DUBLIN — In this episode, Alec Hogg and I discuss the proposed SA stimulus package, asking whether it’s going to spell Ramarecovery or Ramafailure. Cyril Ramaphosa has outlined a plan to boost investment in the hopes of reigniting growth and launching South Africa out of recession. Many questions, however, remain. Much depends on the specific projects and interventions that the government spends the money on. While the plan could help boost long-term growth potential, there are definite risks. We also delve into two mounting global crises: the widening US/China trade war and the rising possibility of a hard Brexit. Both of these threaten to worsen SA’s economic situation at a moment when the country can ill-afford additional challenges. – Felicity DuncanÂ
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 on the line is Alec Hogg.
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Alec, the big news this week is something that we’ve been discussing earlier – the announcement of a R50bn stimulus package for SA. So, Ramaphosa coming out and giving us the outline of the package, what he wants to do, what his priorities are. We talked previously about the limited capacity that SA has to stimulate the economy. We know now what the plan is. What’s your take on it?
Well, first of all, I just love his name, and now we call him Rama-recovery. We call it Ramaphoria. So, Cyril has got a great name thanks to his father. I must tell you, Felicity, I’m reading the most amazing book at the moment by Anthony Butler. It’s the Cyril Ramaphosa biography. It’s almost like a must-read for every single journalist, who even starts thinking that they understand this highly complex, deeply spiritual, very focussed and extraordinary human being. Anyway, put that to one side.
Rama-recovery – what does it mean? The way that, in broad terms that you’ve got to look at this is that Cyril has been to China. He has seen how China works and China works on the basis of ‘First we build a road.’ So, everywhere China goes it’s about powering the infrastructure. Get that right first and then people can use the infrastructure to stimulate economic growth.
Zuma knew all this but Zuma and his cronies were too interested in taking money from all of the projects, if we just look at Medupi and Kusile, for instance. Big infrastructure projects, but they cost a multiple of what they should have because of all the plundering and all the snouts in trough. As a consequence, you don’t want to build infrastructure on which you’re never going to get a return on investment. That kills the whole China model. But the China model here is, build the infrastructure, and things are going to happen and Cyril completely buys that.
So, we’re talking about big numbers here. What I like about the package is that he’s taken money that was already budgeted for, and remember, this is only 10% of the state spending, which has now been reallocated. R25bn is what they’re saving anyway, from the wastage. That is what Pravin Gordhan said before he was fired as Finance Minister. That they’ve managed to find 5%. The total budget is over R1tr, but the money that the state centrally spend is about R500bn. So, of that R500bn, they can pull out about 5%, which is R25bn.
 Now, clearly what’s going to happen is this year when they save that R25bn, they’ll use that as the stimulus package. Then there’s a reallocation of another R25bn from elsewhere in the budget another 5% – not difficult. I think that’s the first point. Where he talks about R50bn – can we believe him? Is it credible? And when you unpack it that way, of course its credible. So, that’s the first thing.
The second thing, lots of money on infrastructure. I’m quite happy we’ve got Wilson Bailey in our SA Champions Portfolio. That is going to be a huge beneficiary of it. So are the other construction companies who’ve been smashed over the past while, Aveng, Murray & Roberts, Group 5 – with no infrastructure spending and managerial errors, these companies are on their knees. They’re going to be assisted before they finally close down and then South Africa loses that capacity – there’s going to be some substance coming through there. You can also be sure that when the Chinese give their loans across that there’s going to be a Chinese involvement in infrastructure as well. So, Zuma said, let’s turn South Africa into an industrial site. Ramaphosa is actually doing it. Zuma wasn’t able to do it because of all the corruption that went on there.
Ramaphosa, if you recall, in Davos, he said that there’re three things he’s targeting on. One is corruption. Two is certainty of legislation, and three, is fixing the SOEs (State-Owned Enterprises). My goodness, has he not focussed on those three things? And this is one that I think is a big part of the plan. The next big one, of course, is the investment conference that comes a little later in the year, and that will also then start turning around the confidence in the country. I’m feeling quite upbeat.
