JOHANNESBURG — Renowned economist Azar Jammine has provided some insight into what’s going on inside the heads of the Ramaphosa camp. After attending a function where one of these unnamed insiders was talking, Jammine says the Ramaphosa camp is hoping for a dominant ANC election performance in 2019 to unlock true reforms for the economy. In many ways, Ramaphosa has inherited a Zuptoid-infested Cabinet while enforced some key changes here and there (ie. in Treasury). There is said to be a bigger plan at play, but the only problem is the economy is facing global emerging market headwinds as well as a supposed fightback by the Zuma camp. – Gareth van Zyl
By Azar Jammine*
At a private function addressed by a staunch Ramaphosa confident and supporter, the point was made that the major cause of the diminution of the hype surrounding the election of Ramaphosa in February has been the change in international attitudes towards emerging markets, which has seen the Rand plunging. With easily the deepest capital markets on the continent, the currency remains vulnerable to further losses of confidence in emerging markets.
Nonetheless, the Ramaphosa New Deal is still determined to root out corruption and sort out the governance and balance sheets of State-Owned Enterprises (SOEs).
There are other clear impediments to increased domestic and foreign investment and economic growth besides corruption, including a still high number of incompetent Cabinet ministers, the uncertainty surrounding the Mining Charter and the debate surrounding land expropriation without compensation. In the formulation of the Mining Charter, the proposal for a 10% free carry is seen as a tax on a dying industry. In the case of the land debate, Ramaphosa is passionate about restitution but in reality expropriation is likely to take place by exception rather than on a large scale.
Government needs to lean on trade unions to exact better productivity from workers in key services such as hospitals and schools. Manufacturing and job creation need to be incentivised with the possible creation of economic zones in which two-tier wage systems can operate.
Efficient implementation of the New Deal will unfortunately have to wait until after the general elections in June next year and even then much depends on the outcome of that election. In the meantime, large financial houses have revised their forecasts for economic growth down to 1.7% to 2.0% for this year, whilst forecasts for the exchange rate have similarly been revised sharply downwards.
Deterioration in attitude towards emerging markets damages Ramaphoria
A private London Business School alumnus get-together was addressed last week by a close confidante of President Cyril Ramaphosa and offered up an updated perspective of how the economic situation is now seen by the leadership camp. Without a doubt, there has been a diminution in Ramaphoria over the past two months.
Prior to this, South Africa was seen as a turnaround situation in a relatively positive emerging market universe, but since then the emerging market class has been broken and hedge funds have moved to exploit the situation by hammering emerging market currencies. This change in sentiment has been driven by expectations of a sharp increase in US interest rates and an associated strengthening of the Dollar following an outperformance of the global economy by the US on the back of tax cuts and an associated consumer boom in the world’s largest economy.
In the long term, globalised synchronised growth can indeed boost emerging markets, but more recently in particular, the position in China has become unsettled and accordingly equity markets and the Yuan have taken a beating. From looking at year-end Rand/Dollar forecasts of around R11.00 to the Dollar (to which we at Econometrix have never subscribed), leading global financial houses have had to revise their forecasts weaker towards contemplating a year-end figure closer to R12.00 with a downside scenario of R16.00 in the event of a complete bombing out of confidence in emerging markets.
The reason for the Rand’s vulnerability is easy to identify. Despite South Africa being seen by some as having lost its position as the largest economy in Africa, the fact is that it has easily the most liquid financial and debt markets in Africa.
The market capitalisation of the JSE, at around $1 trillion, or about 250% of GDP, constitutes the highest such market capitalisation to GDP ratio in the world. Whereas the JSE turnover churns $2bn per day, the figure for Nigeria, for example, is $36m and South Africa has the only effective big functioning capital market on the continent. Other African countries are developing financial markets, but they have become embroiled in corruption.
Decline in growth and escalating unemployment under the Zuma administration
The speech then went on to elucidate the environment in which the New Deal was introduced. This was to illustrate the manner how, despite improving sharply in the aftermath of the democratisation of South Africa in 1994, economic growth had declined under the Zuma administration. In the 14 years prior to 1994, economic growth had averaged around 1% per annum and inflation 14%. However, in the ensuing 20 years between 1994 and 2013, growth had picked up to 3.2% per annum and inflation had averaged 6%. However, between 2014 and 2018, average growth declined to just 1.2% per annum and the unemployment rate, which had hovered between 23% and 25% throughout the 1994 to 2012 period, has escalated to around 27%.
