TITO’S TIGHTROPE
Can he get us to the other side?
● Tito Mboweni is no pushover. His reputation precedes him and this week he received global acclaim when he took over as SA’s 7th finance minister in five years after Nhlanhla Nene’s resignation.
But he will have little time to bask in his new role as he is confronted with the challenge of fixing a broken economy amid deteriorating global markets and trade conditions for emerging-market nations.
Mboweni is set to deliver the mediumterm budget, a plan of strategic spending priorities over the next three years, later this month — mere months from next year’s tightly contested national elections, a factor that may bear on this budget.
SA’s borrowing capacity is limited, with the government resorting to reprioritisation of its budget to stimulate a battered economy. Growth for the year is forecast at a measly 0.7%.
Emerging markets have been on a roller-coaster ride over the past five years since the US Federal Reserve first announced it was gradually reducing the buying of bonds and would raise interest rates. US interest rates have been hiked more aggressively this year, resulting in outflows from emerging markets to the US and causing the currencies of the former to weaken.
Lord (Jim) O’Neill, the British economist who coined the Bric(s) moniker for Brazil, Russia, India and China — later adding SA — told Business Times this week that the world found itself in a “very peculiar era”.
The US dollar and interest rates continue to dominate the global financial system yet that economy has a smaller share of global GDP, owing to China’s rise.
“It is a very structurally unhealthy thing for the world because it means each time the Fed tries to tighten monetary policy there are frequently negative consequences for other parts of the world, whether they be emerging markets or otherwise.”
Countries with problematic domestic fundamentals and requiring capital have become vulnerable, which has been the case for SA, Turkey and Argentina. Emergingmarket nations with similar afflictions as SA — dual deficits and high commodity reliance — have seen a plethora of finance ministers as politics deteriorated under the weight of their struggling economies.
Brazil has had five finance heads in three years. The country is due to hold its run-off elections later this month, which will likely see the country with its sixth finance minister since 2015.
Argentina has had four finance ministers since 2013, with Turkey following closely over the same period.
Musical chairs hasn’t just been an emerging-market favourite pastime; Italy has also had its fair share of finance ministers, with at least four since 2013.
These ministers have often clashed with cabinet and party members, finding themselves walking a tightrope between having strict controls that benefit the economy and giving in to sometimes unreasonable and often dubious demands from politicians.
This is where Mboweni’s appointment is crucial in light of the challenges SA faces, said O’Neill, who regards the finance minister as a “distant personal friend”. O’Neill is a speaker at the Discovery Leadership Summit next month.
“In itself, I think appointing Tito is a very bold and impressive move. I think of him as a tough guy. Let’s hope it’s a further sign this new government wants to improve the governance standard at its two key institutions, the central bank and its finance ministry.”
The government needed to do things outside of the commodity sector “to boost its productivity. They have to somehow be able to have an economic system that can’t be smothered by wild gyrations in commodity prices,” O’Neill said.
Charlie Robertson, global chief economist at Renaissance Capital, said that in the current environment of outflows, emerging markets had to be “particularly exemplary to be able to hold your own”.
“This means strong economic growth, high interest rates and good reform package. Egypt is one example. Its interest rates have soared to nearly 20%, the government is running an IMF-backed reform package. Its currency has been stable all year.”
In contrast, markets with inwardly focused policies such as Turkey, Brazil and to some extent Argentina, have seen turmoil in their currencies.
SA’s policy priorities are domestic-political, with land reform generating negative headlines worldwide. Even if the policy was justified, “people worry that this is a Zimbabwestyle story, a Mugabe-style story”, Robertson said.
“When you differentiate in 2018, you sell the countries which are overly inwardly focused and doing policies that suit their domestic political priorities and not their economic needs.”
SA’s current account deficit in an economy that has seen slower growth than population growth in the past four to five years was odd. “It’s telling us that there’s something still not properly aligned in the South African economy,” Robertson said. The implication of this was that budget policy was too loose and that the government would have to be more austere.
