparing for a potentially extended period of low commodity prices, and has announced a $160 million cut to capex and exploration in response to the spread of the Covid-19 virus. It has also suspended a $121 million share buyback programme, which will be reviewed later in the year. Its SA manganese operations, along with export coal production from South Africa Energy Coal, have been placed on care and maintenance. “The Hillside Aluminium smelter and domestic coal production from South Africa Energy Coal are considered businesses essential for the maintenance of power generation, given the role they play in the sustainability of Eskom’s generation network and will continue to operate during the lockdown,” says the group in a Sens statement.

For those mines invoking force majeure (or unexpected calamity making it impossible to perform on contract terms), the big question is whether or not the lockdown will be extended beyond 21 days.

For the time being, mines appear sufficiently cash-flush to pay employees, but any extension beyond the 21 days could start to hurt. Then you can be sure mining executives will be knocking on President Cyril Ramaphosa’s door.

The country might be able to sustain a 21-day shutdown, but anything longer could be fatal.

Midnight Express at the Lesotho border

Written by Ciaran Ryan. Posted in Journalism

Jailed last year for owning a Lesotho-registered imported vehicle, Joaquim Alves went to war with Sars and Saps – and won. From Moneyweb.

Attorney Mkhozi Radebe's client Joaquim Alves. Image: Supplied

Attorney Mkhozi Radebe’s client Joaquim Alves. Image: Supplied

Travel through the towns bordering Lesotho and you will find scores of imported vehicles sporting Lesotho number plates. These are second-hand imports, usually from Japan, which can be bought in Maseru for R40,000 or even R25,000, substantially cheaper than equivalent second-hand cars in SA.

To protect the local industry, SA car retailers have lobbied for strict controls on how these cars enter the country and who can buy them. To import one of these second-hand vehicles you need to apply for a permit from the International Trade Administration Commission of South Africa, which is limited to returning residents and immigrants for the most part. The same rules do not apply to neighbouring countries such as Lesotho, where second-hand imported vehicles are everywhere in sight, and which is why you see so many of them in border towns. The International Vehicle Identification Desk Southern Africa has reckoned a loss to the fiscus of billions of rands due to illegal imports of vehicles bleeding across the border from neighbouring countries.

See government’s guidelines for importing a second-hand or used vehicle here.

But a recent court case in the Bloemfontein High Court appears to have upended whatever controls are in place. Pretoria-based attorney Mkhozi Radebe of MC Radebe Attorneys says the court ruling is potentially devastating for local car producers and importers: “It means that any South African is free to drive a second-hand imported vehicle without hinderance.”

Radebe’s client Joaquim Alves has been living in Ficksburg in the eastern Free State for 35 years and has businesses on both sides of the Lesotho border. He owns several vehicles, one of which was a second-hand import with Lesotho number plates that was impounded by SA Revenue Services (Sars) officials in May 2019 while being driven by a colleague. The vehicle in question, a Nissan Serena station wagon, travels to and fro across the border several times a week.

“The Sars officials approached the driver of the vehicle at the local Spar in Ficksburg and informed her that she could not drive the vehicle, and that she must accompany them to the municipal vehicle pound,” says Alves. “I arrived soon afterwards at the municipal compound and was told by the Sars officials that they would have to issue a seizure notice in terms of the Customs and Excise Act. When I looked at what clause of the Act they were relying on, I straight away saw that Sars was relying on a clause in the Act which referred to imported goods. My vehicle was not an imported good as contemplated in the Act. It is lawfully registered in Lesotho and is used to transport goods and people backwards and forwards across the border.”

When Alves attempted to lay a charge of theft against the officials concerned, the police refused to take his statement.

A week later, Alves casually walked into the municipal yard and drove the vehicle home, on the grounds that it had been unlawfully impounded.

Things went downhill from there. A few days later, local police officers arrived at his door with an arrest warrant on charges of vehicle theft and obstruction of justice. He had “illegally” repossessed his own vehicle. The timing of the arrest, being a Friday – which means he would not be able to apply for bail until the following Monday – was part of a campaign of harassment by local police and Sars officials, says Alves.

He was locked in a cockroach-infested cell and left to stew for the weekend. Alves, who suffers from high blood pressure, realised he was separated from his medication and might not last the night. He asked to be taken immediately to the local hospital. The arresting officer apparently told him he was under arrest and had no rights. The police eventually relented and took him to the hospital, with a police escort at his side.

His condition now stabilised, he went before the local magistrate on the Monday morning and was granted bail of R1,000 on condition that he agrees to hand over the disputed vehicle.

