WEF Durban – after the downgrade

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The United States of America is undergoing uncertain transformation after the surprise election of Donald Trump as the new president in November last year. The United Kingdom and the European Union are undergoing uncertain transformation after the unexpected Brexit verdict from voters in June last year and France will now undergo uncertain transformation after the not-so-suprising victory of Emmanuel Macron in the second round of the French presidential elections. His victory over the weekend put another stumbling block in the pathway of previously rising anti-establishment politics that started with Brexit, and was reinforced by Donald Trump and was further threatened by Geert Wilders in the Netherlands and by Marine Le Pen in France. And back here in South Africa we are now faced with the prospect of “radical economic transformation” following the introduction of this concept in the State of the Nation Address and the national Budget Speech earlier this year. Since then the already elevated political and economic uncertainty was further jolted when President Jacob Zuma opened “Pandora’s box” for the second time, as quoted by Nomura’s Peter Attard Montalto, with his subsequent axing of Pravin Gordhan as Minister of Finance. The negative response from large global ratings agencies was swift and the country now holds onto tenuous local currency investment grade ratings by its very short fingernails.

In the first week of May, Durban hosted the 2017 World Economic Forum (WEF) Africa meeting. This event provided a platform for a number of government officials to air their views after the “night of the long knives” cabinet reshuffle by Jacob Zuma at the end of March. The president gave the main World Economic Forum meeting in Davos in January a miss and he skipped 2016’s WEF Africa meeting in Kigali, Rwanda. A recent editorial in the Business Day newspaper poses the question  of whether he was trying to dodge difficult questions from global investors and peers or simply did not care.  However, he chose the occasion of the forum in Durban to lead a delegation of no fewer than 18 of SA’s cabinet ministers, which included his brand-new Finance Minister, Malusi Gigaba. This was clearly an opportunity for Zuma and Gigaba to try and undo some of the damage Zuma did with the cabinet reshuffle. By certain accounts

…they made the most of it, taking centre stage and using opportunities, formal and informal, to try to reassure local and global business leaders that SA was on the right track.

The editorial goes on to suggest that whether they succeeded is not at all clear. They were not helped by the fact that, in contrast to previous WEF meetings, government had to go it alone. The business and labour leaders who teamed up with government to sell SA Inc and tried to attract investors at the last two Davos meetings were not about to do so in Durban. SA’s CEOs have made clear their fury at Zuma’s cabinet reshuffle and the junking of South Africa’s credit rating that followed. And many in organised labour made their opposition clear at the Cosatu Congress in Bloemfontein the previous week when they booed Zuma’s speech. Zuma apparently said many of the right things, most particularly when he answered a question about the Cosatu booing by saying, in effect, “that’s democracy”. He punted his radical economic transformation narrative and went heavy on the race issue, but he lined that up with the inclusive growth narrative favoured by business and the WEF itself. He even offered a novel explanation of his decision to reshuffle the cabinet – just as a court ruled he had to detail the rationale – saying his intention was to make room for young people.

Gigaba said many of the right things too, particularly in a well-attended one-on-one session of his own that the WEF included in the programme. He sang the Treasury song on fiscal matters, emphasising that the 2017 budget was already locked down and that in any event, he had no intention of being less prudent than his predecessor. “We can’t spend money we don’t have,” he said, as he too talked about inclusive growth and the need to grow the economy to expand the revenue base from which to invest in socio-economic programmes.

Gigaba was already on the back foot, after it was recently made public that his new economic advisor Chris Malikane (Associate Professor of Economics at Wits University) and senior ANC leaders, including President Zuma, had called for land to be expropriated without payment. In an interview with the Mail & Guardian on the sidelines of the Durban WEF, Gigaba reportedly contradicted Malikane. “There is an Expropriation Act, which gives the government the authority to expropriate land for development. I think that we need to exhaust that legislation before we can think of any additional measures, including outside of the constitutional framework,” said Gigaba. He told the Mail & Guardian that he had once again reined in Malikane, after the advisor reiterated his call for a new economic policy and for an amendment to the Constitution, to nationalise key sectors of the economy. Gigaba also told delegates at a Black Business Council breakfast in Durban that it was time the ANC and government leaders defined the concepts of radical economic transformation and inclusive growth.

The trouble is all the words dripping with honey come in a context that is well-known to those at the WEF whom Zuma and Gigaba sought to court – and ousted Finance Minister Pravin Gordhan’s presence in Durban was a reminder of it.

Zuma’s reshuffle was not about putting in more competent people, or younger ones, but about removing those who stood in the way of his faction’s efforts to plunder the state for their own ends, and putting in more pliable placements.

That context will continue to undermine any credibility that the President and his new Finance Minister might have, no matter what the forum.

In the aftermath of the cabinet reshuffle and ratings downgrades, there has been growing talk of corporates holding off on spending in the local economy. The ratings agencies have cited uncertainty over economic policy direction and concerns about the contingent liabilities that state-owned entities pose for the state as being among the reasons for the credit ratings downgrades. “I think trust is very low and this is reflected in talk of an investment strike,” said Montalto.  Last month, Sibanye Gold’s chief executive Neal Froneman reportedly said that the company would not invest in any new projects in South Africa because of the political turmoil. According to data from the Reserve Bank, the debt to gross domestic product levels of South Africa’s non-financial corporations are far below those of its market peers. In addition,

…cash deposits held by local corporates have continued to rise in recent years.

The total cash deposits held by the private sector – excluding financial institutions such as banks – was about R719 billion in February.

Reserve Bank governor Lesetja Kganyago has however dismissed the assertions that South African companies have gone on an “investment strike”. It cannot be called an investment strike, Kganyago said, because business and consumer confidence are needed for investment to happen. But amid declining economic growth, both metrics have been poor. Nevertheless, he said:

“Policymakers have to provide an environment where business confidence thrives.”

He also pointed out that globally there is a growing worry over the sustainability of corporate debt levels. In an environment of low economic growth, South African companies have low debt levels, making them better prepared, in the event of an upswing, to borrow and finance business activity.

South Africa had to deal with the issues that had been identified by ratings agencies as constraining economic growth, including “sorting out issues to deal with business confidence”, Kganyago said. This is however proving to be very difficult. Trust has “broken down completely” because of the President’s actions, said Dennis George, General Secretary of the Federation of Unions of South Africa. George was part of the labour contingent that travelled abroad with Gordhan to woo investors and placate ratings agencies. Attard Montalto added that “Team South Africa” was never accepted by the wider ANC, the presidency or other ministries, and “after the reshuffle is just hot air”. Although the show of unity helped to prevent a recession last year, business is a lot more sceptial and risk averse, and will “hunker down” or look for opportunites abroad, he said.

But advice on fixing the economy and recipes for economic improvement are well known, widely offered and well circulated and have been for many years now as our year-on-year GDP growth evaporated from a high of 7.1% to its current meagre rate of 0.7%. The blueprint National Development Plan (NDP) lies shivering in the cold. When the President opened “Pandora’s box” for the second time, the stalemate between business, government and labour was once again highlighted.

So, yet again, we wait. Either positive change will come from within the ruling party as the leadership change approaches at the end of this year, or concerned citizens from all walks of life will have to unite to use the next national election to enforce positive change.

Politics aside, global company earnings seem to be recovering after the US Dollar-induced earnings recession that started in 2014. While bond yields and cash rates in Developed Market economies present substantial risks to investors, elevated yields in Emerging Market economies present opportunites. While political uncertainty is a global phenomenon, market performance suggests that political interference in market behaviour is usually short-lived within an appropriate long term investment time horizon.

Source: APS Monthly Economic Commentary