BNC#8 Donald Mackay: South Africa’s economy is playing a risky game — and the stakes are huge

Speaking at BNC#8, trade expert Donald Mackay delivered a hard-hitting analysis of South Africa’s economic landscape, exposing flawed industrial policies, rising tariffs, and the hidden costs of localisation. He reveals how the country’s dependence on trade and subsidies creates an unstable environment for manufacturers and consumers alike. From energy crises to steel and automotive distortions, Mackay uncovers the economic contradictions and global pressures shaping South Africa’s future, offering an eye-opening, no-nonsense perspective on the challenges and choices facing the nation today..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..Watch here.Listen here.Edited transcript of the key note speech.Alec Hogg (00:08:18 - 00:10:06)Well, we have got.Alec Hogg (00:10:10 - 00:34:47)An exciting final program. Final part of the program because we will be starting off with Donald Mackay and after Donald we will be hearing from Celia Brink. Now, if you've been following the conversations, you will know that we've had.Alec Hogg (00:35:01 - 01:04:11)Statement right of reply, right of reply to the statement. Right of reply to right of reply. Are we going to get something like that a little bit later? And Celia is part of the Neil de Beer Liberty Indaba. So you will be talking about the attack on our personal liberties, but you will also having it right of reply to.Alec Hogg (01:04:15 - 01:12:11)The state, the right to reply. You see what you would get started in this.Alec Hogg (01:12:15 - 01:40:15)The next speaker. If you read the booklet and you all read the booklets, I'm not I'm not going to, tell you anything more that you can read, but you'll know from the booklet that our next speaker is highly accomplished, widely respected, and he really is. I will put him top of the pile when it comes to understanding and helping us to understand trade and South Africa's trade.Alec Hogg (01:40:19 - 02:06:39)And South Africa is an open economy. What does that mean? That means most of our economic activity is imports or exports. In fact over 50%. It's quite a crazy stat if you think of it, more than half of South Africa's GDP over 50% is either import or export. That means we have very open economy, and that's why we get so badly impacted by what happens on the global scene.Alec Hogg (02:06:39 - 02:41:43)And that's why we need to understand what is happening internationally. And that's why business seeks to provide that kind of information. We are the only partner of the Financial Times in Africa. We are the only partner of the Economist in Africa. So you either go and pay big prices in pounds or you go to business premium. And I say to my colleagues, we've got to get lots of business premium subscriptions because these, these guys, these London guys, they know how to charge.Alec Hogg (02:41:47 - 03:03:16)But I know that most of the people in this hall are already BizNews premium subscribers. And you get it on the cheap by coming through us. Okay. But getting back to what you don't know about Donald Mackay, when I asked him for his anthem for his walk on music.Alec Hogg (03:03:20 - 03:08:31)He requested something called Rage Against the Machine.Alec Hogg (03:08:35 - 03:10:37)It's an acquired taste.Alec Hogg (03:10:41 - 03:18:39)But that means that officially, we are skipping all the pleasantries and going straight for the jugular.Donald Mackay (03:30:36 - 03:44:25)Good afternoon. It's, It's rough to only have myself and Celia between you guys and your first afternoon drink. So? So. Can't do the best I can.Donald Mackay (03:44:29 - 04:05:11)I, I titled this talk, with a to South Africa with your heart in the East, but your wallet in the West. And, this kind of is, is quite an apt description of the the way government views our relationships with the the rest of the world.Donald Mackay (04:05:15 - 04:31:37)The East is kind of where all the romances, all the love is. You know, it's as if Iran was that girlfriend from high school that just can't quite let go of. That's really not good for you. That is that is how it feels to me. On the other hand, when we want things like FDI, when we're looking for markets to export complex manufactured goods, that's all to the West.Donald Mackay (04:31:41 - 04:59:47)And so, this creates a very interesting conundrum in how we formulate our policy. And I'm going to walk you through some of that. I would argue that much of our economic policy at present is really a series of magical words. And the magical words just like in Harry Potter, or anywhere else. If you say the word, then something very good will happen.Donald Mackay (05:00:01 - 05:24:14)Much many of these words are completely unmoored from any actual economic action, any policy space that's going to alter something. And so we're going to go through what some of those words are. So the very first issue is that industrial policy. That's the that's the first those two words industrial policy. That is the main one outside of National Treasury.Donald Mackay (05:24:18 - 05:48:28)I have to say I have the issues with industrial policy. The sense is that this is our lodestar. This is really what South Africa's economic policy direction is. And the thinking is, to Alec points, we've been a relatively open market, by the way. We're trying to change that very rapidly. So South Africa is certainly not as open as it was even a year