🔒 The Editor’s Desk: The economy is tanking, what now?

This week was all about the economy. The shock GDP figures brought home the grim reality of what we’re up against in the fight to rebuild. But Alec Hogg believes that South Africans should not give up hope, no matter how difficult things may seem. The problems that the country faces can be overcome if her leaders and institutions are willing to take some risks and investigate more-radical options. This is a make or break year for South Africa, and in this episode, Alec Hogg and I break down what needs to be done to avert disaster. – Felicity Duncan

Hello and welcome to this week’s episode of The Editor’s Desk here on Biznew radio, with me, Felicity Duncan, and with our fearless leader, Alec Hogg.

Alec this week was a big week about the economy. It was all about the economy. We had those really shocking GDP numbers out on, I believe, it was Tuesday – a contraction of 3.2% in the first quarter. Now that’s the worst performance we’ve seen from the economy in about 10 years, so, since really the depths of the Great Recession of 2009. So, really a very sobering number and to me, when I looked at the detail, we saw really serious – a double digit – declines in agriculture mostly due to the weather and to the dryness of the climate. And that’s not something anyone can do anything about, but we need to think about resilience in that sector. And then most worrying of all, almost double-digit declines – a little less than that – in manufacturing and in mining. And that can really be laid squarely at the feet of Eskom and the uncertainty that we’ve been struggling with for the last year or so. So, to me it was a real strong diagnosis of the problems and now we need to see the solutions.

Yeah, I like the way you’ve put it. Because it’s almost like that final bit of shock therapy to those who make the decisions that are going to change the economic trajectory to say what is happening at the moment is really going in the wrong way. One thing about this is that everybody is mindful – and again earlier in the week I was at the junior mining conference in Johannesburg where Gwede Mantashe was in splendid form. Remember, Gwede Mantashe is Cyril Ramaphosa’s closest ally politically. So, whatever Mantashe says… He was, in fact, a Ramaphosa protege at the National Union of Mineworkers back when they were both Secretary Generals there. And going through their history together, they’ve been very close allies back to the time… or continue to the time when Ramaphosa became deputy president of the country, and Gwede Mantashe at the same time was the secretary general and so on.

So, this is – it’s not Ramaphosa speaking – but it’s as near as dammit as you’re going to get to that. And the whole philosophy that he was expressing there – and this was, of course, the very first member of the cabinet who had a public address subsequent to their appointment in fact and also subsequent to a three day Lekgotla, which ended last week, and the whole focus there was exactly that, the point you’re making: Eskom, first and foremost, if you don’t get Eskom right, if you don’t keep the electricity or the lights on, you don’t have an economy. So, that was the story that Mantashe was giving to, as you can imagine, a very receptive audience of miners. That’s number one priority in government’s mind right now. Keep Eskom going, find a solution to Eskom, but first and foremost you can’t have an economy if there’s no electricity.

So, that’s the first thing. The second thing is policy certainty. They’ve done, for instance, with the Mining Charter they’ve removed one of the big drawbacks to what’s going to happen in mining in the future, which is exploration. You can’t have a mining sector if you haven’t got people going out there looking for new minerals while you scoop away those that you have discovered, mining being a wasting resource. You’ve got to keep replenishing it. And we’ve had no exploration in South Africa for years now because of policy uncertainty and no promotion of exploration companies, because usually what happens with exploration is that you get Junior, small companies who go out and go and look for the prospects, because often these prospects come in unusual ways which is not conducive to the process that big companies go through.

So, the prospectors go out there they’ll find the opportunities and then they sell them on to bigger companies, which have got the scale to actually bring them to account. What’s happened there, very big change which Mantashe spoke about, was that exploration companies no longer have to have any BEE, which was a problem because if you had to go looking for minerals and you’ve got to give away a big chunk of your equity, if you do find – in an already high-risk area – something, it of course reduces the incentives for more. So, that was another thing, but a big thing was the policy certainty.

So, all of those issues – once you get those issues right or once you have a government which cares about them and is in fact promoting that, then you’re moving in the right direction in the first place.

So, I know it’s hard to look back at the contraction of 3% in annualised terms in your economy and say, well things are being put in place to sort this out. And actually, the future can be a lot brighter. A lot of people don’t buy that because they’ve been traumatised, I guess, through the last 10 years and specifically, the last five bad years of Zuma. And they’re kind of not buying that. But actually… something I’ve been thinking about, Felicity, is investment markets generally, right from the Dow Theory – and I wrote about this in a couple of books I’ve written about share market investing – the Dow Theory replays itself continuously, these cycles. You know, the Indian people talk about the cycles of life and in investment markets, it’s cycles. You start off with the market’s bottom and everybody is depressed and everybody is selling, you can’t find a buyer at that stage, and as you go through the various cycles you finally get to the one where everybody’s excited and you can’t find a seller. Everybody’s buying now.

Humanity works on the basis of cycles and, of course, those who benefit – as Warren Buffett keeps telling us – is those you can actually withdraw emotion from their logical decisions. Right now, if you look at South Africa, the emotion is so negative now. We are looking for a house and I’m talking to estate agents – who are the last people to go negative – and the estate agents keep telling me how everything’s wrong in the country. So, you wonder how they’re going to sell any houses with that kind of attitude? But it just reinforces this thing – at the bottom of a bear market, everybody’s selling, and you can’t find a more compelling argument for reassessing, for re-looking, for asking yourself: Are we at least going to go in the right direction? And that’s why I’m so bullish. I know it’s against the trend, but sometimes that has been the most reliable indicator.