A month later, the police dropped all charges against Alves, but continued to hold onto the vehicle, despite being ordered to release the vehicle by the local magistrate. The court records show it was removed to an unknown location by a Sars official, AL Tau.

Alves was so infuriated by the episode that he decided to take on the police and Sars for its self-serving reading of the Customs and Excise Act and various other pieces of legislation he says were violated. He brought a case before the Bloemfontein High Court, which ruled in his favour in August 2019, declaring that the continued detention of the vehicle was “unreasonable, arbitrary and therefore unlawful” and ordered that it be returned in 48 hours. Costs were awarded against the police and Sars, which are appealing the judgment and have so far refused to release the vehicle.

Alves has spent R200,000 on legal fees so far, all over a vehicle that originally cost just R40,000. “I decided my rights were so obviously violated that I wanted to bring Sars and the police to justice. Yes, it costs a lot of money, but I think it is worth it.”

Alves fully expects the police and Sars to fight it all the way to the Constitutional Court, using taxpayer money to paper over a weak case and a shocking abuse of basic human rights. “I think it is time that we held rogue officials personally liable and stop them abusing the law by fighting cases in court at taxpayer expense.

“Effectively, what this judgment means is that as a South African you cannot be stopped from driving an imported foreign-registered vehicle in SA. That is what the Constitution guarantees us. To do otherwise would be arbitrary deprivation of property.”

What’s interesting about the case is that Alves relied on the Southern African Customs Union agreement, which applies to all countries within the customs union (SA, Lesotho, Botswana, Eswatini and Namibia). Thousands of imported vehicles are impounded each year, but most are released on the payment of penalties. Based on this judgment, those penalties may have been unlawfully charged.

The SACU agreement prohibits any member country applying duties on imports from any other country in the union. Additionally, all members of the union are required to allow freedom of transit without discrimination as to goods being transported, subject to certain exceptions such as goods prohibited on grounds of public morals, health, security and other defined categories.

Radebe argues that Alves had been arbitrarily deprived of property in terms of Section 25 of the Constitution and was denied fair administrative action. “The police had no reasonable suspicions or grounds to impound the vehicle , nor was Alves allowed an opportunity to prove that the vehicle was legally being driven within SA’s borders.” In its appeal affidavit, Sars argues (among other things) that it has not had sufficient time to conclude its investigation and that its actions were reasonable – which is refuted by Alves and Radebe.

Moneyweb was unable to get comment from The International Vehicle Identification Desk Southern Africa before publication.

When the virus crisis is over, the legal battles begin

Written by Ciaran Ryan. Posted in Journalism

SA courts generally recognise force majeure as a reason for contract non-performance, but what about individuals who cannot pay their debts? From Moneyweb.

Any bank seeking to evict a homeowner will likely get short shrift from the courts as judges are required to consider all circumstances – including loss of income due to Covid-19 – before granting an order. Image: Shutterstock

Any bank seeking to evict a homeowner will likely get short shrift from the courts as judges are required to consider all circumstances – including loss of income due to Covid-19 – before granting an order. Image: Shutterstock

While the Covid-19 outbreak carves a vein of destruction across the planet, companies worldwide are reviewing millions of contracts to assess whether they can plead force majeure – or an inability to perform due to the pandemic.

It’s a dead certainty that the courts will be clogged for years with cases arguing the limits of force majeure. Judges will be called on to separate the opportunists – those who had already defaulted on contract obligations which had nothing to do with the virus – from genuine cases of force majeure.

In most cases, companies will be able to plead force majeure as a justifiable reason for being unable to perform on a contract. The China Council for the Promotion of International Trade announced on January 30 that it would issue force majeure certificates, which will assist in legitimising any claims for contract non-performance due to force majeure.

The burden is on the party claiming force majeure to prove that the coronavirus falls within the contract wording and that non-performance was a result of the outbreak.

“It must also show there were no alternative means for performing its obligations and that it has taken all reasonable steps,” writes Liz Pinnock, head of legal at audit, tax and consulting firm RSM, in a recent article on force majeure.

Companies will be seeking to be excused from liability for non-performance, which in most cases will mean renegotiating the terms of the contract by, for example, extending timelines for delivery.

‘Impossibility’ needs to be proven

In a recent article, Justine Krige of Cliffe Dekker Hofmeyr says SA law does not excuse the performance of a contract in all cases of force majeure. “There are certain conditions that must be fulfilled in order for a force majeure to trigger the type of impossibility that extinguishes a party’s contractual obligations.”

