Tipping point looms for SA as despair grows

16
Tuesday, February 23 2016 BUSINESS REPORT
Opinion&Analysis
❚❚ QUOTE OF THE DAY
Experience is simply the name we give our mistakes. – Oscar
Wilde, Irish playwright, novelist, essayist and poet (1854 – 1900)
Tipping point looms for SA as despair grows
BUDGET
PREVIEW
Xola Potelwa
N
OT SINCE Nelson Mandela
walked out of Victor Verster
prison 26 years ago have
investors been gloomier about
South Africa’s economy.
Money is pouring out at a record pace as
inflows dwindle. The rand has plunged and
unemployment is the highest among
almost 40 developing nations tracked.
Drought is driving up food costs.
Hanging in the balance is the investment-grade credit rating South Africa
sweated to achieve in 2000, shortly after
Mandela left office.
South Africans are paying the price not
just for a collapse in commodities prices –
metals and mining contribute more than
50 percent of exports – but for growing
questions over whether President Jacob
Zuma is up to the task.
Stoking doubts were the antics at the
finance ministry in December, when Zuma
removed Nhlanhla Nene and replaced him
with little-known lawmaker David van
Rooyen.
As bond yields soared and the rand
crashed, he changed his mind four days
later and installed Pravin Gordhan, Nene’s
predecessor.
“The country still faces serious structural challenges, and the changes at the top
of the finance ministry just reconfirmed
the policy risks,” said Viktor Szabo, who
helps manage $12 billion (R184.52bn) of
emerging market debt at Aberdeen Asset
Management. “Things could get worse.”
A key test looms tomorrow, when Gordhan presents the National Budget to lawmakers. He has said the government will
do everything necessary to avoid a downgrade to junk, including reining in freespending state enterprises and sticking to
expenditure ceilings.
Trust disappeared
“The trust towards South Africa disappeared,” said Hakan Aksoy, a Londonbased bond fund manager at Pioneer
Investment Management in London, which
oversees €224 billion (R3.8 trillion).
Since multiracial elections brought
Mandela to power in 1994, the economy has
grown by an average of 3 percent a year,
enabling the ruling ANC to provide
housing, water and electricity to millions
of households and extend social grants to
more than 16 million people, while cutting
government debt.
The country’s benchmark stock index
soared to a record, while bond yields fell to
record lows.
Since then, the bottom has fallen out.
The commodity rout could leave the eco-
nomy growing at the slowest pace this year
since 2009.
The country narrowly avoided a recession during the third quarter, posting annualised expansion of 0.7 percent.
Fitch Ratings on December 4 cut South
Africa’s credit rating one level to BBB-, the
lowest investment grade, and in line with
the assessment of Standard & Poor’s
(S&P), which lowered its outlook to negative from stable on the same day.
Be sure to follow #Budget2016
developments on Business
Report as we bring you news,
reviews, analysis and opinion
regarding Gordhan’s speech
tomorrow.
Gordhan, and increasingly Zuma too,
recognise the challenge. In the past month,
the finance minister has held meetings
with heads of the country’s biggest companies to ask their advice on ways to stimulate the economy, while Zuma promised
measures to appease the rating companies,
including spending restraints and privatisation of some state-owned companies.
The rand has recovered some losses,
gaining 3.1 percent against the dollar in
February after plunging 27 percent in the
previous 12 months, and bond yields fell.
While Gordhan’s statements since
taking office have been “good signals”,
they may not be enough, according to
Konrad Reuss, S&P’s managing director
for Africa. South Africa’s “dismal” growth
is the rating company’s biggest concern.
His scepticism is reflected in accelerating capital flight. Domestic investors more
than doubled the amount sent overseas to
R24.2bn in the third quarter from R10bn in
the previous three months, according to
Reserve Bank data.
Foreign investors sold a net R43bn of
stocks and bonds in the final five months of
2015; there is no sign they’re returning,
with net outflows this year at R20bn as of
February 19.
Policy bungles
“While South Africa is hardly alone among
emerging market nations that rely on
commodity exports – Brazil and Russia,
among others, have seen their currencies
tumble and ratings reduced to junk – the
policy bungles came at the worst possible
time. And with local elections looming this
year, Gordhan will have to convince investors he can withstand political pressure
to increase spending.
“We are likely to remain quite cautious
at current prices,” said Kieran Curtis, the
London-based director of investment at
Standard Life Investments, which oversees
about $436bn and is underweight South
African debt.
“The wish list of things that investors
have is quite long and not really very
achievable with the current political dynamic.” – Bloomberg
Concrete interventions
are needed in Budget
Eric Enslin is the chief
executive of FNB Private
Wealth and RMB Private Bank.
