Will Nene lift SA out of Fragile Five? On these pronouncements, unlikely
Funny how life works out. During his days as trade unionist, South Africa’s new Finance Minister Nhlanhla Nene reputedly organised the first ever strike in the country’s financial sector. Now he has to deal directly with consequences of a platinum mining strike whose knock-on effect hampers Treasury’s ability to meet commitments without increased borrowing or hiking taxes. Having served for five and a half years as widely admired Pravin Gordhan’s deputy, the initial reaction to Nene’s promotion was muted. He’s positioned as a “technocrat”, a safe pair of hands.
My own close-up experience with the new Minister left room for doubt about his assessment of the only people sector capable of lifting SA’s economy out if its self-inflicted funk. But for this capital hungry developing country, what we see from inside means little when compared with perceptions from abroad. South Africa is one of what Morgan Stanley’s James Lord famously dubbed the “Fragile Five” – the most economically vulnerable nations on earth. The key to exiting this dubious collection is clear: “We always look for the rise of new leaders with a pragmatic understanding of economic reform and a mass base to push it through.” Ahead of the Election, Morgan Stanley told its clients: “Among the five, the prospects for reform look particularly fragile in South Africa.” In this segment from Friday’s CNBC Power Lunch, I asked two experts to assess Nene’s pronouncements in an interview with the channel. From their response, don’t bet on him delivering what the nation’s foreign funders are looking for. – AH
ALEC HOGG: The South African economy has been plagued by weak economic data, which has sparked fears that we’re heading into a recession. Well, whether that’s true or not, we’ll certainly be finding out in the next few minutes. We have the first, I suppose, public pronouncement since his appointment as Finance Minister on the economy, by Nhlanhla Nene, the new Finance Minister. To help us to interpret this, Chris Hart who is Chief Strategist at Investment Solutions and Rowan Williams, who’s Director at Nitrogen Fund Managers are with us in the studio. We’re going to then look at three clips, watch them with us and we’ll ask our two experts to give us some insights. Let’s take a look at the first of these, the reality of where the South African economy is right now. Nhlanhla Nene: this is his view.
MINISTER NHLANHLA NENE: Part of those realities is actually built on that situation because we actually are not fully recovered. We have seen a period of low employment in the country or rather, high unemployment. We also have had slow growth, and we’ve also seen challenges in our mining sector. We’ve also seen issue that relate to the rest of labour unrests, but it’s been a number of those challenges. However, we see all these things. We know what the problems are. How does this government respond to those problems?
BRUCE WHITFIELD: We see what these problems are. It’s ‘how does this government respond to those problems’.
MINISTER NHLANHLA NENE: Look, since the beginning of the previous administration, this government set about to put together the country’s plan, a long-term vision, a practical and workable intervention, so that plan is now in place. It has gone through and was accepted by everyone.
ALEC HOGG: All right, Mr Hart. ‘A period of unemployment’. How long is he talking about…20 years…15 years?
CHRIS HART: Unemployment is structurally high. It’s unusually high and it’s not because of outside factors. It’s because of inside factors. Our stagnation since 2008 is not because of the outside world. That obviously had an effect, but it’s because of internal factors. Whereas we’re trying to deal with poverty, inequality, and unemployment, what’s happening is government policy is dealing with poverty and inequality through the way they tax and apply the tax. In other words, if you earn well, your income is taken down and then we redistribute the actual in the proceeds. In that process, what you’re doing economically is you’re shifting resources to consumption. To deal with unemployment, which is then poverty reduction (not poverty alleviation) you need to be shifting resources to investment. When we look at the economy, we have the growth drivers in households very weak. The government’s finance is a little bit in tatters – that’s weak. The global economy’s cabinet’s not going to be a driver of growth internally in South Africa. The only strong lever you can pull is in fact, to drive investment to get us out of this hole.
