SA economy: Govt’s intellectual arrogance reaps predictable consequences

Many are worried about the destructive economic path South Africa is following. Including the International Monetary Fund which warns that it is a road to anemic growth, rising unemployment and capital flight. Investec's chief economist Annabel Bishop didn't put it as bluntly in our interview today on CNBC Africa, but she's not exactly cheerful. As she points out, the country's economic policy makers need to set aside their personal prejudices and start to realise they are living in a world that works according to certain (capitalist) rules. Their "left-leaning tendencies" as she describes them, might sit comfortably in the lecture halls of Sussex University. But they are proving to have seriously destructive consequences in the real world. You might say it is the intellectual arrogance of the country's policy-makers that lies squarely behind South Africa's poor economic performance.  So when will they get to smell the coffee? Bishop worries that it takes up to 50 years for new political systems to settle down. A brilliant if disturbing summary by one of South Africa's most gifted economists. – AH  

ALEC HOGG: Annabel Bishop from Investec has been looking at South Africa's latest mining and manufacturing numbers. She doesn't have a smile on her face – Annabel, what gives? Let's start with mining production.

ANNABEL BISHOP: I think there's a lot of negativity, coming from the platinum sector, still. You can't get production up and running immediately after a strike ends. You saw platinum production down by 45 percent, so that was the big move for the year-on-year. Obviously, mining production overall (in August) fell by ten percent. However, I think there's also a negativity in this sector because of the prolonged strike action. I think it's affecting investor sentiment negatively and there is concern that some foreign companies may even look to sell. It's not a happy sector at the moment.

ALEC HOGG: Have we hit rock bottom? I ask this because probably the highlight for me at the Mining Indaba was Jim Rutherford from Capital Group, whom Sandy McGregor from Allan Gray says is the best in the world. He said 25 years ago, South Africa had 40% of global mining production. We now have under 5%. With these latest figures, I guess it must be somewhere like 2 or 3%. Is there a rock bottom, since we still have resources in the ground?

ANNABEL BISHOP: Well, as you say, we had much better statistics. We used to be number one in the world in terms of the gold production exports. Now, we're close to number five or below. The reality is that we do have the minerals in the ground. We obviously need to extract them and I think the big issue is the political situation. We've had 20 years of democracy and it's really, like any country that moves away from a very restrictive regime beforehand. Many people are trying to settle down and find their place in the new society. Sometimes it can take 20 to 50 years before everyone's settled down and worked out where they need to belong. One of the concerns is that globally, wages are probably closer to 50 percent of profitability in South Africa and globally, they are now closer to about two-thirds. There needs to be some readjustment on that score as well. But the worry and what makes me concerned is we haven't hit rock bottom –  the fact that there's so much aggression in the mining sector, so much disconnect between the private sector companies, labour, and even government policies. That's what I think needs to actually change.

TUMI GRATER: Annabel, you spoke about the political situation and the IMF is suggesting that we need to put certain reforms in education, manufacturing, and labour. Are these reforms being done swiftly enough? Alec was saying that he was at the Mining Indaba. There is some dialogue, taking place. Are we maybe just very impatient?

ANNABEL BISHOP: I think the reforms the IMF is looking for is probably opposite to the direction in which we're going. The reforms they're looking at is greater market flexibility and greater ease of doing business. We're really going in a very rigid, Government-controlled labour market, which is being exacerbated by the impact of the ANC's alliance members – COSATU and obviously, the SACP – really going for some quite strong regulations to try to constrain businesses and how they do business. All of that eats into the time of corporates. It reduces their ability to grow, produce more, and obviously, employ more individuals. From that point of view, I would say that the IMF's methods are suggesting something different to what we're doing.

ALEC HOGG: It was a very interesting point that Rutherford made yesterday. He said that the intellect of the South African government has been shaped at Sussex University, which is one of the most left-wing universities in Europe. Thabo Mbeki, Essop Pahad, and now Rob Davies. If you're on one path and everybody else is on a different path, when do you start smelling the coffee?

ANNABEL BISHOP: I think that's pretty much what's happening in South Africa. There's a very negative attitude towards capitalism and a failure to understand that, this is how the global system works. If you want to be a global player and if you want to take advantage of what's happening globally, benefit from a lift in global economic growth – and we are a small, open economy so we have no other choice – then I'm afraid, you have to play by global, capitalism rules. Following a very 'left leaning' approach is concerning if it becomes overwhelming and causes economic growth to slow very dramatically – something that has happened in South Africa. If you look at many of the regulations that are coming through, for example the threat to property rights form the promotion protection of investment bill; that is a very, left-leaning document, which really, does seek to remove property – as is the bent of Communism – from private sector hands. There are a few others as well like the Expropriation Bill. Some worries are coming through.

Businesses aren't stupid. They see these Bills going through. This is the policy uncertainty and this is what's damaging business confidence.

ALEC HOGG: So when does the coffee start waking people up?

ANNABEL BISHOP: I really couldn't tell you that. But I would hope that the chronic slowdown in economic growth as we've had this year would perhaps give some learning – that we can't actually go through another year of strike action like this. Six months for one sector for a strike… Even if it is, largely politically driven…the emergence of a new socialist party trying to get support and driving that activity on the ground… If it affects economic growth negatively…if it damages Government revenues…if it means the budget deficit is going to deteriorate significantly, which results in more credit downgrades. I think there needs to be a wake-up in terms of whether that's a path we want to be on.

TUMI GRATER: But Annabel, there must be some good news from all of this. Yes, we have this data that came out – mining and manufacturing's not looking great – but then again, we had the minutes from the FOMC. We did see some Rand strength, and this has been on the back of weaker Dollar. Let's perhaps look at what the South African Reserve Bank might do because of this.

ANNABEL BISHOP: Yes, you make a point that I wrote on my piece yesterday. It is very positive that we saw the Federal Reserve coming out and trying to calm sentiment a bit. There was an expectation that perhaps the lift-off, or first upward moving interest rates in the United States would be very quick next year (quicker than anticipated). The Fed's really, put that concern to rest, but they are still saying there'll obviously be a lift. What does it mean for the South African Monetary Policy? I think our SARB governor that's coming in, Lesetja Kganyago is going to be very strongly focused on inflation, as he has said in his recent speeches. Luckily for us, CPI inflation looks as though it could tip down in September to about five-point-nine or six percent, so coming back to the top of the target range or actually, falling inside it.

I think it will be quite positive and should obviously assist in not giving us an interest rate hike in November.

I would find it difficult to justify one, given the sheer weakness of the economy. Obviously, we're still going into an upward interest rate cycle. We've already had 75 basis points, possibly maximum at three to three-and-a-half, if you follow the US trajectory and Lesetja has said the Fed trajectory is very important. In South Africa, the concern really is that we need to limit ourselves because of this very poor and weak economic growth. Let's hope that we don't see fiscal tightening at the same time. Higher personal taxes is certainly something that's been looked at quite closely by the Davis Commission. I worry that going out to 2018 we'll get tighter monetary and tighter fiscal policies simultaneously, with an economy that's not going to see much lift-off because we're a commodity exporter.

ALEC HOGG: Maybe that's what's needed to get the Sussex University mindset off the table at last.