T
HE upcoming Budget speech
should prioritise concrete
interventions to avert further
economic deterioration and
improve investment prospects.
There is common sentiment that
South Africa needs practical solutions
to regain upward economic trajectory.
Under the watchful eye of ratings
agencies, the country is under pressure
to improve its current economic position and investment climate. We’ve
already heard in the State of the Nation
address that the economy is at the
centre of our government’s agenda.
Hopefully this will be fleshed out
even further during the upcoming National Budget announcement – through
concrete plans to reassure local and
foreign investors that South Africa is
still a destination worthy of investment.
Of course there are factors that are
To understand
Trump, just look at
Chavez and Putin
WORKING
THE CROWDS
Alexei Bayer
and Bill Humphrey
F
OREIGNERS see Donald Trump as
one of those outlandish characters
the New World periodically produces and then thrusts upon the
international stage.
It is, however, far more than a bewildering one-man show. The rise of
Trump underscores that we are witnessing
a split of the US into two distinct nations.
It is, perhaps, a return to form for a
country that has often split politically (and
once militarily) between its economically
developed regions and its farm- or mineraldriven regions.
One of those two nations remains
closer to the image that America has
projected towards the outside world for
almost two centuries – an industrialised,
highly innovative nation and a modern
society that is open, liberal, tolerant and
democratic.
The other America is once again
displaying the characteristics of a commodity-exporting nation, as it did for much
of US history.
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The positive side to all this is that South
African investors are traditionally optimistic about the country’s prospects –
demonstrated through their preference
to invest locally as opposed to going to
other destinations.
Over the years, South African investors have mainly favoured investing
locally – a trend that is slightly different
when compared with foreign investors
who prefer markets outside of their
domicile country. This counts in our
favour as a country, but we need to
incentivise the confidence of local investors by enabling better returns.
Model of control
Wither democracy?
It is, therefore, only logical that – in order
to understand Trump and above all the
folks who cast their votes for him – it is
fitting to look at other modern commodityexport dependent nations, such as oil-rich
Russia, Venezuela, and so on.
Commodity exporting nations are a
mess everywhere – from Algeria and
Azerbaijan to Zambia and Zimbabwe.
They live off the distribution of freeflowing revenues, which require a strong
state. Friends and family of those who
Poor role models
Optimistic investors
and preposterous as voting for Chavez or
Putin to take the reins in the White House.
What explains the sudden surge in
support for the political style of a commodity-driven nation?
It is convenient – and chronologically
logical – to assume it is purely the result of
discontent with the aftermath of the 2008
recession. This might be a factor, but there
was another key development almost at the
same time, which cemented the rapid shift.
While the rest of the economy was limping from 2008 to 2012, there was a boom in
US oil and gas production, along with
record-breaking farm and coal exports. All
of this wreaked havoc on domestic prices,
the value of the dollar and localised
employment levels – most acutely in the
regions where this production is centred.
control the distribution obviously get a lot
more. These nations tend to be ruled by
charismatic strongmen who safeguard the
interests of their cronies while feeding
nationalist rhetoric to the masses.
Naturally, the masses hate immigrants
and outsiders, because they represent
additional mouths to be fed by crumbs
from the strongman’s table. They are full
of disdain for neighbours who aren’t fortunate enough to have natural resources
in their soil. Commodity exporters don’t
need representative democracy, appointing their leaders by popular acclaim and
very often for life.
When a commodity-exporting country
runs out of its mainline commodity – as
Indonesia and Mexico ran out of oil – or
builds up an industrial base (as was the
case in Chile), they gradually but unstoppably turn into representative
democracies.
How does the US fit into all this? After
all, the country sometimes likes to describe
itself as the world’s oldest continuous
democracy.
Just consider the income inequality
that prevails in the modern US. The differentials are way bigger than in any other
industrial democracy and stand at levels
more in line with Third World commodity
exporters. Is it any surprise that US politics are moving in the same direction?
Trump is masterful in working his
crowds. He presses all the right buttons –
the resentments and the fears of the
masses of citizens of a commodity exporting country. Political pundits say he is a
new kind of politician, but he’s only new
in America.
To find his antecedents, all you need to
do is to look at the late Hugo Chavez in
Venezuela or Vladimir Putin in Russia.
Chavez in particular is remembered for
his hour-long teach-ins, often rambling, yet
also often engaging, to the entire nation
broadcast on live TV.
That is not unlike Trump’s campaign
events, which are really off-the-cuff chats
with the audience.
beyond South Africa’s control, but we
need to urgently address those within
our control. Our current economic
fortunes have been partly impacted by
the poorly performing Chinese economy
and a stronger US dollar. Poor gross
domestic product growth, drought, rising inflation and a weak rand have also
eroded our position.
