DUBLIN — With South Africa officially in recession, the government is talking up the possibility of a multi-billion rand stimulus package to restore growth. But how realistic is this? After all, the rand is weakening, the country is already carrying a heavy debt load, and tax revenues are falling. In this episode, Alec Hogg and I discuss the constraints that the ANC-led government is ignoring and the global context for SA’s capacity to stimulate the economy. While a stimulus package would be great, it just seems very unrealistic. We also look at events in Russia and reflect on how South Africa managed to avoid getting too far into bed with a dangerous foreign power. – Felicity Duncan
Hello, and welcome to this week’s episode of From the Editor’s Desk. This is BizNews Radio and I am Felicity Duncan. With me, as always, is Alec Hogg.
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Alec, we’re going to start off talking about the recession in SA and the discussion that’s been happening about unrolling a giant stimulus package, and this is something that I, myself, wrote about earlier this week. There is so little capacity for SA to go out and spend billions of Rands on a stimulus package. Yes, we are in recession, and yes, a stimulus package would be great given that. But really, where is the money going to come from? What’s your take on this?
I think you articulated it very well in your piece earlier in the week. Essentially, South Africa forgets that it is a very small economy. It forgets that it is subject to the waves of international money flows and it forgets that this makes it more vulnerable than ever when it makes poor economic decisions.
Now, I sometimes think that in South Africa, we carry on in our own direction and because its such a small country we don’t get recognised. A lot of the stuff that goes on doesn’t get recognised. If there was intense focus on the country, a lot of what is being suggested, a lot of what is being articulated, would have a reaction from the international community. But because it’s kind of far away, the tyranny of distance in one respect, the geography of being a little isolated – it’s not always recognised. But when the international community does look more deeply at South Africa, that’s the time you’ve got to be in good shape.
We’ve seen what happened with Argentina. We’ve seen what’s happened with Turkey, and just to recap, Argentina is sitting on prime interest rates of 60% at the moment. So, if you happen to have an overdraft in Argentina, not only are you having to – your imports costing you virtually double what they were costing you just a few months ago – but your interest rates are now at 60%. So, this is an understanding of how difficult it is for businesses to even just survive. Then of course, when businesses don’t survive people get retrenched. When people get retrenched you get social instability, and it’s just a negative impact.
In South Africa, we are one of the fragile five. Argentina isn’t but Turkey is there, Indonesia, India, SA, and the last one has just escaped me for a minute…. But, there are five countries that have been identified. Now, we’ve seen what happened with the Indian rupee – that has fallen significantly. The Turkish lira has completely collapsed because they’ve got a Jacob Zuma look-a-like in power there. We have the South African rand, which has held out very well on the promise of Ramaphoria, but recently has started to slide, and this is the issue that we need to be completely aware of. We don’t make the rules in the country. Turkey, as a small economy in a global environment – you don’t make the rules. Turkey tried to make the rules and they have come very badly off-track.
South Africa needs to become or to understand that it has to live within its means, otherwise people will pay, and people will pay through things like a continuation of a decline in the share price of the country, which is the rand. They will pay through higher unemployment and they will pay through social instability. So, you’ve got all of these things that are now concertina-ing on, and unless the economic policies are sensible they will have an impact. To hear a Government of South Africa talk about stimulus packages at a time that the debt-to-GDP ratio has been on a roar… on a rip for virtually a decade, it’s being going up-and-up. We’re over 50% at the moment, which is a critical level for a developing country. Developed countries can push it a little bit further, and we’ve seen them do so, but in a developing country you don’t have that luxury because you need capital to come in from abroad, to keep your country going, let alone to keep it expanding.
So, when you look at the economic picture all around, and to start talking about things like stimulus packages when you’ve got a public sector that is stubbornly high and continues to grow for social reasons. Then you come out with a petrol price subsidisation, which is really blowing against the wind because as the currency is falling, the petrol price will rise – what you’re paying for oil will rise, and so on and so forth. This is a time for cool heads. This is a time for rationality. This is a time to be engaging with the international community and differentiating South Africa from other parts of the world, where crazy economic policies are being implemented. It’s not a time to start swimming against the tide.
Absolutely, and I think the fifth one there is Brazil. I was also trying to remember for a minute.
Thank you.
Looking at the global picture – and you have to look at the global picture because you exactly, correctly point out South Africa is a small, open economy. It’s not a big player on the world stage. We’re really subject to the winds of what’s happening out there, and the bottom-line of what’s happening, in a lot of ways, is that the United States is growing very strongly. Their economy is shooting ahead. Their unemployment is very low. Corporate profits are at multi-decade highs and so, people are investing in US assets. At the same time, you have the Feds slowly raising rates, making Treasuries relatively more attractive. And again, investors are saying, well, okay, in these circumstances, where am I going to put my money – global investors. And they’re putting their money into US assets, which makes total sense from their perspective. What that’s doing is pushing the dollar up and up. So, we’re seeing the dollar strengthen.
