Big fix to save us from state cap­ture

Top econ­o­mists ad­vise on how to res­cue a looted coun­try

Sunday Times - - THE BIG READ - ROXANNE HEN­DER­SON, LUTHO MTONGANA and PALESA VUYOLETHU TSHANDU hen­der­[email protected]­me­ mton­[email protected]­day­ [email protected]­day­

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

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