Gordhan promises: We’ll use Rand Crisis to reform SA, take tough decisions

For non-South Africans who witnessed Finance Minister Pravin Gordhan’s Davos briefing yesterday, there was little newsworthy in what he said. As the FT’s Martin Wolf reckoned afterwards, Gordhan pretty much stated the obvious – that the country needs to get its act together fast, to address structural issues and rebuild confidence among local and global investors. For a man with Wolf’s deep knowledge of economics, such issues are so basic they’re not up for debate. But those running the SA show of late don’t share his understanding of modern economic realities. So it was a delight to see a subdued Gordhan provide further evidence that Nenegate is proving to be a watershed. He spoke of a “crisis being useful as it brings the realities into your face”; how over the past few weeks the cabinet “has been asking the tough questions about what we need to do differently”; and that within the ANC “there are a significant number of us who want to restore integrity….knocks are a good reminder to live within your means.” As you’ll read in the transcript, I managed to get in a couple of questions. Not so sure about Gordhan’s answer to the first one (re: capping Government spending) but was delighted to hear he’ll be having a close look at redressing what happened to his appointees at SA Revenue Services, who were swept out after Gordhan was demoted in 2014. Hope springs. – Alec Hogg

OLIVER CANN: Well, good afternoon ladies and gentlemen. Thank you for joining us and braving the snow and freezing temperatures as you make your way from the comfortable accommodation at the Congress Centre here in the Media Village in Davos-Klosters at the World Economic Forum Annual Meeting 2016. Welcome also to those of you watching us live online at weforum.org. Now the purpose of this issue briefing is to look at South Africa’s economic outlook, to provide an in-depth learning about South Africa’s prospects and challenges for the year ahead. Those of you who are familiar with this forum; remember, we don’t have a lot of time and that I keep my remarks to a minimum. I’m going to introduce my esteemed colleague here, Pravin Gordhan – Minister of Finance of South Africa with little more than to say that he’s been described to me this morning by one of the participants here, as one of the best things to have happened to the South African economy in quite some time.

MIN. PRAVIN GORDHAN: The best thing is sitting out there, you see.

OLIVER CANN: Not in this room, actually. It’s somebody else. You have fans out there that you’re not even aware of.  We’ll have questions and answers but first, I would like to ask the Minister to spend a bit of time outlining what his personal priorities are, how he’s going to restore the country to sustainable growth in the year ahead, and further away into the medium- and long-term.

MIN. PRAVIN GORDHAN: Thank you and thank you very much for this opportunity. It’s nice to see both leading analysts and commentators in front and fellow South Africans at the back. It’s comfortable at the Congress Centre, but come to the southern tip of Africa. It’s far more comfortable, I can assure you. You don’t need the coats and the ties and you’ll be having a great deal of fun. Okay, the outlook for South Africa. Firstly, we work as a Government team. No Finance Minister can succeed unless he has reasonably good support from Government as a whole. Over the past few weeks, we’ve worked hard as a Government to understand our current environment, understand its challenges, and begin to ask ourselves some tough questions about what we need to do differently. Secondly, South Africa is part of the commodity-producing countries.

It’s part of the emerging markets that are currently under stress because of a variety of things that are happening, a global environment that’s volatile where lots of corrections are taking place, and which have either intended or unintended effects on the financial sector in particular, but elsewhere in the real economy as well. This results in greater uncertainty, particularly for the business sector so a lot of the focus of our work is about we create greater confidence, both amongst foreign investors in our debt market in the real economy but in particular, amongst South African business. Therefore, leading up to Davos, we’ve had good discussions with our business sector to prepare for this eventuality. Certainly, the IMF numbers yesterday seem to indicate (for 2016) that we might be looking fairly dismal.