Although Thomas Piketty in his visit to South Africa had looked only at inequality and the fact that it had got worse, he overlooked the fact that between 1994 and 2014 worsening inequality occurred more because of an increase in the wealth of the elite, including many Blacks, rather than because of any deterioration in living standards of the lower and middle-class.
On the contrary, the poorer classes of society were helped enormously by social grants. In addition, around 2m Whites were replaced by Blacks both in the public sector and because of affirmative action.
Objectives of the new deal
It was in light of the declining fortunes of the South African economy that Cyril Ramaphosa conceived of the new dawn and New Deal prior to the presidential elections last year. The New Deal is first and foremost predicated on reversing state capture and its impact on diminishing the power of key institutions in the country and the patronage that has been associated with them. The definition of corruption is the “systematic redistribution of resources from the party elite to themselves”.
South Africa now lives with the institution of state capture at all levels. A wholesale reorganisation of resources is required to restructure the economy away from its wholesale support for the elite. The problem now goes way beyond Zuma and his acolytes and business gets caught up in the process and this erodes confidence entirely. Various captured media sources tried to portray the “New Deal” as a construct of “White Monopoly Capital“, but Ramaphosa succeeded in converting a January 8 ANC birthday speech, together with the State of the Nation address, into official government policy.
The objective was to target 3% growth in 2018, rising to 5% growth by 2023. However, such growth rates are themselves not extraordinary bearing in mind that the country has a population growth rate of 1%. Even in Africa as a whole, if one talks about 5% sustainable growth, this is equivalent to no more than 2% real growth when the continent’s population growth rate of 3% per annum is taken into account. Nonetheless, the Ramaphosa regime has been engaging with ratings agencies on a continuous basis to explain to them how it intends to improve the medium-term economic growth rate and restructure the economy to deliver a higher growth rate.
Constraints on its implementation
Tentacles of corruption in SOEs
Unfortunately, in light of the dissipation of Ramaphoria, leading financial institutions have been obliged to reduce their forecasts for economic growth from between 2.5% and 3.0% in 2018 (forecasts to which Econometrix has never subscribed and have seen as being too optimistic), to somewhere in the order of 1.7% to 2.0%. (Our latest model run suggests that even this range of forecasts is now overly optimistic for 2018 and that the economy might struggle to get to 2% growth in 2019 and 2020 as well.) Unfortunately, the Ramaphosa camp is now starting to recognise the massive constraints in the face of implementing the New Deal. Although it is undertaking a war on SOEs stealing and Minister of Public Enterprises Pravin Gordhan is making an impact in improving the governance and balance sheets of SOEs, they still pose a huge problem.
In this regard, it should be recognised that 80% of contingent liabilities lie with one SOE loan, namely Eskom. What is disconcerting is the fact that even though its contingent liabilities are R350bn, its EBITDA of R36bn accounts for only 10% of its liabilities. Under such circumstances, it is difficult to see how its liabilities can be reduced in any rapid way. The deterioration in the utility’s financial position is a direct function of the manner in which the Department of Public Enterprises had come to be captured.
Incompetent cabinet
The second huge constraint on the implementation of the New Deal is the fact that the quality of the Cabinet is still very low. Only between 25 and 50% of the Cabinet Ministers are competent, leaving in other words only one third of the Cabinet functioning effectively. (Hopefully this could change once the general election is out of the way next year.)
Mining Charter
Even though the Ramaphosa regime had hoped that the formulation of a new Mining Charter represented a low hanging fruit which could be picked to promote investment, the debate around the new Charter has been engulfed in negativity. In particular, the suggestions of the introduction of a 10% free carry for black empowerment interests is regarded by potential investors as a tax imposed on a dying sector.