She says these are:

  1. The impossibility must be objectively impossible.
  2. It must be absolute as opposed to probable.
  3. It must be absolute as opposed to relative (in other words, if it relates to something that can in general be done, but the one party seeking to escape liability cannot personally perform it, such party remains liable in contract).
  4. The impossibility must be unavoidable by a reasonable person.
  5. It must not be the fault of either party.
  6. The mere fact that a disaster or event was foreseeable, does not necessarily mean that it ought to have been foreseeable or that it is avoidable by a reasonable person.

While companies have highly-paid lawyers to protect their interests, individuals do not. When they apply for a bank loan, they sign an agreement drafted by the bank and heavily skewed in the bank’s favour. In such cases, debtors falling behind on their mortgage and car payments will be unable to plead force majeure, says consumer lawyer Leonard Benjamin.

Two sides to every contract

“Default [by a debtor] is purely a factual issue. Even a deceased person would be in default if their bank froze the account out of which payments were being made on being notified of the death. It’s not a question of blameworthiness. The main thing about a loan is that the lender will have performed fully by advancing the money so it falls only on the consumer to honour their side of the contract by repaying the loan.

“If, in an agreement between companies, the obligations under the agreement are reciprocal, one party’s performance is conditional on the other’s,” adds Benjamin. “A force majeure clause simply excuses the supplier’s performance but it will also prevent it from claiming that the consumer perform.

“A loan is different, as the bank would already have performed in full by advancing the funds.”

Banks risk massive reputational damage if they start pursuing customers through the courts for arrears brought about as a result of Covid-19, says Benjamin. However, any bank seeking an eviction against a homeowner will likely get short shrift from the courts, as judges are required to consider all the borrower’s circumstances – including loss of income due to the Covid-19 crisis – before granting an eviction order.

Banks are already coming under pressure for their “underwhelming” response to the Covid lockdown compared to the response in other countries.

Read: SA banks ‘underwhelm’ with response to virus fallout

Standard Bank’s response appears to be the most generous so far, offering short-term payment holidays for students and small businesses in good standing. The response from the other banks has been more of a “call us if you’re in trouble” approach, while governments elsewhere have made more decisive moves to protect borrowers.

Read: Rate cut not enough

The US has placed a freeze on foreclosures and evictions, while several other countries have announced or are planning to introduce debt repayment holidays for consumers in distress. The UK has announced a three-month payment holiday, and European banks are being pushed to offer similar forebearance.

Calls for decisive intervention

In SA, political parties and trade unions are calling for much more decisive intervention from the banks than the lukewarm response to the crisis so far.

National African Congress of Trade Unions (Nactu) and Lungelo Lethu Human Rights are among a growing number of groups calling for a total freeze on legal action related to debt recovery, particularly mortgage and car payments.

Cosatu wants across-the-board rather than piecemeal loan deferments.

The DA wants a four-month loan repayment holiday.

The EFF wants a payment holiday for a whole range of personal debts.

Nactu says government should invoke emergency powers to jail anyone pursuing legal action against mortgage borrowers and car owners until the economic crisis has stabilised, on the grounds that the country is facing an existential crisis.

US economist Michael Hudson says the massive debts accumulated over the last two decades can never be repaid and must be written off, as was done repeatedly in history. This would be the stimulus needed for an unprecedented economic recovery, he says.

Read: Forgive them their debts

That may be an unlikely scenario right now, but seems inevitable in the longer run as the economic wreckage caused by the virus and decades of living on unsustainable debt becomes more apparent.

SA economy could crater up to 10% this year

Written by Ciaran Ryan. Posted in Journalism

Is this a financial reset? All we know is the recession will deepen. From Moneyweb.

The sacrifice of liberties that comes with greater state intervention in the economy is easier during a crisis. Returning those freedoms is then the challenge. Image: Dean Hutton, Bloomberg
The sacrifice of liberties that comes with greater state intervention in the economy is easier during a crisis. Returning those freedoms is then the challenge. Image: Dean Hutton, Bloomberg

Last week Capital Economics forecast a 2.5% contraction for the SA economy this year as a result of the impact of Covid-19. This was before President Cyril Ramaphosa announced a 21-day lockdown and the mass closure of businesses. It now seems the 2.5% contraction is on the optimistic side.

Russell Lamberti of ETM Analytics believes a countrywide lockdown in the midst of a global financial and economic crisis could shear 10% off economic growth for the year. “With a countrywide lockdown, GDP could contract by 10% or more this year, and we won’t easily recover from this once the shutdown is over,” says Lamberti.

“What is more concerning to me than the virus itself is the reaction to it, which could be worse than the disease. The whole world is going into shutdown, and countless businesses will close their doors forever, leaving millions out of work.

