Life after SA’s junk status

OPINION

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After the downgrades to junk

RW Johnson says President Zuma’s entire efforts are currently bent towards very short-term political objectives
Where to go after the downgrades?Now that two of the three ratings agencies have downgraded South Africa to junk status, the game changes. This was a shoe which took a long time to drop.The resulting situation is serious but not yet clear to all. Growth estimates are down to 0.7% or less and the risk of a recession has been much increased. The February figures for manufacturing output were the worst in years and technically the country may already be in recession. However, it is very important to note that what has been downgraded by Standard and Poor’s (the lead agency) is only South Africa’s foreign currency debt. And that constitutes only 11% of the total government debt.Far more worrying would be a downgrade of our Rand currency debt (ie. the other 89% of our debt), but thus far only Fitch has done that. Since foreigners usually buy around 40% of our Rand currency debt, the country’s general reputation abroad is of some moment.

This has limited the impact of the downgrade so far. The Rand fell nearly 12% but has recovered half of that, testament to the resilience of the carry trade. The greatest damage has been to confidence – not only of domestic and foreign investors but of many ordinary households. The ten year bond rate rose to over 9% and is currently 8.735% compared to the year’s low of 8.3%.

Each flicker upward is extremely costly and already the new finance minister is facing a situation in which the existing debt will cost a lot more to service than had been planned. Ahead lies the virtual certainty of higher inflation, rising unemployment and a continuing investment strike. In general, markets have already gone very quiet. Even those who can afford are holding off from big-ticket purchases such as cars and houses.

Very few people in the ANC have any understanding of economics and many can’t read even these very obvious economic signs. This certainly applies to Zuma and, almost certainly, to Gigaba, the new finance minister. So we have the blind leading the blind.

If the government was economically rational, what would it do?

It is not, of course, true that there is nothing the government can do. The government got us into this hole and only the government can get us out. South Africa incurs debt both on its budget deficit and its trade deficit. If we are bound for a recession then the chances are that our trade deficit will fall naturally, so perhaps one may ignore that – though there are still many areas where import substitution ought to be possible.

The more difficult question is reducing the budget deficit, particularly if the cost of debt rises. Gordhan cut back heavily on provincial budgets so the pips are already squeaking there. But there are many more savings one could make. Really one ought to rationalise central government and collapse the current 37 ministerial departments into maybe 20, with a huge corresponding saving in ministerial and bureaucratic salaries. And so on. But, of course, if we are going into a recession or major slow down this would be the normal time when would expect government to increase expenditure on the usual Keynesian counter-cyclical grounds. But we can’t do that without going deeper and deeper into debt and probably getting further credit downgrades.

Secondly, however, there is whole alternative reform programme advocated by the IMF, the OECD, the World Bank, the ratings agencies etc:

prepare most of the parastatals for privatization,

– liberalise the labour laws,

– step back from many of its BEE and affirmative action requirements and

– take really strong-minded measures to improve education

In other words, the advice from those quarters is that a large U-turn in policy is required: a frank acceptance that South Africa is part of an international capitalist economy and simply has to accept the logic of that system and work within it. The difficult truth which has to be faced is that the whole body of ANC policies since 1994 have been cumulatively disastrous and most of them need to be reversed. What this would mean, of course, would be the complete abandonment of the National Democratic Revolution (NDR) and changes so great that many within the ANC would regard it as “regime change”.

It is not clear that even the Democratic Alliance has grasped how radically things need to change – as any government looked at such a programme it would recoil in horror at its political costs. Preparing parastatals for privatization would mean shaking out all manner of jobs for the boys and cadres – in a market already saturated with unemployment. Liberalising the labour laws would doubtless cause a fall in average wage levels, anathema to the trade unions. More cuts in the budget deficit would mean a large cut in civil service jobs and a pay freeze for the remainder. Even though these measures would kick-start the economy again and raise growth, they would be painful at first.

Above all, the fact is that the post-1994 settlement has seen the rise of a dominant state-sponsored African bourgeoisie, partly private, partly public sector. These have been the real winners from “liberation” but the huge resources pushed their way have only worsened inequality and produced little if any development because both these elements are essentially parasitic. But this bourgeoisie is the key motor force behind all post-1994 governments and it would react with fury if its wings were clipped, or even if the state just stops pumping extra resources in its direction.

If, in addition, the immediate effect of reforms is to increase unemployment, one has a perfect storm, politically speaking. Probably only a dictatorial government would be able to carry out such a programme, a South African version of President Park in the South Korea of the 1970s-1980s.

Alternatively, one could approach the IMF for a loan which would enable one to bridge this painful process and, at the same time, be able to blame the IMF for any unpopular measures that have to be carried out.

However, our government has no intention of doing either thing. At which point one should recognise that Zuma’s entire efforts are now bent on the very short-term objectives of:

remaining in power, to keep his patronage network intact,

– delivering a nuclear deal if at all possible,

– and securing the succession for his ex-wife, Nkosazana Dlamini-Zuma, so that he, his family and the Guptas will all be protected from any possible sanction or confiscation.