Now a big or a key part of what South Africa needs to do to turn around is to deal with these state-owned enterprises that are just relentlessly underperforming – and now right now I’m thinking, obviously, specifically about SAA. This week, you know, we saw the company talking about debt. I mean, the debt burden on there is enormous. They need R4bn to just keep running. They’ve got a R3.5bn loan coming due, and another R9bn-odd due at the end of the year. Just an enormous cash burn – you know, it’s making Tesla look like a real well-run cash machine. What needs to be done there? I know you spoke this week with Russell Loubser about how do we turn this around at this state-owned enterprise, and what lessons are there at SAA that we can bring to bear on places like Eskom?

Well, there’s nothing wrong with the fact that you can run an airline profitably in South Africa. Comair has been doing that for decades. I think they might have had one year where they lost money, but most of the period, they have made money and they’ve run efficiently. So, that’s the first point.

The second point is Russell Loubser, who led the walkout from the board in 2012, seven years ago, when it was apparent that Malusi Gigaba, who has fortunately been being taken off the scene, that he was just a plant for the Zuma way of where can we plunder next? When it became apparent to Russell, after spending a couple of years on that board, that they were going to get nowhere, he resigned. He said this was a waste of time and he’s been proven to be absolutely correct. He put down various criteria in the interview that we had this week on our Rational Radio, and he said that they first of all, first and foremost, it has to be properly capitalised. You must have a properly capitalised business. You’ve actually got a chance, then, to run it like a business and he said to do that you have to get the unions onside.

So, in the reality of South Africa, unless you get the unions to participate and to understand and, in fact, negotiate packages, if you like, for those who must leave to make it an efficient business, then you don’t even have a starting point. When I look at this, and I think of Ramaphosa’s background in the union movement, if anybody is going to be able to negotiate that correctly with the South African Airways unions it would be him.

Secondly, Tito Mboweni, who’s in many ways, is a bit of a weathervane when it comes to floating ideas into the broader public. Mboweni would be a very strict paymaster, and if he were to capitalise or recapitalise the business, or to agree to recapitalise the business through Treasury, there would have to be a very good business plan in place. And I asked Russell, at the end of it – now, remember this is a guy who turned around the Johannesburg Stock Exchange when it was in trouble. He’s got a fabulous record in business. And I said to him, if you were asked to go back to the South African Airways board, would you? And he kind of umm-ed and awed. He wasn’t really keen. And I said, come on Russell, national service. And he said, as national service, yes. But it would have to put those various building blocks in place which could make a successful airline. However, if those building blocks were in place I would never ever return. And I think that’s the approach that Ramaphosa, Mboweni, and others will be able to buy into. It’s this a kind of attitude where people who can help to fix things in South Africa are prepared to do so, but they aren’t going to be prepared to do that if you just apply the old principles. You’ve got to do something radical and a radical change in South African Airways would be what Russell’s articulated. It’s a far better approach in everybody’s mind and certainly politically, more palatable than just cutting off or throwing bad money after good, or finally selling it and saying, well, all those billions the taxpayers have put in were actually just wasted. There is a way out of this. It’s just got to be, as you do with most turnaround situations, have a plan, put the money in that you need to get it turned around, and we have many, many instances in the private sector where this has worked to advantage. Get the right people in there and, hey presto, you can have a successful state-owned enterprise.

Now. you mentioned they’re talking about some radical shifts, and you need to be prepared to take risks and that, of course, brings to mind the discussion that you had this week with… or rather, the discussion we saw coming from Roelof Botha around interest rates in South Africa, which have been high for a long time. And the question is, is it time to cut?

Yeah, that was a fascinating discussion. You know, we often sit with a belief that the Reserve Bank knows all, the Monetary Policy Committee is correct if they are highly conservative etc. But it doesn’t necessarily mean that classical economic theory is still appropriate in a modern era.

We know that in Europe and in the United States they’ve had quantitative easing, and that has perhaps played a major role – well, not perhaps, it’s definitely played a major role – in averting the disaster that was looming in 2007/ 2008. What Roelof Botha is using, though, is the principles that have been tried and tested – the so-called Taylor Rule, where you bring in various variables into a econometric model, and then from that model, it will give you an understanding of where your interest rate levels should be, rather than having a bunch of guys sitting around saying, oh well we think interest rates should be at this level.

So, in other words it’s bringing science to the art of managing an economy and that’s really what he was arguing for. So, his argument is that if you apply Taylor Rule or you apply econometric principles – and indeed, what’s happening around the rest of the world – you can see that South African interest rates are between 200 basis points and 250 basis points too high. That’s a 2.5% cut in the rates, which is required. And he’s arguing for a South African policy, where you put together the right economic brains and economic science, and you get them to put in the variables and let the process come out with the proof of the kind of area where it should be.

He uses the example of when Gill Marcus was at the South African Reserve Bank and how brilliantly, in his opinion, interest rates were managed during that period. But once she departed, a different philosophy seemed to take hold where it is one that is now based more on gut feel than on science. And he’s really calling for a return to science. And what is interesting about this – well, two things, one of which is one of the top economists in South Africa, just to give you an indication of where the guy’s brain sits. His son, also named Roelof Botha, is the top venture capitalist in Silicon Valley. Now that’s a statement you don’t make lightly, but he is the managing partner of Sequoia and Sequoia is the company that gave Google, Facebook, and many of the other big names in the world their push. Clearly, Roelof junior got his brains from somewhere, so don’t write off Roelof senior, the economist. That’s the first point. The second point is that we do have the potential for unleashing, as Roelof Botha senior says, if we had the correct interest rates in South Africa, it would unleash R70bn into the economy, which is currently in interest payments. And that is a massive stimulatory effect and perhaps the kickstart that this economy needs.