ALEC HOGG: That’s really well put there, Chris. From your side Rowan, Bruce asked Nhlanhla Nene what the government’s doing about it and he reverted back to type on the National Development Plan. Now surely, there comes a time when people like you, who manage capital, say ‘look, we don’t actually buy this anymore. We’ve been hearing this. We’ve seen this movie too many times. Let’s rather look elsewhere’?
ROWAN WILLIAMS: You’re absolutely right, and I think what’s been happening from an investment perspective is we obviously go where the opportunities are. Chris was outlining how the government has really been focusing on consumption and fuelling that side of the economy. That’s where investors have been putting capital. If you look at the retail sector – the more consumer driven sector – those have until recently, with the more difficult environment we’re currently in – have performed exceptionally well. Compare that to for example, the sectors that would benefit from increased investments such as the construction sector. It’s had its ups and downs and I think a lot of optimism every time the government and Zuma make a State of the Nation Address but really, no delivery from the government. The capital and the investment opportunities are going where the money has been going. From an investment perspective again, people have disappointed on the construction side, because the capital’s not going there and I don’t think we see the government in the short-term really addressing the issue in terms of their capacity constraints.
ALEC HOGG: You’ve laid the table. You’ve now explained the rational response to it. Let’s get to our next clip because he spoke about current infrastructure plans. Remember, this is what government keeps telling us is going to drive the economy forward and what the impact of the ratings agency downgrading might have on this infrastructure plan. Here’s Finance Minister Nhlanhla Nene.
MINISTER NHLANHLA NENE: I don’t think it’s only talking, as I said. Implementation is actually being stepped up as we speak. If you look at the amount of infrastructure that has been rolled out in the past five years, it exceeds the infrastructure in this country that was rolled out in the past 20 years. That has made a significant and huge impact on the lives of the people. In creating an environment that is conducive for the private sector to come in as well. As you seen also with our energy program, the IPP’s… I keep saying that we’ve seen a tremendous amount of government working with business in something that is of mutual benefit to both the public and the private sector. That is being stepped up and a lot of money has gone into it. Three years going forward, we’re actually looking at close R1tr again, going into that infrastructure.
BRUCE WHITFIELD: However, we get closer Minister, to ratings in downgrades to junk bond status. All of these plans come to nil, don’t they, if we can’t afford to borrow money?
MINISTER NHLANHLA NENE: I don’t think they come to nil. I think they just present us with an opportunity of actually stepping it up. If you look at – as I said earlier – the areas of focus, it doesn’t matter how much our economy grows if we actually haven’t addressed the issues of energy. The economy will choke and therefore, we need to focus on the critical areas without necessarily chasing the numbers. The numbers will actually tell, once we have reached a point where… That’s why the acceleration and completion of Medupi is at the top of our agenda. The proper sequencing also of our entire energy mix, because it’s not only coal. We also need to look at renewable energy and that’s why I’m saying the IPP’s have been a major success. The rollout, unlocking the bottlenecks, roads infrastructure, the ports (as we speak), a number of our parastals have actually put in money where it matters most, and we are seeing significant investment going in that area. The consequences will actually show in due course.
ALEC HOGG: All right, well there’s quite a lot in that, Chris Hart. Let’s start off with the first one. He says we spent more in this economy in the last five years than in the previous 20 years.
CHRIS HART: Well, amounts of money is not particularly useful because when you start to get the financial repression that’s coming through with a lot of the so-called ‘investment-making Gautrain’ being one of them and World Cup stadiums being another: a lot of the investment is dead capital. In other words, you invested in something but if there’s no return on that capital to generate the next lot of investments to draw more money out. We are capital-deficient, so they’re not dealing with a macroeconomic mismatch of trying to invest at a rate much higher than what they are, and with the savings rate much lower than what we are. That macroeconomic mismatch has put us in the Fragile Five. The other problem with the investment is that it’s ‘one for the price of four’ or ‘one for the price of two’, which is a very bad deal. Whether it’s a Gautrain freeway and foot-proving program, which was a ‘one for the price of three’ kind of thing where you get one and pay three times the price of what it should be. Medupi, which is now how many years behind schedule, and we don’t know whether they’ve built a power station or a pipe bomb – one’s not sure in that sense – at huge cost overruns. It doesn’t mean that because we invested… What it means is that you’re actually taking scarce resources and pushing them in areas where it’s not optimal.