Republican US presidential candidate Donald Trump holds up a magazine handed to him from a supporter following a campaign rally in
Atlanta, Georgia, on Sunday. The writers say Trump’s rise underscores a split in the US.
PHOTO: REUTERS
Not surprisingly, Trump has already
expressed his liking for good old Vlad,
called him a real leader and expressed
willingness to work with him.
As is the case with commodity-exporting nations, so it is with the US. Both sport
huge income differentials. And the rich
like to use their enormous financial
resources to perpetuate the status quo,
mainly by buying the political system and
getting their puppets elected rulers.
The surprise lies in how the super-rich
in the US have actually failed spectacularly
in their endeavour. Consider commodity
oligarchs such as the Koch brothers. They
have been rigging the political system for
years – only to see a man who’s totally
outside their control within reach of their
party’s nomination.
One is reminded of the parallels to
Putin’s rise. The Russian oligarchs of the
1990s believed he would be a harmless
pawn in their power games and he swept
past them to take real control.
To the still industrial and
white-collar remainder
of the country,particularly
in metropolitan areas,
Trump is an alien
presence altogether.
On the other hand, Trump’s appeal in
American politics is considerable, but not
limitless. In fact, it is limited to the part of
the electorate that dominates the geographic sections of the country that most
share the characteristics of commodityexporting nations. These include mining
country in Appalachia and the Mountain
West; oil and gas country in Texas, Alaska,
the Prairies and the rural Midwest; as well
as agrarian swathes of the Deep South and
Great Plains.
These regions have historically been
cyclically dominated by populist firebrands espousing dangerously exclusionary views or ultra-wealthy authoritarians,
who proudly perpetrated the abuses of
slavery and segregation. It has been
unusual to combine the two models.
An alien presence
While Trump also has some crossover
populist appeal in the high-unemployment
de-industrialised Rust Belt, these sections
would probably align more heavily with
the politics of Bernie Sanders, if choosing
between the two.
To the still-industrial and white-collar
remainder of the country, particularly in
metropolitan areas, Trump is an alien
presence altogether. They see the idea of
voting for Trump basically as outlandish
Already some of these booms – coal and
farm exports, for example – are dissipating
as quickly as they arrived, but the effects
will continue to be felt for some time.
Control of profits from, and actual
production of US mineral extraction and
farming in the 21st century is extremely
concentrated in the hands of a few major
corporations and the US government.
This is a hybrid of the model of control
in the commodity-driven nations, but it is
concentrated almost the same.
Along comes a brash populist with an
incipient cult of personality from his
media empire. He promises economic
stability and an end to foreigners competing for the crumbs of the profits. He vows
to bring “better management” to the joint
cartel of Wall Street and Washington that
– to the employees on the ground – appears
to turn the money tap on and off at will, so
he can keep the resources flowing and the
jobs coming.
To see how this story ends – if he were
to expand his appeal outside of mineral
and farm country, thereby allowing him to
win the presidency – look to the commodity-driven politics of the semideveloped, commodity-producer countries
with strongmen leaders.
In other words, look at the examples of
Chavez or Putin if you want to understand
the rise of Trump.
Alexei Bayer is the eastern Europe editor of The
Globalist. Bill Humphrey is a senior editor at The
Globalist and a candidate for Massachusetts
Governor’s Council. This article initially appeared
on The Globalist. Follow The Globalist on Twitter:
@theGlobalist
❚❚ DIARY
Wealthy Vietnamese make sure relatives rest in luxury
A QUIET fishing village outside
Vietnam’s ancient imperial capital Hue has become an off-thebeaten-track tourist attraction for
its bizarre graveyard, featuring
colourful and lavish tombs.
Fishermen in the tiny fishing
town of An Bang compete to build
increasingly taller and elaborate
resting places, which are significantly more opulent than the
humble homes of the villagers.
Families in the community
pour up to $70 000 (R1 million)
into magnificent mausoleums for
their ancestors – a serious luxury
in a country where the annual per
capita income is $2 000. Some
90 percent of the villagers have
wealthy overseas relatives, mostly
living in the US, who send money
home to build the tombs.
Built on white sand, the brilliantly coloured structures line up
along the side of the road for 3km.
Vietnam has been deeply influenced by Confucius and Buddhist
thought, despite decades of communist rule. Many people take
ancestor worship seriously.
“Our cemetery is unique,”
retired fisherman Dang Thien
said proudly as he gave reporters
a tour of his family’s enormous
400 square metre tomb.
“It is for the children to be able
to pay their respects to the ancestors,” he said, adding that “a wellcared for tomb will also bring the
family good fortune. It will be
there forever.”
Some new tombs in the 250
hectare site rise up to 10 metres
high and every inch is meticulously decorated. – Daily Mail