Trump may have no clothes, but SA is naked in the investment winter
Personable, affable Ramaphosa offers intangibles in a country that desperately needs to lure the sceptical dollar
Two weeks ago in Cape Town, a few days before Donald Trump blew up the meeting of the US’s closest allies at the Group of Seven (G-7) meeting in Canada, I had the privilege of introducing a very different type of American at a packed meeting of the South African Institute of International Affairs.
UK Prime Minister Theresa May once disparaged “citizens of the world” as “citizens of nowhere” but that moniker is worn with pride by South African-born journalist Roger Cohen and peppers his lustrous columns in the New York Times. Cohen chose for his topic What Trump Means for SA and the World. However, he began his speech with a title inversion and generously remarked: “I am tempted to dwell more on what SA today means to the US…. That a nation, a liberal democracy, one with more fragile institutions than ours, of more recent creation, can survive a corrupt, vulgar, pretty relentless kleptocracy and come through intact with a new leader, Cyril Ramaphosa, who seems to promise a new beginning, one in which accountability, transparency and law are once again meaningful words.” He then added a telling rider: “The US is being ‘Zumaed’ and we don’t know who our Ramaphosa might be.”
Cohen’s bill of goods on Trump comprised a long and depressing list: he loves autocrats, disparages democratic allies and has devalued the priceless word of American support for the postwar order it was so central in crafting.
Even Trump’s attentiveness to his own core political base has global implications. In Cohen’s view, “When a man of moral emptiness and habitual mendacity … can’t quite find unequivocal words of condemnation for neo-Nazis, the ground shifts in the free world.”
Some five days after Cohen’s riveting Cape Town speech, Trump — arriving late and departing early — did some shape-shifting on the remaining architecture of the free world by describing host premier Justin Trudeau as “dishonest” and refusing to sign an anodyne communique before departing to pow-wow with one of the world’s most awful and dangerous despots, North Korea’s Kim Jong-un.
But since Cohen is also fair minded, he did make one acknowledgement about the economic “Trump bump”: “Markets are up, way up.” And indeed, if this trend continues on its upward trajectory there is a far higher chance, for example, that Trump will be re-elected in 2020 than be impeached before then.
While the columnist said he “did not buy” the argument that the dismay around Trump will be offset by his economic nous, or gut instinct, another columnist of my acquaintance certainly does buy it. Writing in London’s Sunday Times at the weekend, historian Niall Ferguson disparaged the elite tendency to dismiss Trump, however personally louche, profanely vulgar and dishonest he may be. “Despite all the trade war talk, the US economy is at full employment, the dollar is rallying, the stock market is up 30% since Trump’s election and the only countries in any trouble are the usual suspects with their usual problems (such as Turkey).”
Ramaphosa’s and SA’s great and gravest current problem is that we are among the “usual suspects” on Ferguson’s list.
Our currency fall in recent weeks is only three places behind Turkey, our growth rate crashed in the first quarter of 2018, our public finances are splattered with red ink and our low local savings base is being further pressured, along with the current account deficit, by the mass sell-off (R4bn net to date in 2018 according to Hilary Joffe, this newspaper’s editor at large) by foreign investors of local currency bonds. As Ramaphoria morphs into Ramareality, it would be fair to extend the metaphor on the “usual suspects” to note that “misery loves company”.
In short, emerging markets are today the opposite of the investor darlings with which we were once bracketed, and no-one knows how long the sell-off will continue. Just last year, in the midst of “being Zumaed”, foreigners were net buyers of our currency bonds by a whopping net R39bn. This proves, simply, that the hot buyers and sellers will come in and out regardless of the mendacity or indecorousness of your head of state. Cue Zuma and Trump.
In a radio phone-in show on SABC last week, I was taken to task by a caller who claimed that my self-evident remark that there are more than 900 local dollar billionaires who have emigrated was terrible news for the fiscus, which more than most relies on the disparaged local 1% to fund its ravenous appetite for over-the-top public service salaries and 17-million welfare grants and the billions poured into bottomless state-owned pits of enterprises.
I responded to his entreaty about history and colonial plunder and the ravages of our past by merely noting the arch phrase that “money is a coward”. Of course the money merchants will take a risk when the yield spread is so appetising that it mitigates risk.
But now, in the winter of our discontent, the US Fed and European Central Bank have taken away the punch bowl: low US and eurozone interest rates and a reversal of global bond purchases. Just how this is ravaging emerging markets such as SA is well reflected in the sovereign share price, or sliding value of the rand. And the overall effect is alarming.
Higher US bond yields are devastating the currency in Mexico and bonds in Italy (an emerging market of sorts that is protected by the euro). According to Bank of America Merrill Lynch, our local bond sell-off is part of $10bn that has flowed out of mutual and exchange-traded funds that invest in emerging market debt and equities. And that figure is just for the past six weeks or so. Expect more pain if, as expected, the US Fed again raises its rate.
Pinpointing the essence of the problem with this ebb and flow was a remark by Edward alHussainy, a currency strategist, quoted in the Wall Street Journal on June 10: “With [US] treasury yields at 2.5% [in conditions of near zero inflation] the assets of potentially vulnerable countries become much less attractive.” He asks and then answers his own question: “Is the return high enough to compensate you for the risk? Clearly the answer across the board is ‘no’.”
Precisely to mitigate the pain of carry-trade dependence, Ramaphosa has appointed and sent into a skittish investor world some eminent local trade emissaries. But quite what their offer is to long-term potential investors is unclear. We tore up our once gold-plated investor protection regime, we have not yet settled the long disputed Mining Charter and we remain embroiled in a debate about property rights and their protection or otherwise.
Perhaps these eminences will soon adapt the words of famed British socialist Nye Bevan, who thundered at his own beloved Labour Party and its hare-brained policy of unilateral nuclear disarmament at the very height of the Cold War in 1957: “You send a British foreign secretary naked into the conference chamber.”
The policy clothes in which our envoys are clad are, in the competitive and troubled world of emerging market investment, threadbare. Two of them mentioned in a recent interview something along the lines of “driving transformation forward”. I don’t think that is going to hack into the ambitious target of $100bn in five years.
Yet another columnist, Wolfgang Munchau of the Financial Times, pondered long before Trump’s weekend tantrum after the G-7 meeting: “What if the US president is personally deplorable but economically successful?”
What if the reverse proposition applies to our president? To offset that gloomy prospect he needs to undertake big investment-attractive reforms very soon, not in five years’ time.