Now, you’ve got a country like South Africa saying, we want to do a stimulus package. We don’t have any money in the bank so, the only way we can do this is if we borrow money, and if we want to borrow money – we’re going to have to borrow in dollars because no one is going to lend to us in Rand, the way that the Rand is performing, and we’re going to have to pay very high interest rates because again, of this backdrop. We’ve got to be sexier than a US asset, which means high interest rates. And so, what we’ll do, if this stimulus package is pursued, is we’ll borrow in dollars at a very high interest rate – which just means that we’re saying, we believe later on, we’re going to be able to pay this off. And the last 9 or 10 years have shown us that that is not necessarily true. We do not necessarily do better over time. Of course, we hope that we do, but you can’t on this unsustainable debt load, at higher rates of interest in a currency that you are going to struggle to pay back in, on the hope that you’re somehow going to turn the economy around. I think first you’ve got to show that you’re capable of generating real growth, and then you’re going to have this capacity for stimulating.
That’s exactly it. Warren Buffett talks about the tide receding and then you see who hasn’t been wearing their bathing-suits. And the tide that we talk about in a global sense is the stimulus packages internationally. In other words, quantitative easing.
So, in real, short layman’s terms, the American Fed and the European Central Bank and the Japanese Central Bank, and the Chinese have created $21 trillion worth of extra liquidity. So, that liquidity – initially, to prop up the world economy, to ensure that it didn’t collapse after the 2008 meltdown – that liquidity found its way into emerging markets, where the yields were higher, it then reduced the yields in emerging markets, and that was the time that countries, in particular the Fragile Five, needed to get their act together. But South Africa had Zuma. So, in fact, instead of using the opportunity of getting its act together, it went the other way.
Now, that money is being sucked back in. The Americans are not only producing or not switching-on the liquidity taps, but they’re actually pulling the liquidity out. And we know who’s sitting there without a bathing-suit. To now start thinking that the world is as it was during the reflation period, is just economic insanity. Perhaps Cyril Ramaphosa believes that by going to China – he’ll get closer to China and they’re going to bail SA out. Well, that’s not going to happen. They’ve already said that that’s not going to happen. China is pretty unhappy about the repayment records of Africa countries and those in South America, so, other emerging markets. Sure, China has got a trade surplus, but that is under pressure with the US. It isn’t sitting with the reserves it used to have. It’s had to use them internally. It certainly isn’t going to be spending that to bail out a country like South Africa.
I heard someone describe the recommendation to Erdogan in Turkey this week, saying that he hopes that Erdogan and the Central Bank of Turkey get a really, strong dose of Turkish coffee. Well, in the South African context, maybe it’s a really, strong dose of a red cappuccino with rooibos tea. But, something is going to have to happen here because wake-up guys, smell the roses. You can’t… This is a tide that has been going your way for 10 years, it’s now reversing. You cannot play ideological, silly games that has been the hallmark of SA politics and rhetoric over the past decade. It’s time to actually smell the coffee, get real, and implement the kind of economic policies that will grow the economy.
That was the other thing that happened to South Africa this week is now we’re back in recession. That immediately sends a signal to all international investors, who have got 52 other African countries to look at, let alone the rest of the world. So, if they’re going into Africa, why would they want to go into an economy that’s actually contracting, where most or the rest of Africa is growing between 4% and 6%? So, you’ve got all of these factors, which has to get the penny to drop for politicians at some point, the sooner the better.
Let’s keep our fingers crossed. I find that politicians are… It’s like the market can stay irrational longer than you can say solvent. I think politicians can stay irrational longer than we can stay sane.
I wanted to pick up a little bit also today, on your interview with Bill Browder. Now, that was a very interesting one and very SA focussed.
It was fascinating. Bill Browder was a hedge fund manager, I actually saw him in Nice at a hedge-fund conference back in 2006, and, as I mentioned in the podcast, he was on the stage. He had all these very cynical ‘hedgies’ eating out of his hand. He had done unbelievably well in Russia and then things started going wrong, not for him or not for his investment abilities, but because of bumping up against vested interests in that country. He wrote a book called Red Notice. It really is a must-read book for anybody who’s interested in how Putin operates and what Browder calls, ‘The Criminal State of Russia.’
And it was so interesting – I saw Bill this week, on Wednesday, I think it was and then put the podcast, edited together and got it out on Thursday night. On Wednesday, later in the day Theresa May had, by far her best speech of her Prime Ministership so far, where she unpacked exactly how the Russians, how Russian agents had come into the UK and applied the nerve gas to one of the enemies of the state, an activist against Putin. She showed and said, we have the video footage from when they arrived at Heathrow. We have the video footage of where they went in the Underground, etc. etc.. So, you have these two Russian agents. Russia says, ‘no, we had nothing to do with it.’ Because the UK, in years gone by, had the threat from the IRA, with terrorism and bomb blasts, and things, the whole of the developed area has got CCTV cameras. They had gone in and they got the CCTV footage to show how the Russians have just been lying. She said, this was like a declaration of war, what the Russians did on British sovereign territory.