”What concerns me is that central banks everywhere are then going to resort to the same prescriptions they have adopted for decades and engage in rampant money printing. I have strong doubts that it will work, and could actually make conditions far worse.”

Whole segments of the economy at risk

Dawie Roodt of the Efficient Group recently wrote that the economy could contract 1.8% this year, but could just as easily shrink by 2.5% or even 3% as the impact of the coronavirus lays waste to whole segments of the economy. The first to be hit will be restaurants, hotels, airlines, hospitality and the retail sector.

Barely a month after Finance Minister Tito Mboweni delivered his budget speech and bravely forecast economic growth of 0.9% for the year, those projections are now toast, with revenues to the South African Revenue Service (Sars) likely to massively undershoot the R1.54 trillion target for the current fiscal year.

Clearly, there is no compass to guide us out of this disaster for the simple reason that a countrywide lockdown has never happened before.

In his address to the nation on Monday, Ramaphosa announced plans to buttress businesses and employees from the impact of the virus. Some of the details are sketchy and it will take days and perhaps weeks before cash reaches the areas where it is needed most.

The South African Reserve Bank will provide liquidity to the banking sector, while the banks are expected to announce debt relief measures in the coming days. Standard Bank has already announced payment relief for students and small businesses that are up-to-date on their payments and in good standing.

Read: Standard Bank provides Covid-19 debt relief for SMEs, students

There is widespread fear of large-scale default on loans as employees, business owners and the self-employed suffer loss of income. This is reflected in the 40-50% plunge in most banking share prices this year, an astonishing drop for a sector that was widely touted as relatively cheap at the beginning of the year when prices were much higher than they are now.

Banking staff are themselves fearful for their jobs, as one executive told Moneyweb. Corporate banking and deal making activity has virtually ground to a halt.

Deals that were ready to be signed a few weeks ago now look dead in the water, given the rapidly deteriorating cash position in companies.

Businesses that looked reasonably healthy two months ago may now have to go to government for bailout.

In the best case scenario, the 21-day lockdown works its magic and reduces the rate of virus infection. The real damage will occur in the second quarter of the year, says Roodt, with the possibility of recovery coming in the third and fourth quarters. But the reality is that the SA economy was already sick before the coronavirus struck.

In a less optimistic scenario, the lockdown does not work its magic and has to be extended. Then the economic impacts will ripple through until the end of the year, with companies permanently closing their doors, resulting in the loss of hundreds of thousands of jobs.

Modern Monetary Theory

This may be the point where Modern Monetary Theory (or virtually limitless money printing) is given a test run to support an ever growing queue of state dependents.

“Big money printing could include quasi-nationalisation of key businesses, perhaps even banks,” says Lamberti.

“What may be worrying about this is the sacrifice of liberties that comes with greater state intervention in the economy.

“People may be willing to give up their freedoms temporarily in the crisis such as this, but when the crisis is over, history tells us that these freedoms are not fully returned to the people. That said, I don’t think people are going to surrender their freedoms that easily to the government. There is going to be a big showdown with civil society.”

Government has mismanaged its accounts to the point where the budget deficit was likely to reach 7% of GDP even before the virus struck. Instead of cutting back on spending, it is attempting to spend its way out of trouble.

“Once the dust has settled, I think it will take the economy years to recover from the damage caused by the global and domestic policy reactions to this virus, and some of the damage in SA may be permanent,” says Lamberti.

JSE Financial Index

Source: ShareMagic

On full display: The fragility of the global order

Written by Ciaran Ryan. Posted in Journalism

Brought down by a microbe without a shot being fired. From Moneyweb.

Taleb argues that admission to the S&P 500 is the start of a suicide process for companies. His reasoning also explains why family businesses survive longer – the owners are punished for faulty decisions. Image: Scott Eells, Bloomberg
Taleb argues that admission to the S&P 500 is the start of a suicide process for companies. His reasoning also explains why family businesses survive longer – the owners are punished for faulty decisions. Image: Scott Eells, Bloomberg

Nassim Taleb, author of Antifragile: Things That Gain From Disorder, and before that The Black Swan, has spent the last two decades warning of the fatal cracks in the global financial ecology.

As a former options trader, he approaches the subject from a risk rather than an economic perspective. The more complex the system, the more cracks are waiting to be exposed by a ‘black swan’ event, such as the coronavirus pandemic. Dramatic movements in markets are caused not by predictable and incremental changes, such as earnings growth, but by calamitous events that are virtually impossible to predict. We are living in such a time right now.

The $1.5 trillion stimulus package announced last week by the US Federal Reserve had virtually no impact on markets. The old prescriptions are no longer working the way they once did. We’re in relatively unchartered territory. The Dow Jones sank more than 9% on Monday, triggering an automatic trading shutdown.

