๐Ÿ”’ How the world sees SA: ANC internal politics trumping science, economics. Investors “very worried” – Eurasia Group

London-based Darias Jonker is leading global political risk consultancy Eurasia’s director for Africa. In this insightful podcast, Jonker explains why multinationals who have operations in SA and foreign portfolio investors in the country’s stocks and bonds are “very worried” at a continuation of the lockdown and the damage it is doing to the economy. He says a bailout package from the IMF is now a matter of when not if and unpacks why President Cyril Ramaphosa has fallen into line with ANC internal dynamics rather than pursuing an approach which scientists and economists believe would be best for the economy. – Alec Hogg

Darias Jonker with the Eurasia Group.ย ย 
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We are a US-based political risk advisory firm. Our clients are roughly 50/50, big multinational corporations on the one hand and on the other hand investors, asset managers, South Side banks, hedge funds a mix of direct investors and portfolio investors all around the world. A large chunk US and Europe but also Asia Latin America and a few South African clients, and a growing client base in South Africa.

I’d love to get your views on the lockdown. I’ll do this in the context of scientists, more and more the saying lockdown served its purpose and it should be lifted immediately, but from a political perspective, it’s where it’s all going to be decided and that’s why I’ve asked if you could just unpack for us your views.

Darias Jonker

Ramaphosa did a very good job at the beginning of the outbreak. His response was world-class, consultative, brought everybody into the fold, both support across the political spectrum from a variety of stakeholders. The rationale behind the lockdown was to buy the state time to improve healthcare capacity and overall readiness for the peak of infections that was to be expected long after the lockdown would have happened. Then this risk-adjusted approach was introduced and there seems to have been more the non-medical ministers than non-scientific ministers as it were, who were putting together a phased approach or easing the lockdown in the economy. We see a collision of science on the one hand and the heavy-handed regulations on the other. Ramaphosa seems to have painted himself in a corner with this. He has acknowledged it in his recent statements inviting an interrogation of the plan. In reality, he’s got a lot of political support from within the ANC for this plan. I don’t see him changing it, but at the same time, it’s a very difficult plan to quantify. Meaning the quantifiable criteria for easing the lockdown on the provincial Metro and district level is going to be very hard once infections start rising or if the infection starts rising, they may not although in all likelihood they will. This is where a qualitative assessment of local levels is the most likely and where we think it’s not only going to create a lot of uncertainty amongst businesses but also open the government to litigation and other kinds of legal wrangling, to further complicate the situation to create more uncertainty. The best thing at this stage would be to change the plan to make it less rigorous, to make it more flexible but because of the dynamics within the ANC we don’t see Ramaphosa doing it. Even though it is likely that most of the country will move to Level 3 by the end of the month. We see many of the major urban centres returning to level 4 possibly even to level 5 through the course of June and July if infections go up and also if they don’t change the criteria, which we are not expecting them to.ย 

How are your international clients, in other words, the global investors you might be investing in South Africa or who are already invested in South Africa reading this?

Our corporate clients with operations in the country are very concerned. It’s making overall business planning very difficult. They are finding they have access to the government but their concerns are not necessarily heeded. The portfolio investors who are taking a more nuanced view are looking at the external environment as well, whether it’s a risk on or risk-off, international market environments or so determines their decision making. They are very concerned about the overall economic trajectory of the country. They are very concerned about what the budget deficit is going to look like and how the deficit is going to be funded. There the key question is not if South Africa goes to the IMF for a conditional lending programme but when. We are not talking about the 4 billion dollars that the government has said is going to borrow to fund part of the fiscal package. It’s when there’s really a need of 8 billion dollars or more, it’s just too expensive to get that from the capital market. That’s the situation which is looking more and more likely. Perhaps not this financial year, for the state’s fiscal year, more likely next year. This lockdown is directly increasing those chances because it’s really making the fiscal trajectory look even worse than expected.

We know that Ramaphosa is well nuanced in business and also that he has connections around the world. He would presumably be aware of this, is the fact that he hasn’t removed the lockdown despite all the scientific and economic evidence telling us something about the internal political dynamics of his position and within the ANC?

Very much so. I think Ramaphosa is doing the best he can do under the political circumstances. The political circumstances within the ANC, the reality within the ANC at the moment is that for him to stay in power he needs to have a broad base of support within the party as possible. He doesn’t really bring a large party constituency of his own to the table meaning he doesn’t have a very large province or other party structure behind him. We’ve seen him not taking on errant ministers and you see this with the police minister for example, he’s not calling the police minister to order. Even somebody who’s more of an ally of his like the Minister of Trade and Industry and Economic Development, we are seeing Minister Patel continuing with blatantly reckless regulations for weeks before Ramaphosa reins him in. We see this with Mbalula as well and so Ramaphosa certainly isn’t wanting to antagonise members of his cabinet. I think he realises things are going to get tough and he hopes that by having a unified cabinet behind him, that will help him rather than having a divided cabinet. The internal dynamics within the ANC have taken a back seat for the past few weeks. We can still safely assume that ANC leaders who are likely to be prosecuted as part of the overall anti-corruption campaign by the National Prosecuting Authority remain committed in their resolve to remove Ramaphosa as leader of the ANC as soon as possible. This is very likely the Secretary-General of the party Ace Magashule, former President Jacob Zuma and the whole cohort of usual suspects as it were. What can they actually do, that is much more focused on the national general council of the party which is the first and best opportunity to weaken Ramaphosa politically. With that having been postponed indefinitely I think that group who I am now calling, thanks to reading so many fairy tales under lockdown to my toddler, I am calling them the trolls under the bridge from three billy goat gruff. We might not be seeing that much of them but they are very much there. So I see them sticking their heads out from under the bridge more and moreover the coming weeks as this political capital that Ramaphosa had built up starts to wane. You’ve seen this with zooming with Zumas podcast. You see this in some very nuanced statements from the secretary general’s office or from the deputy secretary general’s office. The game is still very much on. The question is when is that NGC going to happen. You’ve got a convergence of some of the things that they have been talking about. The NGC will be an opportunity for Ramaphosa opponents to remove him. The need to go to the IMF for conditional lending or to force domestic investors to bail out the government through prescribed assets will in all likelihood become very acute towards the end of the third quarter, beginning of the fourth quarter of this year meaning we might not necessarily have access to those funds at that time but we will have to start talking about it. The medium-term budget policy statement in October is going to paint a very dire picture of the country’s borrowing needs. So you see all of that happening at the same time and I think Ramaphosa senses that. So, for now, he needs to keep as much of the ANC behind him as he can, build up as much a reserve of political capital as he can within the party and that means tolerating ministers who are prone to strong-arm tactics. It means tolerating the left-wing of the party and it does impact his reform agenda. At the moment the finance minister is the lone reformer left in cabinet, who can act out on his reformist orientation. The president personally shares a lot of those reformist objectives but the political reality precludes him from doing that. The central bank governor is also a key reformer and hopefully, we will see a role for him after the Reserve Bank in government leadership. Overall there really aren’t that many reformers in the cabinet and so Ramaphosa has to play to that internal audience and give ministers a lot of leeways. The ANC loves being at the centre of a problem it thinks it can fix and so that the party loves this lockdown strategy it puts it at the centre of everything it gives it a lot of power, and that’s worked out well for Ramaphosa. Over the next few months, more and more stresses and strains and cracks will start to appear.

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