Big fix to save us from state capture
Top economists advise on how to rescue a looted country
REVELATIONS in this week’s leaked e-mails appear to affirm allegations of state capture by the Gupta family and other individuals.
Details of dodgy deals emerged in a week when the unemployment rate reached a 13-year high of 27.7%.
With investor confidence low and corruption allegations mounting, what will it take to turn around the economic crisis?
The surest remedies are time and some well-placed actions, experts say.
“What we need is for those on all sides of the political spectrum to have policies so invigorating that they will persuade business to become investors in new fixed-capital investment,” said Ian Cruikshanks, an economist at the Institute for Race Relations.
“Why do we have to do that? Because we don’t have the structure to turn the economy around,” he said.
New fixed-capital investment, in the form of factories and manufacturing machinery, would boost industry and employment. But it would be a multi-year challenge and the fall of President Jacob Zuma would be only the beginning, Cruikshanks said.
“[The crisis] can’t be changed by the removal of one man. Plans are too well laid for the system of patronage and illegality. It’s embedded in the fabric of the operating parties and it’s not something that we can change in the short term.”
Investec Asset Management economist Nazmeera Moola said that Zuma’s cabinet reshuffle in March tore down confidence. Investors feared that new Finance Minister Malusi Gigaba would push through projects his predecessor had blocked, including the R1-trillion nuclear build.
“The minister has gone out of his way to say those things are not going to happen, but now we need to see action,” she said.
“We need to see the appointment of the director-general and the appointment of the head of procurement at the National Treasury. These are going to be quite key.”
Sanisha Packirisamy, an economist at Momentum, said claims of state capture were likely to create a deeper trust deficit between the government and business. This would result in a dampening effect on potential growth.
Packirisamy said although there was little to no reaction from the market, the negative effects would be felt by the real economy.
“A misallocation of resources and a manipulation of South Africa’s key institutions taints South Africa’s creditworthiness,” said Packirisamy.
“A loss in South Africa’s investment-grade status and a threat of further sovereign downgrades raise funding costs and limit government expenditure on economic and social priorities.”
Phil Roux, the CEO of Pioneer Foods, said although the CEO Initiative had offered a platform for business leaders, “I don’t think it’s helpful for us [CEOs] to comment on the political situation . . . because it seems to be running its own course.
“How do we even begin to intervene in dialogue on that front? There’s such a heavy dose of political volatility and we can’t really influence that . . . we as businessmen must do our best as businessmen and then we can ask the government to aid us to ensure that there are the right economic and commercial outcomes for consumers,” said Roux.
Earlier this year, Pioneer Foods announced the collapse of a deal that would have created Africa’s largest consumergoods company, making it the first confirmed corporate casu- alty of South Africa’s credit rating downgrades.
“I have a multimillion organisation to run and trying to do it in very precarious market circumstances. But we can’t influence the change that has to be done in the country. We are but voices and I think ours are voices in the wilderness, to be quite frank,” said Roux.
“The politicians will sort out their politics and we’ll do our best to run our businesses within all of that,” he said.
Though South Africa is in a political mess, economists and analysts say that the country is not worse off compared with its emerging-market peers.
Turkey faces a threat to the country’s democracy as the constitution changes to a presidential system. Russia is just like South Africa, stifled in political corruption, and Brazil’s president is embroiled in a corruption scandal which could reverse the country into political paralysis if an impeachment plays out.
But according to the Corruption Perceptions Index in 2016, in the key emerging markets in the sub-Saharan region, South Africa underperforms some of its peers, including Mauritius and Namibia, but outperforms the Brics nations of Brazil, Russia, India and China.
Packirisamy said in the long term there was an entire structural change that needed to happen with policy and leadership. However, short-term changes would be the government providing clarity on key issues including radical economic transformation, land reform and mining regulations.
This could provide a more stable environment, while relaxing stringent labour laws and introducing competition into key markets could boost employment, she said. Clarity on these issues, rebuilding confidence and restoring credibility were needed first.
Economist Azar Jammine said that reviewing the implementation of black economic empowerment policies would help stifle corruption.
“But for that to work you also need buy-in from the white business community,” he said.
Yet, despite this, said Iraj Abedian, CEO at Pan African Advisory, the private sector was the key engine of any economic recovery.
“Where the government has got no money to invest and national savings are low and parastatals looted out, the private sector has the only potential engine of growth. But for any private sector, in the current political mindset, it’s prudent not to invest more.”
Abedian said South Africa could have been in a far worse situation had it not been cushioned by the other issues within the global market.
“If Brexit didn’t happen and the British economy was growing, we would be in a much worse situation,” said Abedian.
“Emerging economies are indirectly benefiting from the turmoil going on in the developed countries. There is about 20% [more or less discount] on the developed equities and that discount translates to benefits for emerging economies.”
This “in a way has given a bit of saving grace to the emergingmarket economies like South Africa”, he said.
Colin Coleman, a managing director at Goldman Sachs, echoed Abedian’s sentiments.
“The reason that you’ve seen the rand prices rally has very significant structural issues which are largely being disguised by what is the global emerging-market rally.”
Although there were green shoots from a long period of low growth, it was unfortunate that “because of the domestic problems, South Africa has not taken advantage of these green shoots”, Coleman said.
Abedian said the South African economy was in a “decline but it is not arrested growth”.
“That would arrest traumatically, like Brazil, Russia and Mexico. The South African economy is in a good position structurally to bounce back quickly because it’s a diversified economy.”
INTO THE SUNSET? The fall of President Jacob Zuma would be only the beginning of fixing the South African economy, according to one economist