I like to see infrastructure spending, right. Of all forms of government spending, that is the one that has the most potential to boost long-term productivity gains. Right, education spending and infrastructure spending – because you’re really investing directly in capital. Capital, in the sense of roads and infrastructure or in the sense of human capital.
To be facilitating?
Facilitate, yes, exactly. You’re not trying to create growth just through spending on ephemera and just through putting money into the economy. You’re saying, let’s invest in something that could make everybody in the economy more productive in the future, right? That’s really where you’re going to get growth from.
But the difficulty I think, always with infrastructure spending and country after country has found this, China included, is picking the right project. There’s always you hear of these roads to nowhere or the bridge to nowhere. There’s always a risk that the project chosen is not going to be one that genuinely impacts infrastructure. So, as this project rolls out, I think that what people are going to need to pay attention to is, which projects are being chosen and what are the real impacts of those project?
Right, so for example, projects that try to fix up the spatial problems that we have in our cities. All South Africa cities have a very big problem where most of the people live very far away from the places where there are jobs and they don’t have good transport networks or good transport links to get to those jobs, right?
So, the cost of getting to a job takes up the whole salary you can earn from a job. Dealing with that, is an infrastructure investment that could be completely transformative for the country. So, to me, I think I like to see this infrastructure spending but I want to see specific projects at how those specific projects are going to help South Africa overcome its specific economic challenges, which include things like spatial inequalities, very poor transport linkages between traditionally, poor black areas and areas where there’re jobs – things like that. That’s obviously still to come. We’re going to see that hopefully, filled out over the next couple of months.
Yes, I think you’ve got to step back a little and start looking into these things in perspective. Africa has had huge infrastructural spending over the years. But the people who’ve directed the infrastructural spending have had a different approach towards it, a different world view to the South African President Ramaphosa. The guys who were in control in many parts of the continent when the infrastructure was spent were thinking, how can they give it to cronies? How can they put it in their back packet? That’s not Ramaphosa’s incentive and it’s certainly not his directive here. Remember, he’s the chairman of the Presidential Infrastructure Coordinating Fund. So, everything that gets signed-off, he will at least have had some sight of it.
Now, here’s a guy who spent years in business, in boardrooms and listening, absorbing, and in certain instances, obviously, participating. It’s a completely different leader of your infrastructure project to the last guy, in particular in South Africa, who said, ‘Yes, okay, we love this ide of China’s but what’s in it for me?’ Ramaphosa is saying, ‘We love this idea of China’s. What’s in it for the people?’ I think that’s a critical starting point that we must never forget.
Now, I often get pretty irritated with people in our industry, the media industry, because we think we know. We think we know a lot of stuff that we actually don’t and I see the pundits who were advising that government should do this, Cyril do that, Cyril, you better act now. It is from a position of incompetent ignorance.
When we stop and start looking at it from a position of, what are the big pieces on the board? How are they going to be moved around here? Who is going to be doing the moving? Have I got a chess player, who’s in Standard 2 or have I got a grand-master? Those are the very key things. It’s about allocation of resources and what makes me upbeat about this is that we’ve got a guy who is making the main decisions, or at least passing on those main decisions or the issues you’re talking about now, which are critical. But he’s had experience in the correct allocation of resources and a track record I believe, in his own personal development, of allocating those resources in the way that they’ll have the biggest impact for the country as a whole. So, it’s a different kettle of fish we’re talking about here.
In China, when they were allocating the resources, they were looking at it from a basis of what the bureaucrats thought was the best thing and they had the parties and they had their own elites who needs to be serviced, etc. In the South African context now, finally, state resources can be allocated in a manner where there aren’t those conflicting incentives and it can be done simply to give the greatest potential.
So, your spatial issues that you’ve highlighted there, is absolutely critical. But in the past, when that was addressed, there were too many snouts. There were too many people wanting a cut. This time around, what makes sense, well maybe a ten-storey building in the middle of Houghton makes sense for the people to live there?