Dow Jones Industrial Index down 21% in a month

Source: ShareMagic

JSE All Share index down to 2014 levels

Source: ShareMagic

When it comes to investment, Taleb’s first rule is to preserve your wealth rather than maximise your return. Hence it is preferable to earn zero return than risk a 50% wipeout, as happened to some investments over the last few weeks. Our understanding of risk is woefully inadequate to the dangers inherent in a financial system where perceptions of value can swing by 20% or more in a week. Hence, forecasting is a type of fraud that does harm to those that act on the forecasts, says Taleb.

The events of recent weeks may ultimately lead to a complete rethink of our financial architecture.

If this is indeed the start of a major recession, as it now seems, the rent seekers will be knocking at the door of government for rescue or, in the case of failing banks, at the door of the SA Reserve Bank.

Banks may go back to their roots

Some may end up being nationalised, something economist Michael Hudson – author of J is for Junk Economics: A Guide to Reality in an Age of Deception – argues will be a welcome move as it will allow banks to return to their historic role as lenders to the productive sector rather than to stock market and real estate gamblers.

Governments will find it hard to resist the clamour for financial bailouts from all sectors. This may provide short-term stability to the commercial sector, but it will not address the long-term structural fault lines.

Taleb’s Antifragile argues that systems are made more robust by allowing companies to fail.

When the US banks were bailed out by the Federal Reserve in 2008, bad decision-making by bankers was rewarded and encouraged. The chances of a major banking failure have increased exponentially as the economic consequences of the coronavirus pandemic become apparent. Many airlines, travel companies, hotels and restaurants will likely file for bankruptcy or business rescue in the coming months. Factory closures and job lay-offs are almost certain.

Shielded bureaucrats

Taleb is dismissive of most economists for peddling advice for which they suffer no harm in the event their advice turns out to be wrong. The same goes for bureaucrats who are shielded from punishment regardless of the harm caused by their decisions. 

Tax revenues and expenditures are based on economic growth forecasts that are more PR fluff than actuality. Finance Minister Tito Mboweni’s forecast of 0.9% growth this year was already on the high side, even before the outbreak of the virus. That means tax revenues will undershoot and government borrowing will overshoot, pushing the deficit dangerously above the forecast 6.5% for the current fiscal year. That tab will be picked up by taxpayers.

Read: A decade of budgetary whoppers

Fiscal deficits have proven to be a prime source of fragility in social and economic systems. Government borrowing can be expanded with no accountability.

Another fault line is the pursuit of corporate size for its own sake.

There is very little evidence that size delivers economies of scale but can, in fact, be damaging during times of stress. Some economists have been wondering why company mergers do not deliver the promised ‘synergies’. The combined unit is now much larger, hence more powerful, and according to the theories of economies of scale, it should be more efficient.

Executive ego

Executive hubris appears to be the prime motivator behind merger and acquisition activity, as economist Richard Roll pointed out in 1978. Three decades later, Roll’s ‘hubris theory’” is as valid as ever, given the poor track record of mergers. Which is why Taleb argues that admission to the ranks of the S&P 500 is the start of a suicide process for companies. It also explains why family businesses survive longer. The scale is more manageable and the owners are punished for faulty decisions.

The bureaucrats who delivered us power blackouts (and they weren’t all Eskom employees) and deindustrialisation have moved on to other sinecures and have gone unpunished. As Efficient Group economist Dawie Roodt pointed out in a recent presentation on the 2020 budget to the Free Market Foundation, it was current Public Enterprises Minister Pravin Gordhan who was the responsible minister of finance while state-owned companies were being run into the ground. The EFF calls him the “minister of load shedding” and wants him gone for this and other reasons, though business leaders love him.

Lack of accountability for bad decisions carries no consequence for those who make them. Perhaps we should invoke the Code of Hammurabi, a pre-Christian Babylonian king, who demanded the heads of architects who built houses that collapsed and killed the occupants.

Roman engineers were expected to sleep under the bridges they built so they would be first to die in the event of collapse.

Errors, provided they are small, are fine as long as those making them suffer appropriate harm for causing them – what Taleb calls “skin in the game”. Most successful entrepreneurs have had one or more business failures. They learn from these losses and avoid repeating them. This is what makes for more robust societies.

“At no point in history have so many non-risk-takers, that is, those with no personal exposure, exerted so much control,” writes Taleb.

“This is the Davos crowd, empty suits who shape the future of the planet and carry no downside risk for their awful prescriptions. Inevitably, they will make fatal decisions and suffer no consequences.”