ALEC HOGG: Is this new Finance Minister deluded, is he just poorly informed, or does he not understand?
CHRIS HART: I don’t think he’s deluded, but these are problems that I don’t hear being debated.
ALEC HOGG: But he’s telling us everything’s cool. He’s telling us ‘we’re spending money and spending more than we did in the past’.
CHRIS HART: If you look at how South Africa’s underperformed since 2008, we’re making what I call the triple mistakes to deal with the triple problems. Triple mistakes of striking our way into prosperity, regulating our way into prosperity, and taxing our way into prosperity – there are your three mistakes. We cannot be taxing capital formation when you’re capital deficient with huge unemployment. You can’t be taxing investment viability. Investment is going to be…and it has to be properly directed investment – and I do apologise. There’s investment into what I call ‘the wealth-consuming sectors’ and there are ‘the wealth-producing sectors’. You can have teachers, nurses, and policemen, but only if you have manufacturing, mining, and agriculture to pay for it. Those are the wealth-producing sectors and the wealth-consuming sectors.
ALEC HOGG: Rowan, let’s pick up on a lot of those points. Perhaps the one specific there was that the IPP’s have been a great success.
ROWAN WILLIAMS: Yes, he’s clearly talking a political agenda. He’s obviously got to lay out the positive side.
ALEC HOGG: So this is a politician, rather than an economist.
ROWAN WILLIAMS: Yes, at this point. They obviously have to show that they are delivering. There’ve been little pockets of success, but if we look, we still have a major energy crisis in this county so they can’t really have been a success because we’re not filling the hole. Medupi’s been a major failure and if you look at the S & P commentary on the downgrade, the finance pressure that Eskom is putting in terms of government finances is creating some of the issues in terms of the downgrade as well. Obviously, in terms of the economy, it’s starting to have a major impact. This is part of the government’s lack of ability to deliver and these are structural issues, as Chris also mentioned.
ALEC HOGG: Let’s see our last clip, because this talks to the economic outlook for the next ten years. Can we believe the new Finance Minister perhaps a bit more on this one? Watch closely.
MINISTER NHLANHLA NENE: Well, that is explained by the fact that we are… At times, we would like to classify ourselves as a large economy, so those vulnerabilities actually also come from the size of our economy as well as our exposure to the global environment, but I would want to believe that our expedition of the implementation of our National Development Plan, – which I said earlier is not only a plan – it is at the implementation stage. It is key to actually addressing most of our challenges as we move forward.
ALEC HOGG: So we’re back to politics again – implementation of the National Development Plan. It’s a mantra that is being expressed by Zuma. Just one little point there: ‘as a large economy’. South Africa’s not a large economy.
CHRIS HART: We’re not a large economy and that’s a mistake. We’re deluded that we’re big fish in a small pond. We should be emulating Mauritius, to try to make ourselves the easiest place to do business, and not the most difficult. We’re not like China where you can put the barriers up but there’s such deep potential behind the barriers that people are prepared to climb those barriers. Our mistake is in the global context.
ALEC HOGG: If we were an American State Chris, do you know that we’d rate 17th?
ROWAN WILLIAMS: Seventeenth? I would not be surprised.
ALEC HOGG: We’re one-sixth the size of Texas.
