Investors reward strongmen peers, now SA can make the better case

India and Brazil are eroding institutional strength and boosting authoritarianism; Ramaphosa chose opposite path

In 2013, SA, like the other “fragile fraternity” members at the time, notably India and Brazil, fell victim to a sharp selloff in financial markets as speculators preyed on its weak fundamentals. But a lot has changed. While Brazil and India are back in vogue, SA is not — at least for now. There are several reasons why portfolio investors have found India and Brazil attractive again, not least of which are decisive leadership and probusiness reform agendas.

In India, several growth-boosting programmes have been implemented under Prime Minister Narendra Modi’s control. But most appealing has been his recent decisions to further liberalise foreign direct investment codes and to sharply cut corporate tax rates.

Similarly, investors have been impressed by the speed at which Jair Bolsonaro, Brazil’s new firebrand president, has effected aspects of his agenda. It took the “Trump of the Tropics ”— named for his courtship of controversy — just 10 months to overhaul Brazil’s controversial pension system, for example. And to not just meet, but exceed, privatisation targets.

However, these countries’ reforms have not come without costs. While putting their agendas into action, Bolsonaro and Modi have eroded the strength of nonpartisan institutions and stifled dissent. Moreover, and even though Brazil and India are democracies, there are growing signs of authoritarianism at play, where checks and balances — a hallmark of SA’s constitutional democracy — continue to be undermined.

Yet despite these worrying scenarios, portfolio investors have turned a blind eye to that piece of the picture: rather than disinvesting, they have chosen to embrace the “good news” of reform by buying billions of dollars of equities and bonds, all the while ignoring the potentially negative, and not insignificant, long-term consequences associated with the strong-arm tactics taken by both leaders.

Closer to home, it is clear something significant must shift to arrest SA’s economic decline. This is particularly so given the realities of slowing global growth, stable to falling commodity prices, and the prospect of little, if any, further fiscal and monetary policy stimulus. Without these traditional growth-drivers, it is obvious that SA will no longer have a choice but to course-correct.

Enter finance minister Tito Mboweni’s growth strategy, released in August. It contains old (as well as new) recommendations. These range from cutting red tape, liberalising travel restrictions and deregulating the energy sector, to promoting greater competition in government sectors and using more public-private partnerships to fasttrack infrastructure investment. In short, it is a pragmatic — and certainly more comprehensive — plan than the one put forward in 2017.

But despite several similarities between Mboweni’s “Going for Growth” strategy for SA and the reform agendas of India and Brazil, financial markets have not been impressed. Why? We think there are three reasons.

First, the political configurations of the relevant countries are quite different. In India and Brazil, leadership was transferred from left-leaning parties beset by corruption scandals to opposition parties promising change. By contrast, in SA the ANC retained its power after the May 2019 election, but with the difference that President Cyril Ramaphosa inherited a party with features similarly dysfunctional to those of the Congress Party in India, which lost power in 2014, and to the Workers’ Party in Brazil, defeated in 2018.

Also, some of those still in the Jacob Zuma encampment remain in influential positions, enabling them to continue to stymie the president’s goal of eradicating corruption while simultaneously frustrating his efforts to reform.

Second, Ramaphosa’s leadership style tends to be steady and measured, seeking to build consensus rather than division. The contentious tactics and “big bang” approaches employed by Modi and Bolsonaro, while finding favour with financial markets in India and Brazil, are unlikely to be a hallmark of Ramaphosa’s presidency.

Third, and related to the above point, given his narrow victory at the ANC’s national elective conference in December 2017, the president has yet to fully consolidate his power base within the ANC. Until then he is left with limited room to manoeuvre, being forced instead to continue making policy compromises.

These differences are real. But they do not entirely justify portfolio investors’ indiscriminate selling of SA assets. Given the evidence of institutional strength being eroded in India and Brazil, Ramaphosa has already celebrated some success in rebuilding the credibility of the SA Revenue Service, the National Prosecuting Authority, other key corruption-fighting institutions and some state-owned enterprises. Having reinforced the independence of the Reserve Bank is another crucial differentiating factor relative to India, where political interference in the workings of its central bank prevails.

These are only some of the directional shifts many portfolio investors have ignored. There are more. While it is true that the ANC’s national executive committee in September did not accept the finance minister’s latest growth strategy in full, some business-friendly policies have been endorsed. Though not ideal, this partial adoption is higher than the status quo just a few months ago. And while the SA government has been poor in implementing even existing policies, there has been progress on a variety of fronts.

As for the president’s consensus-based leadership style, some might even interpret it as refreshing compared with the otherwise authoritarian-like ethos in India and Brazil.

So, there we have it. Portfolio investors have been buying vast amounts of financial assets in India and Brazil, despite some obvious negatives in the making. Simultaneously, they have been huge sellers of SA equities and bonds, despite some obvious positives unfolding. With Wednesday’s medium-term budget policy statement, Mboweni has a unique opportunity to help correct this apparent discrepancy.

Indeed, a credible fiscal consolidation plan, coupled with a viable salve for Eskom’s financial and operational woes and a reliable implementation strategy (which for now focuses on those growth-boosting policies on which there is consensus) could be just the tonic needed to revive business confidence and awake the economy from its slumber.

Who knows? The same portfolio investors who have been shunning SA might well be the first to return. Whatever the case, here is an opportunity the government cannot afford to squander.

● Gopaldas is a director at Signal Risk and Le Roux is chief economist at Rand Merchant Bank.