The global political challenges

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South Africans have become accustomed to the often bewildering statements and recommendations made by those in high political office. The most recent is the suggestion by the Department of Education that Mathematics should be removed as a compulsory promotion requirement of high school students. This is surely lowering an already low bar since the current pass rate for maths is only 40%. And, on top of this, in 2016 a “special condonation dispensation” for maths was applied. According to National Assessment Circular 3 of 2016, pupils who passed all other subjects but failed mathematics with a minimum mark of 20% were condoned and would thus pass Mathematics and pass the examination as a whole. The growing importance of maths cannot be understated. Maths began as a tool in construction about 2000 years ago, mainly as a study of Geometry. It quickly became a tool for astronomers, which encouraged the development of trigonometry. But Maths was really set loose in the 19th century when the utility of increasingly abstract language that Maths affords became apparent.  The Department is either barking mad, or will claim shortly that it was “quoted out of context”.

Also barking, but this time up the wrong tree, is our new Public Protector. In a filing to the Pretoria High Court, the South African Reserve Bank (SARB) said the recent recommendation by the Public Protector to change its constitutional mandate amounted to “gross over-reach”. The SARB took the unusual step of going to court after Busisiwe Mkhwebane called for the bank to drop protecting the value of our currency in place of “meaningful socio-economic transformation”. Ms Mkhwebane, who took over as Public Protector in October last year, is seen as an ally of President Zuma. Government critics view her call for the central bank to dilute its mandate as furthering the cause of the president’s associates, who accuse the country’s institutions of propping up “white monopoly capital”. Adding to the pressure, deputy finance minister Sfiso Buthelezi questioned whether the inflation target (set by the SARB), of 3 to 6 percent, should be a “policy for all seasons”. Kuben Naidoo, a deputy governor at the bank, told the London Financial Times that any move to shift away from inflation targeting would “impinge on our ability to do our work” and damage rather than enhance growth and job creation.

In an article with a focus on Africa, David Pilling, writing for the Financial Times, suggests that the assault on the bank is, potentially, another notch downwards for the country whose descent under Mr Zuma into crony capitalism has been arrested only by institutions prepared to stand up for the constitution and the rule of law. They include the courts, the finance ministry that was, the public protector that was and – in its own unflashy way – the SARB. He goes on to point out that as in the USA, where institutional credibility is also under assault, in South Africa too it has not been a one way street. Some institutions have bolstered its credentials as being different from most African countries, where the interests of the state and the ruling party have merged. In South Africa, the courts have passed judgements inimical to Mr Zuma, such as when the High Court in North Gauteng revived 783 charges of fraud, racketeering and corruption against him. The Pretoria High Court may well back the SARB.

As in the USA, the importance of personalities, as well as institutions, has come to the fore. Acting attorney-general Sally Yates stood up to President Donald Trump over his travel ban. Thuli Madonsela transformed what had been the low-key ombudsman’s office into a shield of constitutional probity. Not only did she blow the lid on Mr Zuma’s use of R246 million of state funds to upgrade his homestead, she also, in her last act of defiance, published the damning report on “state capture”, in which she detailed the alleged lengths Mr Zuma was prepared to go to, to satisfy the business interests of his friends, the Guptas.

Mr Zuma and the Gupta brothers, who own media and mining assets, have denied those allegations. Since the report, Ms Madonsela and Pravin Gordhan, a beyond-reproach finance minister, have left the scene, replaced by individuals who are less likely to cause Mr Zuma trouble. Yet the fight between our institutions and the ransacker-in-chief is not over. Now the battle has shifted to the other key institution whose conduct will shape the future of the country: the ANC. The party that inherited the moral authority of the anti-apartheid struggle will, in December, elect a leader to replace Mr Zuma. The choice will help determine whether the ANC continues its descent or whether it can again become a party with the stature to tackle the country’s corrosive social and economic problems.

For the same political challenges, but in a different cage, another wave of corruption scandals hit Brazil. Early in July, police busted an alleged $150 million bribery scheme involving bus lines and a former state governor of Rio de Janeiro, who is serving time for a myriad other offences. They also arrested, on suspicion of corruption, a former minister of Brazil’s president, Michel Temer, who is himself facing graft charges and a vote in congress this month on whether to let the supreme court try him.

Yet investors appear far from rattled. It seems capital markets no longer much care about the deterioration of the country’s politics into a B-grade television crime show, says Joseph Leahy, also writing in the Financial Times. The Sao Paulo stock market plunged more than 10% in mid-May when news broke that Mr Temer had allegedly discussed bribes with a businessman, Joesley Batista, former chairman of JBS, the leading meatpacker. But since then it has been relatively stable, even recovering ground, while the currency (the real) after briefly weakening about 8%, has steadied. The Brazilian currency has weakened by only 1.4% this year against the US dollar, while the Bovespa equity index is up about 5%.

The rationale for this rather benign market behaviour is that what has emerged is a mild picture compared with what many thought would happen if the government lost its way. Brought to power last year after the impeachment of the leftist Dilma Rousseff, Mr Temer promised to introduce tough fiscal reforms. For a while it seemed he might succeed. He persuaded congress, a “political zoo with 28 parties”, to pass a bill limiting increases in federal budget spending to zero in real terms. This was a revelation in a country that spends like an European welfare state but delivers only a fraction of the services. To fund the change he needed to overhaul a pension system that allows people to retire in their 50s. He seemed on track when the JBS scandal broke, scuppering his plans. Yet earlier expectations that the floundering of pension reform would mean cataclysm for Brazilian markets have proven overdone. One reason is that the economic team appointed by Mr Temer is regarded as first class. The two- man team, with extensive experience in the private sector, took over two years ago when the economy was nearing the bottom of the worst recession that Brazil has been through. But they have carefully helped restore confidence. Inflation is at a 10-year low of 3.6% and is expected to fall further. The current account deficit has fallen to lows as well, with a cumulative 12-month gap of just 1% of GDP in May. This, and large foreign exchange reserves, have helped protect Brazil against shock waves during the recession.