CHRIS HART: The big thing is in the National Development Plan, one of the things that I think is a good thing because you don’t get growth without investment; they need to raise the investment rate from 19 percent currently, to 30 percent. Nineteen percent will buy you a two-and-a-half to three percent long-term growth rate. Thirty percent can get you to five or six percent or even more, but how do you fund it? You won’t do it unless you get your savings rate up to a similar order. If you don’t that, the macroeconomic mismatch will get wider, our credit ratings will continue to go down, we’ll become more fragile – the most fragile in the fragile five -, and that’s the critical thing: to get the savings rate up, to actually fund the investment rate. That’s critical. I don’t care what political party it is. Anything else is a magic wand.
ALEC HOGG: It sounds, from what Chris has said now – well, unpacking this – that this really is a lot of politics, but what about this mantra: the National Development Plan? It’s almost ‘well, abdicate responsibility for everything because it’s in the National Development Plan’. Is it being implemented, and is it being implemented in its entirety?
ROWAN WILLIAMS: Yes, they’ve been talking about the plan for the last five years. Certainly, for the first part of Zuma’s term and the second part. What we are seeing is an increase in terms of its profile in terms of some of the government commentary, so I think it gives you some optimism that they will now be following through with it. I think to date it has been a plan and is a plan. Some of the aspects in terms of Medupi and the big power plants…I think they were part of the National Development Plan, so they would argue that although they’re not complete, they have started some implementation.
ALEC HOGG: But if we implement as poorly in other areas of the plan as we’ve done – and Medupi is a great example – then my goodness, this 2030 deadline that we’re looking at Chris Hart, might be, maybe in 2060.
CHRIS HART: The National Development Bill failed on one ground. There are two aspects. There’s the economic ground and there’s a social ground. If they tried to lead the National Development Plan with the social side, you won’t have the resources to pay for the social side. It has to be led by the economic side.
ALEC HOGG: Is there a realisation of that?
CHRIS HART: I don’t think so, because the loony left. Remember, this National Development Plan: if you put it into a European context, is a social democrat plan. It’s a centre-left plan. Economics in South Africa is discussed between the centre-left and the loony-left. Fortunately, with the loony-left exiting the government, the government can actually start shifting more to the centre, but that’s part of our problem in the last five years. There hasn’t been a single bit of legislation that has been investment of business-friendly. It’s all been anti-business and anti-investment, which is why we with the problem here.
ALEC HOGG: And then we saw in the State of the Nation Address where President Zuma talks to business. ‘Come, we have to pull together in the same way’. I suppose that if you beat your dog for long enough, one day he’s going to bite you.
ROWAN WILLIAMS: I think government is missing a major opportunity. If you look at the private sector and the business sector, there’s a deep well of skills there. If you look at the success I’ve had not only in South Africa, but on the global stage as well, I think the government could do very well to tap those resources and that skill set, because that’s one of the things we lack – and clearly, the government also lacks – is that ability to deliver.
ALEC HOGG: Business plays nice. Business plays too nice maybe, and then quietly takes its business elsewhere.
ROWAN WILLIAMS: We have seen business voting [unclear 0:16:18.5] and then taking its skills offshore, as you say. That is, I think, a lost opportunity for South Africa.
ALEC HOGG: Yes, but this is really frustrating. A last word from you, Mr Hart.
ROWAN WILLIAMS: That’s a myth. South African business has been leading investment in this country for the last 20/30 years. Two-thirds of all investment that takes place in South Africa, is private sector that you can get out of the Reserve Bank Bulletin for nothing. The government thinks they’re the leading investor. They’re the ones who led us to electricity shortage and rail shortage etcetera because the private sector investment overtook their lack of investment.
ALEC HOGG: Fascinating insights. Thank you for once again being so diplomatic, Chris Hart and Rowan. It’s good to have you in the studio for giving us the investment side. Chris is the Chief Strategist at Investment Solutions and Rowan Williams is the Director at Nitrogen Fund Managers. There were also snippets from an interview that Bruce Whitfield did with the Finance Minister, Nhlanhla Nene.