I think that the challenge we face is to see what we can do differently to surprise the IMF and others a little bit this year and our numbers, which we will publish on the 24th of February when we table the country’s Budget might indicate slightly more optimistic numbers than what the IMF is seeing at the moment. The struggling areas of our economy are agriculture, manufacturing, and mining. Mining, for reasons that are very obvious and that’s a fairly general phenomenon. An additional factor is, of course, drought. Some of the traditional supporting parts of the economy like the services sector etcetera, are slowing down a little so that’s an area we need to focus our minds on and more importantly, our actions to see how we can get better results of that. Exports seem to be improving and obviously the weaker currency is a huge supporting factor, but demand on the other side of the border is equally important whether it’s from Europe or the rest of Africa.

One of the issues that we are looking at together with business is how we can enable business to actually get involved in more tradeables, more effective winning of market share particularly in sub-Saharan Africa because there’s a lot of space to be gained in the construction and generally, in the services sector as well. Focusing in certain parts of the real economy and supporting that, particularly through investment in infrastructure and undertaking some tough reforms, particularly in the education and skills development area and the area of delivery of infrastructure in terms of creating greater efficiency and better spending of public funds. Creating co-investment opportunities for business and Government. In our IPP program for renewable technologies (one of the best in the world and understated at the moment as we tend to understate ourselves in South Africa)…

Read also: How world sees SA: Rand at fresh low, Gordhan “can’t do it all on his own”

It has attracted hundreds of billions of Dollars, both from South African institutions as well as from foreign investors. There’s another round, which is coming as well, which will significantly change co-investment in that particular area, but change our energy picture as well. I don’t think I was here in Davos last year. We were ‘under watch’ for the energy situation. We’ve stabilised that and the renewable side is introducing about 2000 megawatts at the moment and that’s going to increase incrementally in the next couple of years as well. Restoring confidence, making sure that we undertake key reforms, delivery of infrastructure, skills development and education, greater attention to how we focus, the tens of billions of Rands of business incentives either through the tax system or direct rebates to business, is another area that we want to look at so that we boost the right areas of the economy, giving a lot more attention to small and medium sized businesses in South Africa.

Here, Martin Wolf – after his visit to South Africa – talked about some of the legacy issues that we still confront as a society both on the social side as well as on the economic side. Given the dominance of two or three companies in key areas of the economy, the rise of the small and medium sized business sector has been very limited. It’s an area we need to give a lot more attention to, together with building entrepreneurship on our side as well. Last point: we’re focusing a lot, particularly in the new area of the ocean’s economy and how we tackle the issue of limited demand for our commodities differently from just exporting, where the demand is actually limited through a program called Operation Phakisa which, together with business and other sectors is looking at the details of what goes on and how we implement those details differently or think of more creative ideas as well.

Often, the skepticism about the stalling of FDI into South Africa… Some of the more recent examples I’ve got in front of me from our Department of Trade and Industry: Mercedes Benz – R2.4bn announcement on increased investment. General Motors – R1bn. Ford – R3bn. The Mette Group – R400m. BWM – R6bn. It goes on, particularly in the auto sector. Beijing Automobile Corporation – R11bn. Hi-Sense, which has created an operation in South Africa also made some investments and more recently, Unilever and Johnson & Johnson have increased their production capacity as well. Clearly, we need to increase our FDI, create more confidence, and work more coherently as a country from business, labour, and Government as well and I think we can do better as we go forward. As they say, “Crises are useful.”

It brings the truth to your face and it forces you to think more creatively and differently, and understand your challenges perhaps more deeply than you would have if things were comfortable. Both 2008 and 2009 taught us that to some extent. We thought that just getting a massive stimulus going from the fiscal side and some efforts from the monetary side will help us to overcome the kind of challenges we had post-2009. That hasn’t been the case so we have to take a harder look at some of our structural constraints and begin to deal with them in a much more assertive way. Thank you very much.

OLIVER CANN: Thank you. Now it’s customary at this time to open the floor for questions but for the first time, I notice that one of our audience actually has the microphone already. Alec Hogg, are you hogging the microphone there for a reason?

ALEC HOGG: Hi. I’m Alec Hogg from Biznews.com in Johannesburg. Can you give us any clarity on how you’re going to rein back on public sector spending? Secondly, your old stamping ground – South African Revenue Services: your team seems to have been cleaned out there. Are you going to reinstate them?