ago.Donald Mackay (05:48:28 - 06:13:27)And that, direction of travel, is quite alarming given how dependent we are on on trade. But industrial policy really means that the government says not only that, there's sometimes market failures. We got to do something because nobody wants to build that road. And so we can we build the road. But it's something deeper than that which is industrial policy is viewed as as a source of innovation.Donald Mackay (06:13:31 - 06:38:45)The sense is that we'll come up with the ideas we be in government, which, to be clear, I've never been part of. So maybe I need to stop referencing the we. But the sense is that we can we can create value, in a way that the private sector can't. And so the, the shift in economic policy direction at the moment is distinctly moving to the left.Donald Mackay (06:38:45 - 07:05:15)And I think some of this, in fact, is in response to the GNU. So the GNU has created pressure on parties like the ANC to distinguish themselves from the other partners, particularly the DA. Of course. And so in doing that, the, the move has been to pull further left. And I will give you guys many, many examples.Donald Mackay (07:05:18 - 07:36:29)So in South Africa, what does it mean when we talk about industrial policy. The first thing is transformation. I mentioned it I disagree with Piet on one foundational issue, which is I think transformation is absolutely essential to South Africa. You can't continue with an economy that has, such a racial characteristic to poverty and, you know, all of the other negative experiences in life, I just don't see how BEE gets us to a transformed economy.Donald Mackay (07:36:33 - 08:03:26)And so I think we have to make a distinction between the objective, which is a transformed society, and the process, which is 30 years of BEE that has not worked. We still have many, many, many, very poor black people. And so clearly, if BEE had worked, you know, kind of 30 years in, you can't be going looking to take the training wheels off any moment and all things would be good.Donald Mackay (08:03:30 - 08:22:49)So this is an this is an undercurrent in all of the policies. Localisation is the other big one. And this is, this is a deceptive one because it just feels good. And you say, well, you know what? Many people have mentioned Shin and T move, for example, and they'd say, why don't we just make more of our clothing here?Donald Mackay (08:23:03 - 08:48:32)And then we don't have to export all of our jobs to these other countries. The reality of the situation is that Shein and Temu export to South Africa at about the price that clothing retailers are purchasing their clothing, and so Shein and Temu have effectively cut out the retailer, which is an interesting innovation. They're not cheaper than what the retailers buy.Donald Mackay (08:48:36 - 09:19:43)I would argue that's an innovative business model, rather than simply the predatory kind of way that that that is often framed. The the problem is we're not competitive at manufacturing almost anything. And every time yet another municipality falls over, Eskom breaks. There's a water problem the rail, the roads, the crime, whatever it might be. It is like a tax on every single productive business in the country.Donald Mackay (09:19:43 - 09:44:23)And at some point, when you're paying such a high tax rate and getting so little in return for it, it becomes increasingly difficult. To develop an industrialised economy. So on the one hand, we keep saying we got to make more things locally, but we're not creating a competitive environment. And so our approach to localisation is we remove import competition out of the market.Donald Mackay (09:44:27 - 10:22:35)We we raise tariffs. Moving up at the fastest pace since 1994 at an absolutely breakneck speed. If you take, steel for example, many steel products, primary steel products now have an effective tariff of over 100%. You've got a downstream sector which now cannot buy affordable steel. And so we're kind of cannibalising the downstream industry to save this one upstream company that is hungry for increased amounts of protection, we see subsidies.Donald Mackay (10:22:46 - 10:55:33)Dawie mentioned earlier, the automotive subsidies, 43 billion rand last year spent on automotive subsidies. Again, I'd love us to make cars here. We employ 120,000 people in the manufacturing of cars. That's across everything from component producers to to the OEMs. I call the more expensive in South Africa because of the subsidy program. And so we must be very careful what we wish for these support mechanisms don't come free of charge.Donald Mackay (10:55:37 - 11:20:18)To Dawie's other point, nothing matters more in an economy than the consumer. 