That is, Zuma is now completely focused on pressing ahead with all these objectives up to the ANC conference in December 2017: a short-term horizon.

It is important to realise that all the policy initiatives now in play – the drive for radical economic transformation, the drive against white monopoly capital, a possible constitutional amendment to allow expropriation without compensation etc – are all just a means to this end. They are all merely ways in which Zuma hopes to bind ANC activists to his camp long enough for him to secure the objectives above.

It is important to realise that what Zuma wants – for his family to keep all their ill-gotten gains in complete security and keep his patronage networks intact – could be satisfied quite equally in an NDR or anti-NDR future, so he may not care much about actual policy. But in the meantime this gives him a large advantage.

For example, Gordhan kept putting off plans for National Health Insurance as unaffordable. Zuma will never admit that and will happily promise NHI to activists and voters alike because all he is interested in is getting through successfully to the end of 2017. In other words, Zuma is quite unconcerned as to whether his promises are unrealistic, unsustainable or whatever. He is, in the classical sense, irresponsible. He makes these promises to get himself over the finishing line at year-end. Finish and klaar.

It is worth noting that he has a typically ANC view of what matters. For example, the govt. broke all the procedural rules in order to push through the Land Expropriation Bill in May 2016 with the idea that this would help the ANC in the August 2016 local elections. It probably had no effect at all because all the polls show that land reform is way down the list of popular desiderata.

Certainly, the elections were just as disastrous for the ANC as they had always threatened to be. Having got the Bill through Zuma has shown no interest in implementing it and has referred it back to Parliament. Under that Act the govt may expropriate property but still has to pay compensation of 85% of market value. Serious land reform would thus entail huge government expenditure yet almost no funds have been allocated for land reform in the budget. The policy is there for show, to help mobilise activists and make rural voters believe the ANC is serious. Which it isn’t – though of course it is dangerous to keep on whipping up unrealistic expectations in this manner.

Zuma’s power depends first and foremost on the Premier League – the premiers of Free State, Mpumalanga, North West and KwaZulu-Natal, but he also has vast patronage networks throughout the police and security services, inside all the other ANC provincial organizations, in the parastatals and in the provincial and municipal administrations of the country.

Beyond them there are many private sector businessmen who have put money into Zuma’s back pocket and have to be continually rewarded. But all these clients require constant cultivation: they are essentially opportunists and would doubtless switch to another camp if Zuma ran out of resources. Cash is king.

Accordingly, Zuma’s prime concern is to maintain this patronage network. He has to keep feeding the tiger. His own need to milk the Treasury only comes after that. He has made so much out of being President already that the main question is keeping what he has – though, of course, there is no such thing as having too much.

Gordhan’s fiscal austerity was severely cramping his style and, in addition, Gordhan was refusing to intervene to ensure banking facilities for the Guptas. And so, in a supremely symbolic act, Zuma axed South Africa’s leading Indian public servant in order to please a family of “foreign” Indians. But with Gigaba now Finance Minister Zuma is well placed to keep his clients happy. Meanwhile, the fact that a number of Zuma critics have recently received death threats will be a reminder that there is a stick as well as a carrot in play.

Malusi Gigaba started office with a promise that he would maintain Gordhan’s posture of fiscal consolidation (i.e. shrinking the budget deficit). When he was appointed the ratings agency, Fitch, rang him and had a long conversation with him during which he stressed this point – but also stressed the goal of “radical economic transformation” of an unspecified kind. As soon as the call was finished Fitch concluded that either he was lying; or that he was simply trying to make the right noises without serious intent; or that he was so green that he didn’t understand that the two goals were incompatible – but in any case they would immediately downgrade to junk status not only the foreign currency debt (as S&P had) but also the Rand-denominated debt, a far more radical measure.

It is hard not to conclude that they were right. Indeed, Gigaba followed up with the even more remarkable promise that South Africa must depend on its own resources and “not spend what we haven’t got”. If one believed this, it would mean a total cessation of borrowing – a completely incredible objective.

Despite these promises of economy, it is likely that the run-up to December will see a considerable number of give-aways to sweeten the public mood – perhaps an increase in social grants/pensions, perhaps some generous wage increases, and certainly all manner of promises about projects costing a lot of money in the future.

All of this will, of course, be cloaked in large declarations about “radical economic transformation” and the struggle against “white monopoly capital” – and, indeed, by whites more generally. African nationalism was at base always a racial mobilization against the ruling white minority. The liberal and then the Communist intellectuals who sympathized with the movement helped graft on to it a notional commitment to non-racialism – it legitimated their own position, after all – but this seldom ran much more than skin deep. Those who joined the movement all had to be mobilized against the enemy – “die Boere” – and this was a racial mobilization.