Expropriation of land without compensation
Arguably the most important impediment at present in the face of attracting large-scale investment into the country is the debate surrounding land expropriation without compensation. The debate has been unfortunately packaged. Even though the constitution does not need to be changed, the fact is that the country does need an accelerated programme of land reform. However, in order to achieve this, the best people need to be put in positions to lead the way and this is not happening in the Department of Land Affairs and Rural Development. Ramaphosa is himself passionate about land restitution and the country seems to be expecting it to take place on a large scale. Even so, in reality, such a programme is likely to happen by exception rather than the rule but unfortunately it is seen as the thin end of the wedge of property rights. What is needed is a balance between expropriation without compensation and land reform.
Improvement in public sector wage environment
An additional huge constraint on the implementation of the New Deal relates to public sector wage pressures. Whilst big increases might be awarded, the real challenge is to extract appropriate and corresponding productivity from the workers. More is being spent on education than in any other country and yet the outcomes are particularly weak in this area. Clearly, the government needs to lean on the unions to improve productivity at hospitals and schools. In this regard, it is important to note that the trade unions together with the Communist Party were at the forefront of the support given to Ramaphosa in the presidential election last year. The problem is that these unions are now aware of their political strength and have been using this to exploit the opportunities available to secure the best return for their workers.
The need for economic zones
One of the objectives of the New Deal is to promote manufacturing in such a way that the sector creates 1m jobs over the next five years. In order for this to be achieved, new tax incentives need to be introduced together with economic zones that allow for two-tier wage systems that can promote employment even in the face of restrictive labour legislation in the rest of the economy. Trade barriers to African integration also need to be removed in order to help promote the domestic manufacturing sector.
Massive improvement in justice system
Finally, it is all very well to talk about succeeding with fighting corruption and state capture. However, identifying and prosecuting people remains a massive challenge. Government estimates that at least R50bn could be brought back into the economy in the form of an anticorruption fund which could be used to support youth unemployment. It is imperative that the appropriate projects be funded. In this regard, Ramaphosa, together with a group of corporates has developed a youth employment scheme (YES) whose aim it is to create 1m jobs over the next three years, i.e. 330,000 jobs per annum. Although such targets might not be achieved, some important progress has been made in this regard.
Importance of next year’s election
The hope in the Ramaphosa camp is that next year’s general election might see a result that gives the new regime the confidence and the ability to restructure the economy effectively. The hope existed earlier that a general election could be held to take advantage of Ramaphoria in such a way as to give the new president an overwhelming bill of support from within the ruling party. However, in the face of a pushback by the Zuma factions, such an outcome now seems improbable. This in turn implies that one will need to wait until at least June next year before structural reforms in the economy can get going appropriately to improve the sustainable growth rate of the economy. In this regard, a worst-case scenario would be if the ANC failed to reach a majority in next year’s election.
This would destroy confidence in the economic outlook. On the other hand, a support base of 60% or more of the electorate would certainly give Ramaphosa the mandate to undertake substantial structural reforms. The reality is that the outcome is likely to be neither of these two extremes, thereby offering up a mixed prospect for seeing the kind of structural reforms needed to uplift sustainable growth. In addition, one needs to pose significant questions around the ability of the global economic environment to provide a conducive atmosphere for improved economic growth. Even so, there are some important initiatives that can make significant progress in the interim.
For example, in the discussion which followed, the issue of the difficulty of foreign corporate executives getting visas was discussed and the dearth of skills and skills transfer that this entailed. It was suggested that the government is contemplating introducing a body that would process visas expeditiously for executives in the corporate sector. The issue of the oligopolistic nature of the economy squeezing out small businesses in agriculture was also brought up and here again, it was emphasised that the Ramaphosa regime recognises that there is far too much regulation around small business.
Conclusion, imperfection but hope now exists
In conclusion, it is apparent that the spirit of Ramaphoria engulfing the economy earlier this year has dissipated in the face of a number of impediments, including the pushback being provided by the Zuma factions to attempts at addressing corruption and state capture. There are clearly innumerable vested interests throughout the public sector whose interests would be jeopardised if the anticorruption programme were to succeed. Nonetheless, one has to recognise that where there was no hope for the economy in the past, there is some newfound hope even if its benefits will not be realised in the short term. Political imperatives ensure that it will take time before structures are put into place that can indeed enhance the introduction of measures that will finally begin to attract far greater investment and helped to boost economic growth and employment creation in the longer term. Unfortunately, one may have to wait until the next decade to see the benefits of such measures fully coming to pass.
- Azar Jammine is the Chief Economist at Econometrix