Slow-mo­tion crash is about to speed up

Sunday Times - - OPINION -

IF you have ever had the mis­for­tune of be­ing in a car when the wheel nuts have not been tight­ened prop­erly, you know that sick­en­ing feel­ing as the steer­ing wheel starts to shake. If you don’t slow down and pull over, it can have dis­as­trous con­se­quences.

The de­ci­sion by the na­tional ex­ec­u­tive com­mit­tee of the ANC last weekend to re­tain the ser­vices of Pres­i­dent Ja­cob Zuma is a slow­mo­tion car crash for the econ­omy. It was as if the party, ig­nor­ing the shud­der on the steer­ing col­umn, geared down into a hair­pin bend and pushed the ac­cel­er­a­tor hard into the floor, obliv­i­ous of the con­se­quences.

History might show it was the tip­ping point for South Africa’s in­vest­ment grade, a time when in­vestors fi­nally lost faith in the will of politi­cians to self-cor­rect.

While not ac­cept­ing blame for the re­cent spate of rat­ings down­grades through his sack­ing of Pravin Gord­han and Mce­bisi Jonas, the pres­i­dent did ac­knowl­edge in his bud­get vote this week that trans­form­ing the econ­omy is harder when it is sub-in­vest­ment grade.

In an econ­omy, as in the case of the wheels com­ing off a speed­ing car, a crash hap­pens slowly at first, then sud­denly very quickly.

While for­eign cur­rency flows into the bond mar­ket of about R5-bil­lion a week are lulling many into a false sense of se­cu­rity, paras­tatals are find­ing it nigh im­pos­si­ble to raise debt. Transnet strug­gled to raise a quar­ter of the R200-mil­lion it wanted in April, and the South African Na­tional Roads Agency has all but given up on go­ing to the bond mar­ket for now. Cor­po­ra­tions such as Capitec and MTN have had their bond is­sues over­sub­scribed over a sim­i­lar pe­riod.

It turns out Fu­ture­growth As­set Man­age­ment had a point last year when it an­nounced it would no longer in­vest in the debt of six paras­tatals. It was widely crit­i­cised. Par­ent Old Mu­tual even apol­o­gised for the stance of its sub­sidiary, and fund man­ager An­drew Can­ter re­scinded his hard-hit­ting re­marks. He got lit­tle pub­lic sup­port, but since then, in­vest­ment in paras­tatal debt has dwin­dled to a trickle.

The re­al­ity is that paras­tatals are heav­ily de­pen­dent on pub­lic money, and more and more there is pres­sure on the Pub­lic In­vest­ment Cor­po­ra­tion and the Govern­ment Em­ploy­ees Pen­sion Fund to stump up when pri­vate in­vestors won’t.

Both have is­sued state­ments in re­cent weeks seek­ing to re­as­sure mem­bers that their money was safe. Why do that un­less there are se­ri­ous ques­tions around their ap­petite for pub­lic debt?

The PIC holds about R2-tril­lion in state-owned-en­ter­prise debt, which in­cludes 48% of the debt in San­ral and more than half of Eskom’s and two-thirds of Transnet’s. It is al­ready heav­ily ex­posed but may feel pres­sure to fund even more debt un­less the pri­vate sec­tor can find an in­cen­tive to do so.

But in the busi­ness en­vi­ron­ment con­fi­dence is at multi-decade lows.

One pri­vate-sec­tor ca­su­alty of this gloom is Thabo Dloti, whose stand­off with the Lib­erty board over the im­ple­men­ta­tion of strat­egy cost him his job. The board wanted a speed­ier re­turn to prof­itabil­ity than Dloti thought pru­dent, and he stepped aside, mak­ing way for David Munro, the third in­vest­ment banker in un­der 15 years to make the jour­ney across town from Stan­dard Bank to Lib­ridge to run a busi­ness that has been through mul­ti­ple dif­fi­cult it­er­a­tions in re­cent years. In an en­vi­ron­ment of low re­turns and slow growth, the only op­tion may be to take a hatchet to costs. It could get messy.

Messy seems to be the new nor­mal, though. With the govern­ment telling Eskom this week to rid it­self of its CEO, there are ques­tions about where Brian Molefe might turn up next. He has been linked to a re­turn to the PIC, which man­ages the re­tire­ment sav­ings of civil ser­vants. That’s the last thing they need.

While much SOE debt is govern­ment guar­an­teed, there are wor­ries about state fi­nances. It is short of money, too. When Gord­han tabled his Fe­bru­ary bud­get, he an­tic­i­pated growth at twice the level even the most am­bi­tious fore­cast­ers are pen­cilling in now.

The ANC needs to de­cide whether it wants to gov­ern a coun­try in the throes of a down­grade. That in­tro­spec­tion may see it put coun­try above party come De­cem­ber. Or not.

Whit­field is a pub­lic speaker on the po­lit­i­cal econ­omy and an award­win­ning fi­nan­cial jour­nal­ist and broad­caster

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