100% agree with him. The consumer in South Africa is endlessly sending money upwards to producers, and so I jokingly refer to this as trickle up economics, where you take the money from the poor and you give it to the wealthy, and that is literally what happens.Donald Mackay (11:20:29 - 11:46:46)So localisation. I'm not averse to us making things, but we need to make things that we're good at making, and we need to create an environment where manufacturers can thrive. We should not refuse to address the underlying problems, and they attempt to compensate with it or for it by introducing these other mechanisms. I've written on the slides, which I'll share with Alec.Donald Mackay (11:47:05 - 12:15:15)In the trade off between manufacturers and consumers, the consumer will always lose in our current policy space. Localisation matters more than energy at the moment. And I'm gonna give you a very real example of something I find absolutely astonishing. There were no tariffs on solar panels. And then 2 or 3 years ago, government said, oh my God, we're going to we're going to build solar panels in South Africa.Donald Mackay (12:15:21 - 12:34:46)So we introduced a 10% tariff on solar panels. And then they said, well, we only have one producer. Yeah, maybe we need to offer some kind of rebate of duty. And so under certain circumstances you can get away with not paying the duty. And now, just a few months ago, they said, well, we're not really that keen on that exception.Donald Mackay (12:34:46 - 13:04:27)We thinking of taking it away. And so last year 109 million rand was paid in import duties on solar panels. Another 240 million was rebated. But here's what we're actually protecting. We're protecting the assembly of solar panels. No one in South Africa makes a solar cell. I've no reason to think anyone ever will. So what we're doing is we're adding a tremendous cost in the country, which is which is energy scarce.Donald Mackay (13:04:31 - 13:30:30)And we're saying we're going to protect people. You just kind of plug these things together. And it's really not much more sophisticated than that. And this just seems like a perverse trade off. But versions of this are happening all the time. The other big one you'll hear is beneficiation. We have a strange, almost the kind of a religious belief that if you have the rocks here, then factories will follow.Donald Mackay (13:30:34 - 13:53:32)And when you kind of go back to your your very first economics lesson and you learned all about things like the factors of production, you very quickly realise that that having the rock in the ground is just nothing other than luck. You happen to have platinum here. No one has any control over that, but people have a huge amount of control of where they deploy their special skills.Donald Mackay (13:53:32 - 14:20:08)And so it's not clear to me why anyone would want to manufacture here. We talk about Ferrochrome. We used to produce lots of ferrochrome in South Africa. Eskom broke that sector by creating such high prices. It's not obvious we get that sector back even with cheaper electricity, because the problem is we control the chrome of the world. Mostly most of it we control.Donald Mackay (14:20:12 - 14:41:15)The problem is China is the world's biggest stainless steel producer, and they cannot go without ferrochrome to produce stainless steel. They have a ferrochrome industry because ours failed and ours did not fail for any reason other than energy. The idea that they going to relinquish that seems farfetched, but we'll see, I hope I hope it works, but I'm not.Donald Mackay (14:41:15 - 15:09:01)I'm not optimistic. And we're not in this very weird situation where we're often trying to subsidize our way to prosperity. We subsidise the energy for ferrochrome. Maybe it works, maybe it doesn't. But everyone else is knocking on the door. What is special about these companies? Why can't I get cheap electricity to and the the the subsidy programs can't find their way through Treasury any longer.Donald Mackay (15:09:01 - 15:32:38)Treasury does not want to open that up. And so what has happened is we've introduced an environment where we have stealth taxes and subsidies. And let me explain how these work. I think they're absolutely pernicious. We've identified at least 40 transformation funds. So you guys talk about the big one. There are tons of them. They're all over.Donald Mackay (15:32:38 - 15:58:34)There's a soybean transformation fund. There's an automotive transformation fund. And these funds are not funded importantly by national Treasury. To a large degree, these funds are invisible. There's no oversight. We have a localisation support fund. Sounds wonderful on the surface over a billion rand has been paid into that fund. How does the money go into the fund? Why are so many people contributing?Donald Mackay (15:58:44 - 16:34:30)Because if you want your merger approved, you now have to throw some money in. They do not publish financial statements. We have no idea what happens inside. They they're the new the big kind of transformation fund. We've there's money flowing into that Vodacom wanted. They merger approved 400 million rand thrown into the transformation fund. There was a there was a cartel of companies in the cooking oil industry that were found to be behaving poorly.Donald Mackay (16:34:34 - 16:59:04)They did a fine of 100 million. 