WELCOME TO THE GREAT RESET
As the Covid-19 pandemic spreads, business leaders are painting a grim picture of our economic future — and are giving their ideas on how the world will have to change
Johann Rupert, 69, is surviving the coronavirus lockdown shacked up with his extended family in Graaffreinet, the town where his father Anton was born in 1916. As far as a lockdown goes, it’s not exactly a hardship. Rupert’s views extend to the Camdeboo National Park, with its spiralling basalt cliffs set high over the Valley of Desolation, in the heart of the Karoo.
It’s the sort of serenity you’d want if you’re being forced to contemplate how the decades of slog spent expanding the empire your father created — in Johann Rupert’s case, building Remgro, assembling luxury goods company Richemont, and starting investment company Reinet — are being upended by a virus few saw coming.
“People speak as if this is just a blip, but I don’t think it’s like anything any of us have ever seen before,” he tells the FM. “Economists are discussing if it’s a ‘V-shaped curve’, or a ‘U-shaped curve’ — it’s all meaningless. What they don’t get is that this isn’t just a pause — it’s an entire reset of our economic system.”
You might say this is characteristic of the burly and often bracingly direct Rupert, who heads SA’S second-wealthiest family, after Anglo American’s founding family, the Oppenheimers. A few years ago, The Financial Times dubbed him “Rupert the bear” for his “obsessively cautious” outlook.
A year before the 2008 financial crisis, he said: “My gut feeling is that the risks are getting bigger and bigger.”
In 2011, he spoke in vivid terms about how China was overheating. “I feel like I’m having a blacktie party on the top of a volcano.
“The volcano is China … in the morning we put on our ties and our watches and we go, and the food’s better, and the wine’s better, and the weather is great, but let’s not kid ourselves. There is a volcano somewhere, whether it’s this year, in 10 years’ time, or in 20 years.”
Rupert, if anything, embraces the moniker of sceptic.
“There were a few of us whom the press used to describe as the horsemen of the apocalypse — Nouriel Roubini, Niall Ferguson and Nassim Taleb. I believed at the time that the free-enterprise system wasn’t working as it should. A few of us were very concerned,” he tells the FM.
Covid-19, says Rupert, is the worst of all the recent crashes. In stock market terms, it’s been a rout: the US Dow fell 23% between January and April — its worst performance since the 1987 crash — while the JSE shed 22.5%.
The companies controlled by Rupert haven’t been spared. Remgro’s shares have fallen 32% this year, even though it owns stakes in pretty resilient businesses, including fibre company Dark Fibre Africa, Firstrand bank and Mediclinic.
More disturbing, Remgro CEO Jannie Durand said a few weeks ago that he expects the harsh conditions to “continue for at least the next couple of years”.
Richemont, which owns some of the best luxury brands around, including jewellery brand Cartier, watchmaker Piaget, French fashion house Chloé and luxury penmaker Montblanc, is down 11.6%.
Only Rupert’s investment company Reinet has risen, 5.1% this year on the JSE.
Rupert says many people underestimate how deep and devastating Covid-19 will be. Perhaps that’s because none of us in the modern era has witnessed the economic fallout of the early 20thcentury crashes, like the Spanish Flu or the Great Depression.
“When I was young, at least twice a week my parents would speak to us kids about the Great Depression,” says Rupert. “It moulded characters — my mother would keep saving until she was 82 years old, even though she didn’t need to. That’s what it did.”
When the depression started in 1929, Rupert’s mother Huberte was only 10 years old. His father Anton, who would later start tobacco company Voorbrand in 1941, was a teenager at the time, and felt the squeeze just as acutely.
Thanks to Covid-19, SA is facing a similar economic shock. Small businesses have closed their doors following President Cyril Ramaphosa’s lockdown, and an economy struggling for 0% GDP growth before the virus is now set for a brutal contraction.
Mcebisi Jonas, SA’S former deputy finance minister, says no-one really appreciates what the country could be in for.