So, to have Theresa May, the Prime Minister, say this in one voice… To have Bill Browder explain exactly what happened with his lawyer, Sergei Magnitsky, who was – simply because he was exposing theft from the tax authorities in Russia – thrown into jail, beaten, and eventually beaten to death after 11 months of torture… That got Browder, who was a hedge-fund manager, if we put him into context, to completely change his life. He then picked up the Magnitsky cause and got – through the help of the late John McCain and others – got legislation adopted in the US and is now expanding into other parts of the world, including the UK, which is cutting off the supply lines to these Russian oligarchs, or the people in Russia who are plundering that country.
So, it’s a little bit like Zuma and the Zuptoids, and something that South Africa is very aware of, but going to the next level. Fortunately, in South Africa, the rule of law has prevailed. We’ve got a constitutional democracy, and Zuma was ejected from office by his political party. In Russia they don’t have those options. In Russia they’ve got a Zuma who’s continuing along his, if you can imagine, along the same path. And the South African context in this interview was very interesting. We spoke a lot about South Africa. Bill Browder calls it the best country in the world. He’s got a house in the country, he didn’t want to tell me exactly where, for obvious reasons, but he hasn’t been able to visit his house for four years because he was worried that if he went to South Africa during the Zuma administration, he would have been arrested and whisked off to Russia and that, he says, is the end of him. They’ll kill him.
He describes himself, in the book, and also in the podcast as Putin’s number-one enemy. And I must admit, I found it quite interesting that he was prepared to see me, given the threat that he has to his life on a continuous basis from the Russians. If they’re prepared to go and try and bump off a little-known activist, you can imagine what they’d like to do to Browder, who is all over the media and has been extremely out there and very outspoken on what’s going in Russia. So, he’s probably the bravest man I’ve met. It was a fascinating hour or so that I spent with him, cut it down it wasn’t that long, I think it was just over 30 minutes – the podcast. But it’s one of those podcasts that I think every South African should listen to, because we came within a whisker of being landed with a R1 trillion nuclear deal that the country did not need – it’s got an excess of power – and certainly could not afford it. You talk about the unaffordability of a stimulus package, well, imagine if we had Russian nuclear powerplants being built all over the country for a trillion rand. That was the deal that Putin struck with Jacob Zuma. So, another reason to be happy that the ANC, in December, made the right decision. But there’s still a long way to go, to get this economy back on track.
Absolutely, and really, with Russian activities, their clear policy of intervention in other states and their clear policy of using money to pollute, I would say, the politics of other states – under those circumstances, there’s really nothing that a democracy can do, except to invest in its institutions and invest in, as you say, the rule of law, and try to keep everything in the light, and keep everything transparent.
That’s really the only defence we have and, as you say, it’s really comforting, I think, to see that South African institutions – even though they’re relatively young, compared to a lot of other democracies – South African institutions were able to act like the immune system and stave off this infection with Russian money. Even though it was a very-near thing, we did do it and that’s what it’s going to take, I think. Because Russia is not rolling tanks into any other countries. They’re really just rolling in money and subterfuge and manipulation.
In many ways, that’s a lot harder to fight. You’ve got to just hope that your press and you’ve got to hope that your oversight committees, your judicial system, and your politics are resilient enough to hold that off. Because the attacks keep coming and it’s getting a bit scary out there, I would say.
It is, in a way, but you make a good point – Russia isn’t rolling out tanks because it’s not a super power anymore. It has the same spending on defence, for instance, that the UK has. The UK wouldn’t try and attack anybody, unless it’s Argentina, I guess, but there’s a realistic or a realpolitik issue that’s happening in the world today. But it isn’t like you are having a super power taking on another super power, and then getting little countries like South Africa involved in the fracas. Russia is really, small and vulnerable, relative to other parts of the world and it has an elite that – according to Bill Browner anyway – is continuing to plunder the country.
We, as South Africans, can see that there’s some very good news in a lot of this. The country has been through the fire, but the institutions have held and the centre has held, and as you find the rest of the world get’s more and more focussed on applying sensible economic strategies, or else punishing countries that don’t – that too, is going to play in South Africa’s favour. So, it’s almost hard to see the wood for the trees, when you’re in the middle of it. But if you can take that helicopter view and look at the country, and realise that many of the global trends are actually playing in its favour. Of course, South Africa has to now really get its act together. It cannot continue to work along the same lines that it did during the Zuma-administration, and not just ignoring sensible economic strategy, but actually, plundering the country as well.
So, it is a long way back. But the road to prosperity starts by getting the right strategies, the right policies, the right frame of mind from those who are leading the country. And we’ve seen terrible deviations from that path. We’ve stopped building the nation and become much more of this internecine kind of fighting and racism from all sides of the spectrum. Going back into the history, bringing up resentments, expropriation of land without compensation, banks saying that if that happens, if you get your property expropriated you’ve still got to pay your bond and this just sends fear into the system. It’s time now to recognise that and to actually move on, and to get back to what Mandela understood the country needed, and that is the concept of nation-building and looking forward, rather than looking back.
