Be sceptical of analysts at all times, and weigh what they say against how things actually turn out.
The chief economist of one of South Africa’s largest banks told me once that the challenge of his career was keeping his job while retaining his credibility as an economist. Over subsequent years a number of the better bank and investment house analysts in South Africa have expressed similar sentiments about the pressure they are under to talk South Africa up in the face of hard economic and political reality.
I came across a particularly stunning example of the problem in June when PSG told their clients in a note: ‘There’s a sense of optimism over the current state of the country after Cyril Ramaphosa was elected as President and people are generally optimistic about his ability to implement pro-growth economic policies. A recent survey done by Reuters shows that local economists reflected positive projections for economic growth in 2019 ranging between 1.20% and 2.30%. Plans are also being implemented to address concerns regarding faltering state-owned enterprises (SOEs), to attract foreign investment and to make the country more investor-friendly. There is a sense of increased optimism, although it is cautious. The reason for this caution is due to the recent election. Consensus is that Cyril Ramaphosa will be able to implement reforms quicker. The structural issues in the country have finally been identified and the country’s ruling party has been honest in announcing them and planning action. This includes appointing a new head of SARS (and) reshuffling the cabinet to appoint competent ministers in key positions (for example Pravin Gordhan as minister of public enterprises).’
It is utter nonsense. Actual confidence measured in terms of indicators that range from the lead indicator to the purchasing managers index, the business confidence index and the CEO confidence index are down and/or at near record lows.
There are very real doubts among serious analysts, even among his supporters, about whether Mr Ramaphosa understands what needs to be done let alone whether he can do it. None of the major policy decisions taken by the government since Mr Ramaphosa came to power – ranging from higher minimum wages to expropriation without compensation and now National Health Insurance – make the country ‘more investment friendly’. The opposite is true. The report of his own advisory land panel released last week called for everything from abandoning market-related compensation to curbing property sales to foreigners, and forcing prescribed assets. Business Day reports this week that ‘foreigners [are] ditching South African stocks in droves’. Fitch last week downgraded their rating outlook to negative, and Moody’s cut its growth outlook in early June and will soon downgrade its ratings outlook. The week before Fitch’s decision, the International Monetary Fund (IMF) announced that it was cutting its 2019 South African economic growth forecast to 0.7% – half of what it had estimated just eight months ago. FNB this week showed that more houses are being sold by South Africans who are emigrating than are being bought by foreigners.
As for ‘consensus that Cyril Ramaphosa will be able to implement reforms quicker’, there is nothing of the sort in the analyst community. That ‘the structural issues in the country have finally been identified and the country’s ruling party has been honest in announcing them and planning action’ is a fabrication. The ruling party this week again called for the nationalisation of the central bank.
The Cabinet is disastrous for structural reform across portfolios that range from trade and industry to labour, education and, given the deputy minister appointment, finance. Even at public enterprises none of the hard decisions on austerity and the sale of underperforming state-owned firms are being taken, with Eskom’s outgoing CEO this week describing that utility as being in a ‘death spiral’!
The PSG analysis is sufficiently far removed from reality to recall the fantastical 2018 assessment by Goldman Sachs that South Africa ‘would get back to 2.8 percent growth next year and 3.2 percent in 2020’. In the Goldman Sachs case, however, anyone with experience will tell you that when that firm tells you it is daytime you had better go outside and check for yourself.
Why is the South African analysis sometimes so far off the mark? Some of the reason is plain bad analysis and a misreading of the environment. Western analysists especially find it very difficult to appreciate the implications of revolutionary ideology and to account for such in their assessments. Some of the reason is not taking the business of political and strategic analysis seriously and rather parroting the b-grade assessments that pass as analysis in the mainstream media – as appears to be the case for PSG. Some of the reason is political both in terms of correctness and strategy – to appease. Some is an intentional effort to talk the country and the economy up because you want to sell more of your product to an unsuspecting public and understand the consequences that would attach themselves to telling the truth.
Our advice is to be sceptical of analysts at all times – and that includes this analyst. Analysts in the employ of banks and financial services firms in South Africa especially are having a really hard time seeing the downsides – let alone communicating these to their clients. Consult a broad spectrum of views and always insist on consulting independent views. Consult the balance of any analyst’s opinions, especially written opinion, over time and weigh these against actual events. Every analyst will get a call wrong from time to time. However, the balance of the calls they have made should be shown to broadly align to events as they transpired. For the majority of South African analysts this is not the case.
Frans Cronje is the CEO of the IRR.
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