“People are yearning for business as usual. But
New unemployment claims in the US soared in the second half of March
they don’t seem to realise we’ll never have business as usual after this. This is really huge,” he tells the FM. At best, says Jonas, we may see a 5% contraction in the economy this year. But it could be far worse, he adds, maybe closer to 10%.
Of course, says Jonas, much of this is speculation, as we don’t know the economic impact of the lockdown. “It’s a hard choice: protect lives, or protect the economy. And of course you have to protect lives, but we have to do something drastic to keep the economy going,” he says.
A few weeks ago, Absa senior economist Peter Worthington estimated that SA’S economy would fall by 23.5% in the three months to June on a quarter-on-quarter annualised basis. Overall, he expected SA’S economy to contract 3.1% this year.
Only that’s beginning to look like too sunny a prognosis.
“Since we published that forecast, the downside risks have mounted,” Worthington told the FM from Canada this week. “And those initial estimates were based on an assumption that the lockdown [would be] lifted on April 16. If that’s extended, we’re looking at something more serious.”
While all countries are bleeding, some have more room to counter the shock. The US, for example, has said it will sink cash equal to 10% of its GDP into softening the blow for the economy; the UK and Germany are looking at 15%.
SA doesn’t have this leeway.
Says Worthington: “At the moment, we’ve only talked about measures equal to less than 1% of our GDP. What we’ll have to do as an alternative is put some energy into structural reforms, particularly of state-owned companies.”
And when SA finally goes back to work, the state of unemployment — already at 38% before this crisis — will be even more gruesome. Trying to forecast just how many jobs will be lost is a “weird complicated tangle”, as there are too many unknown factors.
“After the financial crisis of 2008, SA lost 850,000 jobs,” says Worthington. “It was only last year, 2019, that we finally saw private-sector jobs reach the same level as before the financial crisis. I think the job losses this time around will be greater, since the economic contraction will be so much more severe.”
For an economy driven into junk status by the kleptocratic Jacob Zuma administration and a paralysed ruling party at war with itself and unwilling to make the right decisions, Covid-19 is the straw that may break its back.
“At this point, the choice has been taken out of the politicians’ hands,” says Rupert. “They have to restructure the economy. They’ll have to take the decision on privatising state-owned companies — today. It doesn’t make a difference if you’re running a household or a country, it’s about choices and prioritising where you spend money.”
And there’s an easy place to start: the vanity project that is SAA.
Before Covid-19, the airline was in ICU; today, you’d have to think there’s no pulse.
Rupert is scathing about the national carrier. “If you take all the airlines cumulatively since Howard Hughes took control of TWA Airlines in 1939, they’re run at a gigantic loss. SAA is among the worst. But you can take any of the SOES — they’ll all have to be restructured,” he says.
He also dismantles the myth that the world economy was going great guns before the coronavirus struck. “SA isn’t an exception. Europe couldn’t add any jobs, even with zero percent interest rates. Worldwide, we knew something horrible was going to happen — and Covid-19 just pulled the trigger.”
Less than a year ago, Rupert suggested that SA’S economic trajectory meant it was a real possibility that the country would be asking for a bailout from the International Monetary Fund (IMF) sometime in 2020.
The ANC, he said, “doesn’t know what’s awaiting it”.
At the time, it seemed unlikely. But in recent days, even finance minister Tito Mboweni has dipped his toe in the water, saying it may be an idea to “speak to the IMF and the World Bank about any facility that we can access for health purposes”.
However, the ANC has since “rejected” this idea — a sentiment no doubt driven by the ideological hardliners who see this as compromising SA’S fiscal sovereignty. The irony is that it’s just this ideological inflexibility that has left SA’S economy in tatters.
Perhaps, if there’s one positive to be taken from this crisis, it’ll be to finally push the ANC past its ideological barrier to selling cash-guzzling state companies.
What does a reset look like?
If this is the big reset, it’s still unclear how the world will look once the Covid-19 cloud lifts.
