WORLDVIEW: The real threat to a Ramaphosa recovery in South Africa

By Felicity Duncan.It's common knowledge by now that South Africa has suffered a lost decade. The country never recovered from the global financial crisis of 2007/8 and the recession that followed in 2009. Since that time, the nation has barely managed to tread water and keep economic growth in line with population growth..Most attribute the lost decade squarely to the many failures of Jacob Zuma's avaricious and corrupt administration. And let's be clear, Zuma didn't do anything to help SA out of its 2009 slump. In fact, he did a lot to make things worse for the country, looting state enterprises like Eskom and allowing them to fall to ruin, and scaring off potential investors, both foreign and domestic – not to mention discrediting and destroying key institutions..___STEADY_PAYWALL___.But here's the hard reality: it wasn't all Zuma's fault. He made things worse, but South Africa was not the only country to face a difficult recovery. In fact, one can make a case that even the USA – which has done well in the wake of the crisis on many measures – has experienced a lost decade..And therein lies the threat to South Africa's turnaround: Even if Ramaphosa does everything right, the global economy may still hammer us..The lost US decade.It's worth spending a moment explaining why a person might say that the US has experienced a lost decade. After all, the country is currently experiencing its longest-ever expansion – surely all is well Stateside?.The reality is a little more complex, as James Montier, a strategist at investment firm GMO explains. It's true that the US economy has expanded for the better part of ten years. However, it's not all roses..First of all, GDP growth has been very slow – slower than any other post-recession recovery. Despite Donald Trump's claims to have turned around the trend, there are no signs that growth is accelerating on a sustainable basis. The economy is growing, but very slowly (especially compared to historical rates)..In the long term, GDP growth is basically a function of two things: population growth and productivity growth. You can make more stuff by having more workers (population growth) or by having each existing worker make more stuff in the same amount of time (productivity growth)..In America, population growth has fallen for several years, for a range of reasons, and that's an issue. But, more importantly, productivity growth is also very low. As Montier points out, many major economic sectors like healthcare, education, construction, transportation, and certain services have seen zero productivity growth (a few have admittedly done well, like manufacturing, information, and finance)..For workers in low productivity growth industries, this has meant that wages have not risen (after adjusting for inflation) since the 1990s. And, for various reasons, even in the high productivity growth sectors, wages have risen very slowly. Most Americans haven't had their incomes grow at all in the last ten to fifteen years. It's been a lost decade for almost all Americans – aside from the top 10%..Similarly, corporate earnings are not really growing (except for a handful of high-profile FAANGs). Montier found that, however you slice it, aggregate US corporate earnings have been growing even more slowly than GDP for the last decade..Now, here's where the problem comes in..Despite slow growth in GDP and earnings, the US stock market has been shooting the lights out. In fact, the market is trading at levels close to the crazy heights of the tech bubble..In part, this is because companies have been engaging in massive share buybacks. Basically, American companies have been borrowing money (at very low interest rates, thanks to loose monetary policy) and buying their own shares. This has pushed up stock prices. It also means that companies have replaced their equity with debt..Perhaps you can see the risk here?.For an issuer, debt is riskier than equity. If a company's share price collapses, the company may feel bad about it, and the board may be fired by irate shareholders, but if there's a run on a company's debt, it is legally obliged to liquidate all its assets to pay back its creditors. Too much debt is an existential threat. And lately, US companies have run up enormous debts while experiencing low levels of earnings growth..These companies seem to be expecting massive future earnings growth. But with workers' earnings stagnating and growth slowing worldwide, it's not clear where that growth is going to come from. Indeed, on the balance of probabilities, lower earnings growth seems more likely..Just one example.The story of the US is just one example of a key vulnerability/risk in global markets (namely, an overpriced, over-leveraged US corporate sector). There are plenty of others – a brewing emerging markets crisis, slowing global growth (exacerbated by trade tensions), issues in the Chinese economy that are similar to those in the US, and many more. Any of these could easily blow up into a full crisis and send the world economy plunging, taking South Africa along for the ride..The point here is that Cyril Ramaphosa faces a pretty grim reality: he could do absolutely everything right, and South Africa could still have a bad few years due to external factors that are beyond his control. As the world economy looks increasingly shaky, this is probably something keeping the president up at night.

WORLDVIEW: The real threat to a Ramaphosa recovery in South Africa

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