You know, Felicity, you live in Ireland, and I live in the UK. There are a few suburbs or areas, which are just made for the rich. In South Africa, all of the areas are like that. So, if you go to Houghton you aren’t going to find any low-cost housing. If you go to Sandown you certainly won’t either. If you go to Turfontein, you aren’t going to find any fancy housing, and so on. Elsewhere in the world that doesn’t really work like that and that’s primarily because you need to have the people who do the work in the area to be living to close to it. Because of apartheid, we didn’t have that. Those are some of the issues that I think are going to be addressed and are going to be changed. You’re going to have people upset about it. If you’re living in a very upmarket area and you have a low-cost housing project put on your doorstep – sure, you’re going to complain. But if you got a Ramaphosa, who’s making the rules, he’s not going to listen to you.
Yes, I hope so. We were speaking a little bit about China there and just touching… The big news out of China, this week has to do with tariffs, right. So, Trump has officially rolled out tariffs on an additional $200bn worth of Chinese imports – that’s on the $60bn that had already been done. China announced its retaliations this week and Trump is now threatening to find tariffs on an additional $200bn, bringing the total up to, essentially, $500bn, which is pretty much everything that China exports to the US. So, this tariff war is escalating very quickly.
Now, there was some hopes that China and America were going to engage in high-level talks in the next week or two, but I see in the news this morning that China has said it’s not going to particulate in those tariff talks.
I’ve seen quotes from various, mostly mid-level, Chinese trade negotiators saying, it’s impossible for us to negotiate under these circumstances because we’re just kind of constantly being hit with additional tariffs and threatened, and put under an enormous pressure, which doesn’t open up a lot of room for negotiations.
So, at this point right now, a lot of posturing, a lot of aggression, no scheduled talks ahead of us and it really does have all the contours of a classic trade war, escalating tariffs, escalating rhetoric and ultimately, a decline in trade and a decline – ultimately of course – in economic growth. This has serious implications for South Africa and the rest of the world. Do you want to unpack that a little for us?
Yes, it does. I was actually fascinated by the podcast that I put together for The Rational Perspective on this subject. It had got, when I looked after two-days, it got 12,000 downloads so, clearly a lot of people are interest in this and realise that the impact of giving a toddler a machine gun, and just letting them let loose in the world – it’s very dangerous. Unfortunately, what has happened in the US is you’ve gone from a president… I just loved what the guy from Monitor, who started that company, said. He met this young senator from Illinois I think it was and he was there with a yellow notepad and all he did was ask questions and write on his notepad, and that was Barack Obama.
Donald Trump doesn’t do that. He doesn’t listen. He doesn’t ask questions. He has a worldview that is shaped by his own personal experiences, which as we know, were very confined to one area of the business environment. The way he negotiates is the way it works in the property area. It doesn’t work like that when you’ve got too many working parts, as we have in the world. We’re seeing in the Middle East where he’s causing unbelievable long-term problems there, which just haven’t been fully unpacked and going completely against what the rest of the world negotiated in the Oslo Agreement. And he’s doing the same thing now in the international, world trade area.
He’s got a huge fan club in South Africa because people who feel – well not huge, but he has a fan club in South Africa – of people who feel that they’ve been hard-done by and he will come to their rescue, etc.. But they are really grasping at some kind of a straw. The reality about what is happening here is South Africa is going to get caned. We nearly saw South African interest rates rising this week. The Monetary Policy Committee thought long and hard about what’s happening with the trade wars and the vote, eventually, was 4 to 3 to keep rates unchanged. Now, if you had not had the developments you had this week it would have been 7 to 0, to leave rates unchanged. That’s the reality of it, and why is that so?
Well, because when you have a blockage to international trade, to participation, to people being able to freely engage, you then affect economic growth. It just happens like that. Nouriel Roubini, who was the only high-profile economist to predict a global financial crisis in 2008. I remember, I was sitting in the room when he was being castigated by others, just ahead of the global financial crisis, for being so pessimistic. They called him, ‘Dr Gloom.’ This week, he did an interview with Bloomberg, which is in our podcast, where he said, it’s a disaster and he says it’s a disaster because it a tax on the American people. You’re talking already $250bn in Chinese products, 10% tariffs, which means the American people will pay $25bn in additional taxes. If there’s no change and the Chinese, as you’ve just pointed out, are not going back to the negotiating table, then Trump is going to push us up to 25% in January. Once it goes to 25% in January, what does that work out? It’s $70bn tax out of nowhere.
