There’s a big difference between hope and reform

Michael Morris | May 14, 2019
South Africa’s poor especially will find it very hard to make sense of money-market optimism – until it is real enough to trust.

‘Ordinary’ South Africans, and especially poor black South Africans, must be hoping beyond hope that the Big Guys – whoever they are, the bankers, the corporate bosses, the investment analysts, the kingpins of the economy – know more than they do. 

They must be hoping that the polished and knowing wisdoms shared over chilled chardonnay and nibbles of birdseed biscuit smeared with a tart chèvre really do count for something. 

They must be hoping that business’s enthusiasm – unlike their own – about the re-election of the ANC as the governing party after a quarter of century in power really does mean more than more of the same.

How else would they – the poor, and the rest of us for that matter – have read the Bloomberg report on Friday that began, “Gains in South African assets Friday suggest investors like the picture emerging from the election results”?

The report bullishly foresaw that ‘(a) win of between 55% and 60% is expected to boost Ramaphosa’s position within the party and his ability to implement key changes’, offering as an indication of ‘how the reform optimism is playing out in markets’ the following cheering signs:

  • ‘The rand advanced for a fourth day and yields on benchmark bonds saw their biggest drop in six weeks…’; 
  • ‘South Africa’s benchmark FTSE/JSE Africa All Share Index is gaining for the first time this week. The gauge rose as much as 1.7% on Friday, the steepest one-day jump since Jan. 9’;
  • ‘The yield on benchmark 2026 government bonds is down seven basis points to 8.48%, the biggest drop in six weeks. The yield on the country’s $2bn of Eurobonds due 2028 fell three basis points to 5.18%, the most on a closing basis since April 9’; and
  • ‘The cost of insuring South Africa’s government debt against default fell for the first day in four and was trading at 187 basis points.’

The divergence between the money-market outlook and voter sentiment is sharp; last week’s result was the ANC’s worst electoral performance since 1994, and a dramatic drop from its 69.6% mandate of 2004. On top of that, as the Daily Friend pointed out at the weekend, South Africans’ participation in voting reflects waning popular enthusiasm for making any choice at all, whatever the policy choices on offer, and quite likely because of the policy choices on offer. 

Last week, 9 million people who were eligible to vote didn't register to do so. And of the 26,7 million who were registered to vote, only about 65%, or some 17 million, joined the voting queues. Thus, as many voted as were eligible to vote and did not.

Yet, business sentiment is up.

Could there be something in it? Could it be, as that Bloomberg report expressed it, that the ruling African National Congress’s ‘victory margin … will strengthen President Cyril Ramaphosa’s hand as he pursues reforms to revive a flagging economy’?

Everyone hopes so, and with good reason. We don’t only want hope, we need it. This is perhaps a quintessential South African condition. Just a little over a month ago, a business consultant was quoted as saying that ‘in true South African spirit, there remains a sense of determined optimism’.

But there can be no overlooking the fact that, as is true of the state of the economy, this determined optimism is flagging in conditions in which growth is pitched at less than one percent, more than half the country’s young people are jobless, half of every 12-year school intake drops out of the system before matric, the budget deficit remains a multiple of the rate of economic growth, and a bloated and costly public service that is meant to be ‘delivering’ is deeply compromised by incompetence, waste and corruption. 

Hope and optimism won’t fix any of this. It is sobering to read the April 2008 news report in which Stanlib director of retail investing Paul Hansen assured readers: ‘Share prices discount the future, often six months out, sometimes more. The man in the street may be baffled by market behaviour when the news has been so gloomy for so long, but in general terms this is a hopeful sign.’

It might have been true in the moment, and that might be the key to understanding market sentiment; momentary optimism is vital in an environment shaped by short-termism. A leading economist put it to an IRR gathering a year ago: ‘Their (business) outlook is very short-term… They only see an interest in surviving until tomorrow. They just want space to survive for as long as possible.’

And when it becomes impossible, they leave, taking their money with them. 

All the attention must, therefore, fall on whether President Ramaphosa ‘pursues reforms’ or not.

As IRR CEO Frans Cronje pointed out in February, the ANC’s current policy thrust was ‘squandering confidence’ in his ascendancy.

‘The much heralded Mining Charter has in truth shut the door on much by way of new green-fields mining investment. New minimum wage laws have effectively closed off avenues to formal employment for a majority of young people. Threats to property rights have reached a sufficiently advanced stage to, in and of themselves, prevent an economic recovery. The proposed National Health Insurance scheme risks wrecking South Africa’s private healthcare system and with it the ability of the country to retain a strong middle class. Ever stricter enforcements of racial-nationalist empowerment policies act as a tax on investment and reduce productivity and international competitiveness.’

Cronje went on: ‘These policies speak to an ideological worldview that is hostile to markets, private enterprise, and risk-taking investment and instead prioritises state control and direction of the economy over structural reform and modernisation while being blind to the economic, social, and political consequences.’

He noted that ‘very few analysts are prepared to publicly concede the risks or admit to the structural reforms that will be needed to turn the tide’.

Such reforms included deregulating the labour market, abandoning minimum wages, slashing civil service expenditure, putting an end to preferential procurement policies, selling parastatals, repealing race-based empowerment and equity laws and replacing these with policies focused on actual socio-economic disadvantage, allowing parents to take management control of schools, introducing a hybrid constituency-based electoral system, affording greater policy-making powers to provinces, and reversing every threat to property rights.

‘Short of implementing this list, South Africa risks very serious political and economic reversals over the decade ahead. Those reversals will reduce living standards, erode much of the socio-economic progress made since 1994, and call into further doubt the sustainability of the constitutional order, civil rights, and the rule of law.’

Now that the election has come and gone, an obvious question is: has Ramaphosa given any indication since February that these are the reforms he means to pursue?

Just this week, colleague Terence Corrigan wrote that ‘while many have pointed to the heightened pressure for results under which the ANC will be embarking on its new term of office, it is committed to a course of action that stands to make it near-impossible to deliver on the economic growth, jobs and rising living standards that would be transformative to the lives of South Africa’s poor.’

Which is why most of us, and the poor particularly, will find it very hard to make sense of ‘hope’ – until it is real enough to trust.

 

Michael Morris is head of media at the IRR.

 

If you like what you have just read, become a Friend of the IRR if you aren’t already one by SMSing your name to 32823 or clicking here. Each SMS costs R1.’ Terms & Conditions Apply.

 


comments powered by Disqus