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Buffalo stance

2 November 2016 By George Hay

What type of beast is South Africa? Finance Minister Pravin Gordhan raised the question when he delivered the country’s medium-term budget statement to parliament in Cape Town on Oct. 26. “Lions that fail to work as a team will struggle to bring down even a limping buffalo”, he warned cryptically. With the country showing encouraging signs of getting tough on corruption – a sense heightened by a damning report on President Jacob Zuma released on Nov. 2 – the key question for foreign investors is which animal the domestic economy more closely resembles.

South Africa should be a lion. For a country that less than 25 years ago was a racist pariah state, the turnaround has been exceptional. It had an average growth rate of 3.6 percent between 1994 and 2007, and boasts a modern financial sector. But what sets it apart from many emerging markets is a strong set of institutions, both financial and legal. “Politically, we are sorted out because we have got the constitution”, Gordhan told Breakingviews in an interview on Oct. 28 – adding that even Britain lacks such a document.

Right now, though, the country is limping badly. The International Monetary Fund is forecasting just 0.1 percent growth this year and 1 percent the next, and at 50 percent of GDP, public indebtedness has almost doubled since 2008. Some of this can be attributed to external factors. Every 100 basis points that U.S. bond yields increase pushes up South Africa’s long-term rates by 0.73 percent after a year, the IMF estimates. A slowdown in China, or in commodities, hits hard. Every 1 percent off Chinese GDP means 0.3 percent off South African GDP growth, with roughly a three-month lag.

Still, other problems suggest that Gordhan is right when he advises that South Africa needs “more team”. Inequality as measured by the Gini coefficient is 0.65, and unemployment exceeds 25 percent – both miles worse than emerging market peers. And then there’s corporate inequality. While the top four or so firms enjoy the high prices that stem from an oligopoly and make returns on equity exceeding 20 percent, it’s notoriously difficult for new entrants to compete. “If we don’t get our act together it’s the ordinary folk, whether middle class, working class or poor, who are going to be worse off,” the finance minister predicts.

The scary numbers show up in the social fabric. The increasingly fractious #feesmustfall movement is a student protest movement, but it’s really about the frustration young black South Africans feel at their lack of opportunities. Family homes in Johannesburg’s well-to-do northern suburbs are encircled by 10-foot-high fences. The volatile rand encourages rich South Africans to spirit their wealth offshore. Investec held an investment seminar in Johannesburg’s Sandton financial district on 26 October, the same day as Gordhan’s entreaties for South Africans to work as a team, to educate middle-class investors in how to move their savings offshore. It was packed out.

At the centre of everything is Jacob Zuma. Corruption charges levelled at the South African president are so numerous that they have even been referenced in a TV commercial for Nando’s restaurants. Recently replaced Public Protector Thuli Madonsela released a previously blocked report on Nov. 2 in which she advised setting up an independent commission to investigate links between Zuma and the Guptas, a prominent business family. Madonsela, when in office, demanded Zuma repay 7.8 million rand of public funds used for unnecessary enhancements to Nkandla, his house in KwaZulu-Natal. The courts have overturned a 2009 ruling that prevented the president from being tried for 783 counts of corruption connected to an arms deal.

Meanwhile Gordhan now looks more of a lion than its prey. On Oct. 31 charges brought against him by the state prosecutor were dropped. Part of the reason may have been that scores of the business community and Zuma’s own African National Congress party had queued up to support him. Gordhan’s experience vindicates the country’s institutions, and are key to his borderline-hubristic belief the country can overcome its graft problems. “I think your elite,” he says, referring to Britain, “gets away with more than South Africa’s will in the next 10 to 15 years”.

The best-case scenario from an economic perspective is that Zuma is deposed quickly, and replaced by a leader willing to implement the various plans that are already in place to help public and private sectors cooperate to ease the unemployment crisis. Unfortunately, the president can only be removed if the ANC ruling party’s 86-strong national executive recalls him. This is realistically only likely to happen when it holds its elective conference in December 2017. Madonsela’s proposed investigation, if it happens, won’t be quick – it will take 180 days to complete.

In theory, Zuma could be around until 2019. If he is, there could be further “state capture” – the phrase that has become a byword for South Africa’s troubles. In real terms that means more state-owned enterprises building up debt. With foreigners holding a third of local-currency government bonds, and foreign equity holdings at 45 percent of GDP, South Africa is vulnerable to credit costs rising were it ever to lose its investment-grade status. It’s rarely a good thing when everyday citizens know what a ratings agency does – and in South Africa, that’s now the case. South Africa can avoid all this – but the decision to stop limping will have to come from within.


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