Now, after 23 years in power, the movement has grown old and ragged in power. It has lost most of its non-African support, all of its moral authority, and a fair amount of its self-respect. It is mainly now about money and power, the same things gangsters care about, and it has unsurprisingly become gangsterish. As it gets ever more worn down and skeletal all that it has left to call upon is that original racial mobilization.

What in fact will happen is a gradual further deterioration through the year as the other ratings agencies follow Fitch in downgrading to junk status even our Rand debt. These are the second shoes which have still to drop. (The patter of tiny feet.) There are lag effects here and also for the gradual omission of South Africa from all the various indices of government bonds, with the most important being the WIGBI (World Govt Bonds Index).

As that happens various institutions will become forced sellers of South African bonds to the tune of around $10bn. with, doubtless, more sales of Rand-denominated bonds. The result of this will be a steady series of blows to financial confidence, producing low economic growth, higher unemployment and thus increasing inequality. Like voters all round the world, those affected will blame the government for these woes. The ANC attempt to deflect blame onto big business and whites is, for the most part, unlikely to work.

Thus the great drama of the next nine months. Zuma’s patronage networks still make him the master of the ANC apparat. It looks as if the ANC in the Western, Northern and Eastern Cape will side with Ramaphosa, as will Gauteng. Limpopo is up for grabs by either side but right now the Zuma forces control KZN, Free State, Mpumalanga and North West. (In practice presidential patronage is bound to mean that Zuma will also win useful minorities even in the provinces he loses.) If Zuma can retain that control until December, Dlamini-Zuma will be elected as his successor. But as the economic situation worsens the strain is mounting and will mount continuously all the way to then. Already violent social unrest is becoming endemic and as unemployment mounts is likely to worsen.

In one sense we are back to 1990 where township violence can be contained only by security forces in armoured vehicles. In the long run no South African government can hold out indefinitely against the forces of the international market. Thus whoever wins the ANC leadership contest will come under enormous pressure to announce a clear change of direction.

A few words about that. Scenario planning of the high road-low road sort does not work very well because these are essentially extrapolations from existing trends. We should all know that human events do not unfold like that. To put it in Marx’s words, quantitative change, if continued long enough, will produce qualitative change. Or, if you like, you reach a tipping point, whereupon the game changes. Our own history has numerous such examples. In the 1980s international pressures mounted against South Africa. PW Botha made significant changes in response – the tricameral parliament, abolition of the pass laws, a blind eye turned the breaking of the Group Areas Act, talks opened with Mandela and so on. But none of these was sufficient and, notoriously, when he reached the tipping point of the Rubicon speech, he backed away from more fundamental change. In the end, of course, these pressures could not be resisted and we got De Klerk’s speech of 2nd February 1990 which launched a whole new game, a complete paradigm shift.

The pressures now building up on the government may, in the end, be great enough to force another big qualitative change, either towards the NDR or away from it. However, one has to be sceptical if either of the two main contenders for the Presidency are likely to make really dramatic moves.

Consider Dlamini-Zuma. Her previous ministerial career has shown her to be a highly ideological woman. She supported Mbeki’s early Aids policies and his protection of the Mugabe regime and she has always exhibited all the ANC’s hostility and paranoia about the Western world. She will be 70 when she becomes President. If she manages this it will be entirely due to Zuma’s patronage network and doubtless he will continue to control this behind the scenes (for it is this on which his security depends), rendering her a mere puppet. But she will depend on much the same base as Zuma and will be subject to all the same pressures to feed the tiger.

Ramaphosa, on the other hand, has no discernible base at all. He does not even have large support or a loyal patronage network in his home province of Limpopo. He is gaining support solely on the basis of being the anti-Zuma. This is unlikely to provide him with a solid enough base to carry out major changes.

So, if things continue as now the outlook is for Dlamini-Zuma to win and for SA to drag along at low growth rates hoping, like Mr Micawber, that “something will turn up”.

Two things could change this:

– first, Ramaphosa could cast caution to the winds and launch a populist campaign of his own, taking dead aim at the Guptas. This is Zuma’s Achilles heel for the sight of the fruits of liberation being captured by a family of foreign Indians enrages African nationalists of all stripes. This is probably the only way he could gain enough support to win. Gimmicks like going on hunger strike for the Palestinians will achieve nothing. But Ramaphosa is more likely to lose cautiously than win boldly.

– Zweli Mkhize could take a hand either for Ramaphosa or on his own account. This could change things. He was a popular and successful premier of KwaZulu-Natal and ANC party boss there and if he detached KwaZulu-Natal from the Zuma side, the latter would likely collapse. But Mkhize is a cautious man and time is getting very short if he’s thinking of anything as bold as this – and it would mean virtual war within the Zulu camp.

In either case we are in for a violent and bumpy ride at least until the end of 2017.

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1 Comment on "Life after SA’s junk status"

  1. Thanks a lot for these insights. And for your book “The looming crisis”, which I think will go down in history as one of the best ever written in the genre – for its timeliness, thoroughness and clarity of analysis. Made Clem Sunter’s work look like “bubblegum future studies”.

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