Rupert says: “We’re now seeing what our parents and grandparents went through dur
Mcebisi Jonas ing the world wars and depression. It’ll be a reset in how we operate and how we think, and in society in general. Mankind is resilient, but it’ll be a big wake-up call.”
Mteto Nyati, CEO of technology company Altron, agrees with Rupert.
“There will be a huge number of small businesses, and even large enterprises, that go under,” he says.
“None of us knows how long this will last, but I imagine we’re looking at between 18 and 24 months before we start to re-emerge. And that’s being optimistic.”
The flip side is that SA needed to make immense structural changes before Covid-19 hit; so the pause for the virus gives the government the space to implement these changes.
Nyati says this means, in particular, a hard stop to supporting basket-case stateowned companies like SAA, and renegotiating civil-servant wages.
“We don’t have unlimited resources, and we’ll have even less after this,” he says. “So do we want to spend that money supporting small businesses, or do we want to support SAA? Of course we’d rather support small business. This crisis will force us to be more disciplined, and to make the right choices.”
The crisis strengthens Ramaphosa’s hand in cutting public-sector wages. Nyati says labour unions will have to change their stance or risk becoming utterly irrelevant.
“I don’t think the unions have the sort of negotiating power they think they do,” he says. “They’ll need to be flexible enough to protect jobs, but also create new ones. It’ll be a wake-up call to unions, as well as everyone else.”
Roze Phillips, a futurist and medical doctor who is head of “people” at banking group Absa, says while it may be a big reset, it won’t be the great equaliser many are hoping for.
If anything, as many people lose their jobs, it may actually amplify the gap between rich and poor; between those who have options and those who don’t.
“Like the virus is doing to our physical bodies, it is also revealing the immune-compromised state of our business and society,” she says. “Those closer to the breadline and those more vulnerable, like those who run small businesses, will struggle to reboot.”
To counter this, governments across the world will take stringent new measures to reduce this wealth gap. This could take numerous forms, says Phillips, from a wealth tax to the more radical step of paying a basic income grant to every citizen.
“People will come out of this far more aware of the gap between rich and poor,“she says. “And in a country like SA, where this [gap] is the most glaring, I worry that this may potentially spark an eruption of anger that may destabilise all of society.”
Rupert, too, worries that this could spur social unrest. “More people will become unemployed. But people are already angry. You can see this in the fact that we have a resurgence of ‘strongman’ leaders, from Vladimir Putin to Donald Trump,” he says.
It also means that capitalism, certainly the ideologically pure brand of free-market fundamentalism, is under siege like never before.
This week, The Economist described how “for believers in limited government and open markets, Covid-19 poses a problem”.
The modern welfare state, the magazine points out, grew out of crisis and conflict — as did the tax system and nationalisation.
After this crisis, governments are likely to be larger, and more powerful, than ever.
Nyati says the purest, most inflexible model of capitalism has been under siege for years anyway. This crisis accentuates the need for capitalism with a greater social conscience as the rational choice.
“If we just do what we’ve done in the past, it won’t work — all the people who bought our products will be out of work.
“So we need to look at ways to support them,” he says.
Altering investment decisions
The reset also has big implications for how investments are made, and how executives allocate capital. It means, says Nyati, that investment decisions will have to be made with far more rigour and discipline.
“There’ll be far stricter focus on returns. Executives will have to prioritise better, since it’ll be much harder to get investment committees to approve acquisitions. There are still huge opportunities in some sectors — cloud computing, internet security and the internet of things — but there’ll be no place to hide for poor investment discipline,” he says.
Business models will also change. Says Phillips: “Those companies that have flattened bureaucracy, removed the hierarchy, will benefit from the agility this creates. Companies that are command-and-control will struggle.”
And in a year’s time, you can expect to see far more people working remotely, far fewer people in the workplace, and a greater push for companies to employ more “entrepreneurially minded” people.
Absa’s Worthington says you can expect companies to pivot to new products that will suit the new environment. For example, tex