Government ‘cures’

Another fallacy of government is that its intervention is benign. When faced with complex and failing systems, the cure is subtractive rather than additive. If you are ill, removing things that harm the body, such as sugar and cigarettes, usually works better than taking a drug. On this basis, it is unlikely that the raft of new financial sector laws and regulations passed in last decade will deliver the stability it set out to achieve.

Most of recorded history derives from black swan events, rather than the ordinary.

Our risk models are based on false probability theories that assume the ordinary, when history tells us it is the extraordinary and the unpredictable that will decide our futures.

“Every additional deviation in, say, the unemployment rate – particularly when the government has debt – makes deficits incrementally worse,” writes Taleb in Antifragile. “And financial leverage for a company has the same effect: you need to borrow more and more to get the same effect.

“Just as in a Ponzi scheme.”

Rate cut not enough

Written by Ciaran Ryan. Posted in Journalism

Growing calls for freeze on debt repayments to ward off ‘social disaster’ aspect of Covid-19. From Moneyweb.

Moratorium should be ‘long enough’ for people from all walks of life to recover from the economic disruption caused by the virus. Image: Reuters
Moratorium should be ‘long enough’ for people from all walks of life to recover from the economic disruption caused by the virus. Image: Reuters

A growing number of organisations and consumer activists are calling on the government to follow international trends and impose a moratorium on debt repayment obligations due to the devastating impact of the coronavirus.

Consumer defence group Lungelo Lethu Human Rights Foundation is calling for a moratorium on debt repayments for six months, and a freeze on any debt-related legal proceedings.

The National African Congress of Trade Unions (Nactu) has likewise called for a freeze on debt repayments, as is happening in many other parts of the world.

“Potentially hundreds of thousands of South Africans stand to lose their jobs as a result of the economic downturn,” says Nactu secretary-general Narius Moloto. “We are looking at social disaster unless we provide immediate relief to those in financial distress.

“Already thousands of workers in restaurant and hospitality trade, and those involved in contract work, have lost most or all of their income,” says Moloto.

Nactu is calling on government to use its emergency powers to kick-start a massive infrastructure programme to get the country back to work as fast as possible.

This week, US President Donald Trump announced a freeze on foreclosures and evictions until the end of April. Several other countries have announced or are planning to introduce debt repayment holidays for consumers in distress.

Debt counsellor Michelle Barnardt says government will have to provide relief given the dire level of overindebtedness in the country, with nearly four out of 10 people already in arrears on one or more accounts. “If people cannot work and earn income they will not be able to make monthly debt payments. This will include groups like attorneys, advocates, and those in entertainment and hospitality.

“Drastic times calls for drastic measures,” says Barnardt. “In Afrikaans we say ‘Jy kan nie bloed uit ‘n klip tap nie’ [You can’t draw blood from a stone].”

“This situation is definitely affecting everything and everybody, and government must step up to the plate and prevent anyone being victimised as a result of this terrible economic downturn.”

Read: SA to regulate price increases linked to coronavirus – trade minister

Consumer lawyer Leonard Benjamin advises anyone facing legal action as a result of their deteriorating financial position to mount a legal defence. “It would be shameful if any court issued a judgment against a debtor in these circumstances, and almost certainly unconstitutional.

“No court can issue a judgment without considering all the circumstances of the debtor, and the economic impact of the Covid-19 virus is certainly sufficient grounds to defend against a monetary claim.”

Lungelo Lethu president King Sibiya says he is inundated with calls from people who have been unable to earn an income these last few weeks as a result of the virus. “These include people who earn commissions, part-time workers and informal sector workers. The impact of the virus could be catastrophic for the economy. We cannot expect people who have suffered a serious loss of income to be able to repay debts until the economic impact has stabilised.

“We are therefore calling on the government and the banks to be sensitive to the dire situation people find themselves in, and to allow a debt repayment moratorium. Many people, through no fault of their own, are going to find themselves seriously in arrears as a result of the economic disruption caused by the Covid-19 virus,” says Sibaya.

Freeze on evictions

“In addition to a moratorium on debt repayments, we are calling on the government to impose a freeze on any debt-related judgments and on evictions. These must cease immediately.

“This is not business as usual. If we do not address this matter urgently, we face massive social chaos, far worse than anything we have seen up to now,” says Sibiya.

He adds that the moratorium should be long enough for people to recover from the economic disruption caused by the virus. “Many banks overseas have introduced waivers to allow customers time to recover from the economic effects of the virus. We believe we should follow the example of Malaysia and impost a six-month freeze on loan repayments.”