1 million of that is paid. Is the fine 90 or in fact 101 million, 1 million is paid as a fine that goes into the National Revenue Fund. 100 million goes into a set of transformation fund initiatives. And like I said, remember you. You have no visibility on what happens inside of these funds.Donald Mackay (16:59:08 - 17:29:15)We see the scrap metal sector, which has an subsidy program, by by forcing down the price of scrap into the local mini malls. We have subsidised finance into that sector. Alec, if you want to understand why ArcelorMittal Newcastle is struggling in South Africa, is currently the world's cheapest producer of lung steel. And why is that? Because you got cheap raw material.Donald Mackay (17:29:21 - 17:58:38)My calculation is around a billion rand a year in raw materials subsidies. Zar calculates it slightly more modestly at 6 billion. The IDC has an exposure to the minimal sector of 14 billion rand, ten times the market cap of metal. And so what has happened is we're awash with steel and it's forcing down the price. And of course, they can't make the trade off now.Donald Mackay (17:58:38 - 18:21:34)But this is this is how the money kind of flows. We've seen an increase in the use of permits. So if in the past if I said, well, I have a particular widget I need to import, no one makes it locally. I could go to a government department called the International Trade Administration Commission and I could say could I get the PT removed?Donald Mackay (18:21:34 - 18:40:37)And pretty much they would take it away. They confirmed there was no one here, but they get rid of it. That is no longer the case. What now happens is the duty remains and they'll give you a rebate which is connected to a permit, and the permit has B requirements, or the permit has employment equity requirements or whatever it is that they choose to put in.Donald Mackay (18:40:41 - 19:06:10)You have to sign a reciprocal agreement, a document I think is just absolutely unacceptable. But the reciprocal agreement says there's a string of commitments you need to make. If you breach those commitments, will take away the concession that you thought you had. National security. Just a couple of days ago, a revised version of the International Trade Administration Act was published for comment.Donald Mackay (19:06:22 - 19:31:48)And there's a whole new section in there on national security. And this is kind of bad lessons we're learning from, from Donald Trump. But national security will soon become a feature. And it's an undefined concept, like no one really knows what it is. We already have it in our competition law, and these things allow just a tremendous amount of leeway without any form of accountability.Donald Mackay (19:32:02 - 19:55:09)A trade in foreign policy, you are utterly disconnected. And this this is an enormous problem. We we have a foreign policy which which leans heavily towards the likes of Russia, Iran, China. But the trade, the value in our trade all sits with the West, and these just remain unreconciled. So.Donald Mackay (19:55:13 - 20:25:06)The US, of course, has been an enormous disrupter. When Rob spoke earlier, I actually thought he was the new ambassador for the US. But but we we now we now have two fiscally socialist parties in the US. There is no party that in any way supports the free market any longer. So we, Comrade Trump, has given us government taking shares in all sorts of companies.Donald Mackay (20:25:10 - 20:46:42)The US debt is is rising at a light, an alarm that just I find at a rate that I find absolutely alarming. We were not sitting with a responsible adult in the room anymore. And I think that has consequences for countries like South Africa. And I'm going to wrap up in a second. If you just give me two more, two more minutes here.Donald Mackay (20:46:46 - 21:13:27)US debt is increased by 2.3 to 2.4 trillion rand since Trump came into office for the second time around. These are just mind boggling numbers. And we of course have tariffs, tariffs, tariffs. Dawie mentioned it. I'm incredibly offended by tariffs as a rule. The idea that this just gets normaliSed, I think is, it's just absolutely terrible.Donald Mackay (21:13:31 - 21:40:46)And so in all of this environment, we've created a really unstable global trading system. We the US has kicked off a war with Iran. I have no sympathy for the mullahs in Iran, but I don't really understand what the endgame is with with the war. So how does this play out? And even if the US says, listen, we're one and done, two weeks from now, we leave.Donald Mackay (21:41:05 - 22:09:09)That does not remove the problem from that part of the world. And so I don't entirely understand this. And in this very unpredictable environment, I find South Africa increasingly moving to some of the more reprehensible, possible trading and investment partners, Iran being an obvious one. But even China. So we've signed an agreement with China, which is honestly the strangest agreement I've ever seen.Donald Mackay (22:09:13 - 22:33:11)Neither China nor South Africa appear to get any advantage out of this agreement, making me wonder what the real agreement was about. And so we're we talk about a goal. AGOA was was never a thing. The total rand value of AGOA in tariffs saved in a year average out at about 2 billion rand a year. That is nothing.Donald Mackay (22:33:15 - 22:59:13)Almost all of those benefits concentrate in 6 or 7 companies. So does it affect Mercedes Benz? Yes it does. But does it affect South Africa? I would argue we're indifferent to AGOA. It essentially doesn't mean anything, but this tension with the US is driving us into the arms of of countries that I think are really not good for South Africa.Donald Mackay (22:59:17 - 23:23:00)And I just close off by saying we can we're allowed to be perfectly disapproving of Iran and Trump. We don't have to kind of pick one or the other. And yet we seem to feel in this moment that because many of us are offended by what President Trump has done, that we need to we need to run directly into the loving arms of the mullahs in Iran.Donald Mackay (23:23:05 - 23:23:41)Thank you.

BNC#8 Donald Mackay: South Africa’s economy is playing a risky game — and the stakes are huge

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