So, you’ve got this incompetent person, an economically incompetent person, who’s making decisions based on a world view, which is extraordinarily narrow and he’s taking the whole world into it. What I was trying to write about in a Daily Insider earlier in the week, was to say that Americans have 5% of the world’s population. They have 25% of the world’s wealth. In Donald Trump’s view, they are entitled to that 25% of the world wealth and he will fight to keep that 25% of the world’s wealth, even if it means that the pie that the world shares contracts. Instead of having an Obama-type approach, which says, that 25% of the world’s wealth might become 20%, but if we have a much bigger pie, or it might become 15% and it might eventually become 5%. – but we have a far bigger pie then America will benefit as well other people elsewhere.
What they fight back on, what the Republicans say is China has not been playing fair. China has been cheating. China has been stealing and a lot of that has got substance. When you’ve got a country of 1.2bn people you can’t expect everybody is actually going to play according to the rules. Indeed, if you’re sitting with a GDP per capita which is 90thin the world – you must understand that the politicians are going to try and do what they can to raise that GDP per capita. But the reality is, you don’t have to do what Trump is doing to fix that. Roubini suggests that the rest of the world, if they’re cross about these things, which they are, about certain of the practices that the Chinese are doing in the trade world, get together and impose those ideas. Say to China, This is the way we should be doing things. You can’t continue to steal, take intellectual property, etc. If you do we, as the rest of the world will, at that point in time, react.
But what Trump has done is just say, well, we, America, are looking after our little slice of the pie. We don’t care how small the pie becomes, because that’s the reality of it, and then the rest of the world, the other 95% of humanity is going to be affected by this, in the short-term. In the long-term there’s only one loser in all this and the long-term loser is the US itself.
I agree, and I think it’s an incredibly short-sighted thing. Right now, the US economy is doing very well. It’s benefited enormously from the last 25 years of increasingly open trade. US products are made all around the world and sold all around the world. It’s really been good, basically, bottom-line: really good for American businesses and American companies. I think that Trump and many of his advisors have a world view shaped, as you say, first of all by their narrow interests. But also, shaped by the 1950s they haven’t updated to say… Trump is so eager to get people back into coalmines and to get Americans assembling iPhones and things like that. That stuff is all right at the bottom of the value chain. That is low-value work. Those people who are coalminers and the people who are assembling iPhones and things like that. Yes, they’re working and it’s great, but the contribution per hour of labour to GDP is really small.
It’s worth it for China to do that because China is starting from a low base. But it’s nuts to take people out of high-productivity industries in America and put them into things like coalmining – you’re just undermining your long-term economic potential. But the problem is, we’re dealing with a person here who thinks that the economy was in the 1950s is how it should always be and refusing to acknowledge that technology has moved on. That the US is better positioned to benefit in much, more high-value, high-productivity areas and that rather than drag people into these jobs, what they should be doing is trying to help all Americans find work in higher productivity areas.
The irony of all of this, and we really need to touch on Brexit very briefly, but the irony of all of this is that the US is the best positioned of any country in the world to take advantage of the Fourth Industrial Revolution, to move up the value chain. It’s got the best schools. It’s got the best education system. It’s got a pretty ordinary healthcare system, which I think… Warren Buffett keeps saying, ‘You’ve got to fix healthcare.’
But when you look at the average American person – if you asked the average South African, what’s a CD? He’d say, it’s something you put into an old computer. If you ask the average American, what’s a CD? They know that it’s a certificate of deposit that you can invest in, rather than a bank account. There’s just a very different understanding or level of appreciation as a whole, a consciousness if you like, about the way economies work in the US, because of the education system. They haven’t got people who have to walk seven miles to get to a mud hut to get to school in the morning. They’ve got very well-trained teacher on hand and that is an advantage.