Read: How much could Covid-19 impact the SA economy?

In Malaysia, Public Bank is offering an immediate moratorium of up to six months for the monthly instalment payments on loans and financing for individual and business customers affected by the outbreak. Last week Italy announced plans to introduce a moratorium on debt repayments, including mortgages, to help families and businesses cope, according to the Wall Street Journal.

In the UK, the government is backing mortgage holidays of up to three months. There are also calls in Ireland for mortgage holidays of up to six months.

All countries around the world are looking at imposing similar measures.

“We must follow the international example and impose a freeze on debt repayments for a reasonable period of time,” says Sibiya.

No time to waste

Moloto says there is no time to waste in getting the economy moving as fast as possible. “The construction sector is in terrible shape, in large part due to crony capitalism and state capture, but we cannot assume that conditions will turn around on their own. They won’t.

“These are virtual war-time conditions requiring emergency action.

“We have a chance here to create hundreds of thousands of jobs in the next few months,” he adds. “As a first step, government must place a freeze on debt-related legal action and impose a six to 12-month freeze on debt repayment obligations.

“We understand this will come at a cost to the banks, but we cannot put the interests of the banks above that of the people.”

The great foreclosure rip-off

Written by Ciaran Ryan. Posted in Journalism

January’s interest rate cut has effectively wiped out all mortgage bond arrears, say consumer activists. But you won’t hear that from your bank. From Moneyweb.

Banks that engineer situations in order to be able to argue that homeowners remain in arrears even after a rate change could find this approach backfiring on them in dramatic fashion. Image: Shutterstock
Banks that engineer situations in order to be able to argue that homeowners remain in arrears even after a rate change could find this approach backfiring on them in dramatic fashion. Image: Shutterstock

The January interest rate reduction should be even better news for hard-pressed consumers who are behind with their bond repayments.

Moneyweb readers may recall that the last time there was a rate change, in July 2019, all accumulated bond arrears were effectively extinguished.

Read: Congratulations, your mortgage arrears have been extinguished

The latest rate cut has had the same effect – but you won’t hear that from your bank. That’s because each time the interest rate changes, the banks spread the arrears over the remaining term of the loan. In legal terms, that wipes out the arrears. All you have to do is pay the latest, adjusted instalment and you’re back on track.

There is international case law to support this from the Northern Irish courts in Bank of Scotland versus Rosemarie Rea.

The problem is that there is now mounting evidence of banks pursuing customers through the courts for non-existent arrears.

Consumer lawyer Leonard Benjamin has been itching to test this in our local courts but so far none of the banks have bitten. It seems they would rather keep it out of the courts for reasons that are all too obvious. A decision against them would open a Pandora’s box of historic claims from people who lost their houses when they were not, in fact, in arrears.

Double dipping

Benjamin says what SA banks have been doing is called “double dipping” – the same thing Rosemarie Rea successfully argued in her case against Bank of Scotland.

If the bank spreads your arrears over the remaining term of the loan, and then still claims you are in arrears, it is charging twice for the same thing.

The UK courts have ruled that this is unlawful.

“There is absolutely no doubt that the banks understand that a rate change would automatically wipe out the accumulated arrears,” argues Benjamin. How they deal with this varies from bank to bank.

After the July 2019 interest rate change Moneyweb alerted readers to the double-dipping argument. Readers were advised to approach their banks for official confirmation that their interest rates had been changed on the basis that this would confirm that any arrears had been extinguished.

Some of the banks simply stopped, or refused, to issue the notice of the changed interest rate as they are required to do in terms of the National Credit Act (NCA).

Requests to banks denied

According to Benjamin, several of his clients approached their banks for official notification of interest rate changes, but were denied for various reasons. If so, this would be a breach of the NCA and the home loan agreement. In some cases their requests for the official interest rate notice were denied as the matter was “legal”. 

All banks approached by Moneyweb say they do not engage in “double-dipping”, though this is disputed by Benjamin. Standard Bank, for example, says one of the methods it uses to assist clients in financial distress is to re-spread the arrears over the remaining term of the loan. “This in effect means that the client would no longer be in arrears but would, as a result of the re-spread, need to pay a higher instalment to the bank in respect of the home loan due to the outstanding balance increasing,” says Standard Bank spokesperson Ross Linstrom.

FNB likewise refutes any suggestion of misconduct in the management of mortgage accounts in arrears.

Lee Mhlongo, CEO of FNB Home Finance, says when customers fall into arrears, each case “is assessed on its own merits and we endeavour to reach an agreement with the impacted customer”.