Markets realised the ANC was unlikely to accede to this before elections. Nor would the ANC relax labour laws, which was what the markets believed could create jobs and lead to growth. Drastic improvement of the education system was also necessary.
“But the markets can’t do anything about the labour market legislation, they can’t do anything about education. All they can do is hit the currency, and that’s what they are doing,” Robertson said.
Mboweni’s litmus test will be the budget. Political analyst Daniel Silke said the pressures on Mboweni included implementation of the stimulus package and limiting the impact of inflation, among other things, but austerity measures were not on the cards.
“It’s highly unlikely that, from a political point of view, it will be possible to introduce any kind of dramatic austerity measures in the next six months or so, certainly when it comes to labour-related matters,” he said.
At the height of Pravin Gordhan’s raging battle against his boss, former president Jacob Zuma, I had to often remind myself not to get lost in the personality clashes and to focus on the importance of the office of finance minister. Backers of the former president pushed the narrative that Gordhan was undermining Zuma and fanned the flames of this battle royale between the supposed “white monopoly capital” defender-in-chief and a president fighting the good battle of “radical economic transformation”. This argument only served to blind us to their real motives as we’ve come to learn. What was lost in this battle was just how important stability was in this most senior cabinet position, and perhaps, secondly, the personality. This is especially the case for a small emerging-market country such as ours, so heavily reliant on foreign sources of capital. A change of Treasury head at any of the world’s larger economies such as the US or Japan hardly registers as a threat to their fiscal stability because of their sheer size and their ability to fund themselves internally.
Of all the own goals SA has scored in recent years, the biggest faux pas has been the musical chairs in the Treasury. Over the past decade we’ve had eight changes in that seat.
That makes for a rather difficult investment case to sell. Bad politics has also afflicted Brazil and Argentina, which have also had their fair share of changes to finance ministers.
The Treasury was dragged into SA’s bad politics as global markets zeroed in on the most vulnerable of emerging-market nations in light of the US Federal Reserve’s policy normalisation. The higher yield offered by these nations would no longer be as lucrative, with growth in the US and especially in their tech stocks offering better prospects.
Our fundamentals mattered again, and when your desperate president has grandiose nuclear plans with his close friends the biggest beneficiaries, we were singled out as a bad apple. It damaged our credibility and if not for the resilience of institutions such as the central bank and courts it would be a much darker story.
With the appointment of Tito Mboweni, the sixth man at the helm of the Treasury in the past three years, one hopes these battles around the office cease in this period of heightened scrutiny of emerging markets. In the decade before the global recession of 2008, the Treasury was led by Trevor Manuel. His term began in 1996 and ended in 2009, among the longest of any finance minister in the world.
While such a term would perhaps suggest this was a period where Manuel and his team were left unchallenged politically, it quite simply was the opposite. Policy spats were the order of the day, with Treasury at the centre of implementing some of the most unpopular macroeconomic policies of the Mbeki era such as the Growth, Employment and Redistribution (Gear) policy. The policy, which among other things championed inflation targeting, caused much friction in the tripartite alliance and would eventually lead to the backing of Mbeki’s deputy against him by both the SACP and Cosatu.
Despite these heated policy battles, Manuel’s position at the helm of Treasury was defended by a boss who remained resilient despite his falling popularity.
But in so doing the office remained shielded from necessary policy battles in Luthuli House, with no one doubting the many budget commitments made in the 12 years of Manuel’s tenure. It’s this level of support that Mboweni will have to be afforded if SA is to regain the confidence of stakeholders.
We are all still living with the effects of the tectonic shifts in the global system after the last recession, shifts that have disrupted our politics and unleashed a populist wave that has been accentuated by the growth of social media. In this era, some rather ill-considered economics are brought to the fore without any depth to the argument. It’s for President Cyril Ramaphosa to be strong and for his cabinet to defend the Treasury against the mud thrown their way in what is clearly an austere season for the state.
The biggest faux pas has been the musical chairs in the Treasury