For Alberto Ramos, an economist at Goldman Sachs, the source of Brazilian market steadiness was a “still favourable external environment, still very credible and orthodox economic team (if they cannot do it who can?) and the fact that the alternatives to this administration are not great or well defined”. But things could change if governability continued to decline, he warned.

The other factor helping Brazil is that emerging market competitors do not look any better off. “In the land of the blind, the one-eyed man is king,” said Alejo Czerwonko, emerging market strategist at UBS Wealth Management. Brazilian sovereign bonds in dollars paid more than their South African or Turkish counterparts, yet the political situation was no worse than in those countries.

On the subject of corruption, Tony Barber, also writing in the Financial Times, points out that from Paris to Bucharest, from Madrid to Moscow, an often well-founded perception of corruption in high places is testing the patience of European societies and shaking up political life. Since early June, corruption-related controversies have brought down the mayor of Brussels, forced out Romania’s prime minister and sparked the resignations of four French government ministers barely a month after their appointments. It is at least five years since corruption scandals began to blow through Greece, Italy and Spain like gale-force winds, battering the electoral fortunes of established politicians and uprooting decades-old party systems. Yet nowhere in western Europe has the impact been as far-reaching as in France. Emmanuel Macron won the presidency in May, despite never having been elected to public office, partly because financial scandals destroyed the campaign of Francois Fillon, the former prime minister, when he was the centre-right frontrunner. Mr Macron has swiftly changed the tone of French politics with regard to corruption. Acting with a ruthlessness that showed his grasp of the French people’s disgust with graft, he presided last week over the departure of four ministers caught up in judicial inquiries into alleged corruption. It was a signal that he intends to keep his presidency free of even the mildest suspicion of misbehaviour.

Across central and eastern Europe, anger at corruption has given rise this year to some of the region’s largest street protests since the demise of communism in 1989-91. In Hungary, Romania, Slovakia and other countries, anti-corruption activists say that the younger generation is not satisfied with living standards superior to those under communism only, but insists upon higher ethical standards in public life as well. The consequences are striking in Romania. After hundreds of thousands of people staged anti-corruption demonstrations in February, the government withdrew a decree that would have pardoned some jailed officials and saved many more from prosecution. However, Romania’s struggle for clean government goes on. Last week, Liviu Dragnea, leader of the ruling Social Democrats, engineered the removal of Sorin Grindeanu, his handpicked prime minister, amid a contest of wills inside the party over how energetically to tackle corruption. Mr Dragneau has a conviction for vote-rigging, against which he is appealing. Deep frustration with graft is no less evident in Ukraine, where the 2014 revolution was inspired to a considerable extent by public wrath at the flagrant corruption of former president Viktor Yanukovich and his entourage. It is also on display in Russia, where thousands attended anti-corruption protests in Moscow, St Petersburg and other cities on June 12 despite official intimidation.

The more intense focus on dishonesty in European political life is not necessarily an indication that corruption is more widespread than in the recent past. Rather, it may reflect citizen’s lower tolerance thresholds for politicians’ sharp practices after so many scandals involving political parties, banks, business and state administrations came to light during the post-2008 financial crisis. Mr Barber suggests in his article that, in addition, some national judiciaries are making more strenuous efforts to root out graft. Spain’s high court has called on Mariano Rajoy, the prime minister, to testify in one of the nation’s biggest corruption trials since the return of democracy in the 1970s. The so-called Gurtel affair, which involves alleged kickbacks to Mr Rajoy’s Popular party, and similar scandals engulfing the opposition Socialist party, are a big factor behind the partial break-up of Spain’s traditional two-party system.

Back here in the South African corner of global political challenges, much of what we are seeing appears to have a familiar ring when we take note of the widespread global fight against corruption. Markets reacted violently in December 2015 when Finance Minister Nene was fired by Mr Zuma. The rand collapsed to nearly R18 to the US dollar and the 10-year government bond yield shot up to 10.5%. Yet, in spite of the ongoing battle that Mr Zuma and his backers are waging against the anti-Zuma camp within the ANC and against broader civil society and against steadfastly moral independent institutions and against the Constitution, the Rand strengthened to just above R12 to the Dollar and 10-year bond yields fell to below 8.5%. This strength in politically-sensitive areas of the market seems to suggest that the bad news post-Nenegate is not as bad as had been priced in at the time. However, the ANC is now clearly in a desperate internal battle to prevent a break-up and to somehow arrive at a point where, however fragile, an element of unity can be claimed.

What started at the ballot box in August 2015, when the ANC suffered hammer-blows in the most important large metropolitan areas of the country, has gathered momentum, hopefully on the back of global best practice in intensified anti-corruption activity. Is the positive and apparently politically-insensitive behaviour in our currency and bond markets over the last 18 months suggesting that the outcome of the anti-Zuma campaign will result in an acceptable result for those against whom he is waging this battle?

Or will these areas of the market stand accused of completely mis-identifying the light at the end of the tunnel?

In conclusion, we still believe that well-diversified portfolios offer benefits and provide long-term financial returns.

Source – APS Monthly Economic Comment