What Donald Trump is doing, is if you unpack the whole thing, it’s an elitist’s view, which says, we’ve got dumb people in our country so, let’s give them dumb jobs. Instead of saying, hey, if I unleash the human potential, which is what his founding fathers did in 1776, if I unleashed the human potential every human being has got the potential to be actually, extraordinary. And if you start from that basic point or that basic premise that people are fools. There are a lot of dump people around – we’ve got to give them dumb jobs. Then you really are… Well, it shows your own mindset.
But moving onto the UK. Just like the US, the UK has got a massive advantage, when it comes to the Fourth Industrial Revolution. Think about a couple of things here. The people who go to the universities, the top universities in the world – the top 100 universities in the world. There is a preponderance of US and UK institutions. That is built into the system here. Felicity, if you want to go into a UK school and teach something or help even, you have to go through lots of different hoops to get in, in the first place to, (a) make sure that you aren’t going to be a predator on the kids, but (b) to make sure that you are actually adding value. That’s how far the education system has evolved.
As a consequence, you have a society that’s evolved. That is more engaged, more interested, understands and is able to uplift itself and is able to align itself to the new world. That is until you have a 36-hour work week, like you have in France, and so on and so forth.
So, when people look at Brexit they see it as… And the Brits, the one thing they aren’t really good at is change. They’re a fantastic nation but they don’t understand change because they haven’t been through it and they really didn’t like the change they had to go through in the Second World War. So, there are still very deep scars there. But when you have a look at who is best positioned for the Fourth Industrial Age, it’s got to be the educated people, and who are the most educated nations on earth? The US, and the UK.
And who’s learning from this? Where are the Chinese students going to? Hundreds of thousands of Chinese goes to the US and the UK every year to go and learn and then they’re being forced back to their countries. What used to happen in the past was that when the cream, if you like, of the rest of the world went to the US, they were welcomed, and they were retained. Hence, you had this huge immigration to the country, which added 0.5% a year of GDP growth, over the last century. Those are the realities of where we are, and we are now going to a point where the two countries that have got the biggest advantage in the future, are the two countries that are really now struggling with how do we adapt towards it? And they almost, in certain cases, has got Brexit going back or forward.
It was a huge week in Brexit this week, and it’s now looking increasingly likely that there will be no deal. We don’t know if it’s all theatre, in the same way as Trump could be all theatre, just to keep the people like us interested and the rest of the world interested. But what happened in Saltsburg – there was a lot of under-current, a lot of discussion, a lot diplomacy in the way these highly sophisticated Europeans do it. They will send people in. Talk off the record. Lots of off the record. The whole idea was, Theresa May was going to arrive in Saltsburg. This is where the 27 EU leaders get together for their summit and they were going to give her support so, she could go back home and fight off Boris Johnson and Rees Mogg.
What happened, when she got there, she played according to the script to say, here is my plan – we’ve got to take it or leave it. This is the best I can do. And they just said to her, no, your plan is not good enough and take it off the table, and by the way if you haven’t fixed one of the big issues there, the Irish border, in a month’s time, then there’ll be no negotiations in November, and that means you’re going to have crash out with no deal in March 2019. That’s what happened and to understand this in the terms that all of us can appreciate. Well, first of all the pound weakened, and not surprisingly because the uncertainty is greater. But the betting odds went from 4:1 – in other words, very unlikely in a two-horse race that the Brits would leave the EU without a deal, to 1.5:1 – and that’s how important Saltsburg was.
So, now, Mrs May came back. She was angry. She’s reacted in a way that you would imagine immediately of somebody who has been ambushed. The British people, remember they got involved in two World Wars when it wasn’t fought on its own soil. They were fighting for an idea and the British people have an idea in their minds and their idea in their minds is their sovereignty and their independence. Their idea that they’re getting back Brussels or Europe is that their sovereignty and their independence is not going to happen if they continue along this path, they’re going to be punished, which is was Macron has been saying all along.
So, it’s got to a stage now where things are getting very interesting in Europe. Things are very interesting in the US. Clearly China is going to have its own issues, and South Africa for the first time in many years has got a guy in control there who understands all of this. He sees the moving parts. He’s a great negotiator. He also understands how the country needs to make the most of the limited resources it has, and how to allocate those resources accordingly, and I think for that, we cannot be too grateful.