“Some customers are able to settle the full arrear amount and others can enter into a payment arrangement to pay an additional amount over and above the monthly instalment in order to bring the account up to date,” says Mhlongo. “FNB’s objective in all cases is to help customers avoid falling into arrears, both to the benefit of our customer in terms of saved interest and to the bank in terms of not having to raise impairment provisions. However, we cannot unilaterally increase the instalment that is raised, therefore recovering on arrears requires consultation with our customer.”

Calculating move

Again, Benjamin refutes this, saying in cases he has seen, FNB changed the way in which it calculates the new monthly instalment on arrears accounts when there is a rate change to exclude arrears. It does this by deducting the arrears from the outstanding account balance and calculates the instalment on the net outstanding balance. The bank then argues that mere payment of the new instalment will not eliminate the arrears, which remain intact and can, therefore, be relied on to foreclose on the consumer’s property.”

The problem here is this is unlawful in terms of common law, the NCA and their own home loan agreements, says Benjamin.

The question arises: Why are the banks so hellbent on foreclosure when they have claimed before the courts that they do this only as a last resort?

Read: The days of easy evictions are drawing to a close

Judges are being bamboozled by the banks

“Banks are routinely deceiving the court in claiming they use foreclosure as a last resort,” says Benjamin. “Where are the judges in all this? They are being bamboozled by the banks.”

Benjamin says this behaviour only makes sense once you understand the financial incentives behind the rush to court.

“In many cases, the banks’ lawyers have been getting away with this unlawful behaviour for decades, so why should they stop now? The banks are being badly advised. In the second instance, many home loans are backed by insurance policies or guarantees that trigger in the event of default. The banks receive a financial benefit from these guarantees, but only once there is legal judgment against the customer.”

Benjamin backs his claims of double-dipping with more than a dozen cases that have come across his desk since the July 2019 interest rate change.

“In all of these cases, the banks are violating the NCA and their own home loan agreements.

“The clients are not in arrears. None of them. If necessary we will take this to the Constitutional Court to prove it. We have to stop this abuse of the courts and the human and legal rights of bank customers.”

Many of his cases are now before the courts, but the banks appear to be ducking the day of reckoning by avoiding arguing the merits of the cases. The faint vapours of a massive class-action suit are beginning to waft through the corridors of justice.

Law Clinic weighs in

Stephan van der Merwe, senior attorney with the University of Stellenbosch Law Clinic, says banks that engineer situations in order to enable them to argue that homeowners remain in arrears even after rate changes could find this approach backfiring on them in dramatic fashion.

“In light of the recent judgment of the Cape High Court in Stellenbosch University Law Clinic & Others vs National Credit Regulator & Others, there may be further limitations placed on the amounts that banks can recoup under defaulting mortgage bonds.”

Read: Court decision opens the way for consumers to get billions in fees back

This is because of Section 103(5) in the NCA, otherwise known as “the statutory in duplum [double] rule”, which prohibits credit providers from recovering more than double the outstanding loan amount once a borrower defaults and remains in default thereafter. “One could argue that by capitalising and amortising the arrears amount, the consumer effectively remains in default up and until the last instalment is made in terms of the loan,” says Van der Merwe.

“In the case of a mortgage bond over 20 years, the impact would be significant,” he adds.

“Take for instance a mortgage bond of R1 million to be repaid at current interest rates over a 20-year period. At the end of that 20 years the consumer could have paid a total amount of R2.6 million. If the consumer misses the first payment but thereafter continues to make the monthly payments in accordance with the mortgage agreement the consumer would actually be in default the entire time. As a result, the total amount that the bank would be entitled to claim from the consumer is R2 million, a loss of R600 000 to the bank. It makes no difference if that first payment is capitalised and amortised as this arrear would only be settled at the end of the 20 years. Therefore, the entire time the consumer would be in default and Section 103(5) would apply.”

Muddying the waters

Forensic accountant Andre Prakke says the problems start when a debtor is in arrears and the entire loan becomes payable. To avert this problem, the overdue amount is then capitalised.

This has the effect that the interest included in the amount capitalised becomes capital. Given the scenario of a bond, the greater portion will then be interest that is capitalised and the interest charge is then in effect changed to capitalised interest.

“This muddies the water in that it could become such that the in duplum rule is ignored as it is a matter of fact that, after constantly capitalising interest, the interest charge loses its character and it cannot be distinguished ‘what is what’ that is debited as an additional charge. It becomes impossible to know what is owed by way of capital or other charges, such as the insurance premium, and that also has an interesting effect – maybe legal charges of past transgressions, although only taxed legal cost can be debited – and so on.”

In the next instalment, we will look at how other banks are claimed to be subverting the courts.