MATSI MODISE: Good afternoon, my name is Matsi Modise, the Managing Director of SiMODISA and I’m essentially an entrepreneur and an entrepreneurship activist. To keep my question brief, venture capital is key to enhance and enable this fourth industrial revolution because technology underpins it. What role will the Government play in terms of creating VC right now (because it’s basically non-existent) and how does that then integrate with a partnership with the private sector?

MARTIN WOLF: I’m Martin Wolf from the Financial Times. I have two questions, which are linked. It seems that this is an extraordinary opportunity to the crisis. As you said, relaunch fundamental reform in South Africa. This goes beyond 2016. What do you think your priorities are likely to be? In particular, it would seem to me that the biggest challenge you have is persistently high unemployment, which is a cancer – economically and socially. What do you plan that could really make a difference to this longstanding problem?

MIN. PRAVIN GORDHAN: Okay, let’s go to Alec’s question. Interestingly, when we look back… when these sorts of challenges are put to us about public spending, South Africa’s actually had a very good record over the past 20 years on the fiscal side. We haven’t breached any of the commitments we’ve made to the South African public and to other stakeholders at all in the last 20 years. Post 2012/2013, we said ‘belt tightening’ and ‘cut down on wasteage’ and we’ve had interesting results as a result of some of those efforts that we’ve put in. We will continue the fiscal consolidation path that we’ve indicated. We will be as tough on ourselves as we need to be. For example, one of the strains on the fiscus are some of the State-owned companies. You’ve heard me say (very publicly) from the day of my appointment – December 14/15 – that these entities must stop relying on the fiscus.

Our aim will be to return them to some kind of profitability and financial sustainability, and take the strain off the fiscus so that we can put the money where it begins to make a difference in terms of growth and job creation as well. On the Revenue Service, there’s a simple statement. What we want as part of our democratic project is to build solid State institutions, which are not dependent on individuals. They’re dependent on the values you instill, the integrity you have, and in the case of the Tax and Customs administration, the fairness with which you deal with the public and the kind of legitimacy you hold in the public eye. You need a different kind of sophistication, given the kind of discourse that’s taking place in the OECD and in the G20 about base erosion and profit-shifting. It’s a nice catch-all phrase, but it hides a lot of complex transactions that banks of lawyers and other professionals are working on full-time and affects both developed country fiscus and ourselves as well.

Read also: RW Johnson: Key 2016 questions – will “unfire-able” Gordhan act decisively?

What we want there is stability at the end of the day, skill leadership that will take us in the kind of direction that we want to go in, and build on the good reputation that the Revenue Service has. The nitty-gritty: I’m still going to get on top of all of the issues there and we’ll come back to that when you’re back in South Africa.

Venture capital is clearly one of the challenges. We’ve made some changes already to begin to provide (at least in policy terms) for venture capital and a bit of money has been set aside. I think our contribution to small business is too fragmented and in too many different places. Now that we have a Ministry and a department, hopefully we can concentrate those resources and begin to talk a lot more actively to the private sector. My own view is that we need a few building grounds set aside but don’t ask me where we’re going to get the money from just yet. At least the objective is clear about what we actually need to do to build the kind of entrepreneurship culture with the help of the private sector as well.

Fundamental reforms: For some years Martin, both the IMF and the OECD have one-liners in their reports about South Africa. Your product market is very concentrated. It’s a nice euphemism for saying that you have quite significant oligopolistic industries in South Africa, given our history and the way things have happened. More recently in our country, there’s a fascinating ‘discussion’ going on about, “What did 1994 give us?” The bottom line is that it gave us equal rights for South Africans and a democracy. What it didn’t give us is the equalisation of the economic scales. Those who have wealth and economic power and those who’ve already accumulated some over the last 20 years or so, need to have a very different kind of discourse now by saying, “How do we restructure our economy in a way in which there’s greater inclusivity, not just between poor and rich but between different types of business categories as well?”

There’s certainly a kind of impatience developing that we need to build on. Secondly, from the State’s side we’ve been giving lots of assistance in monetary terms and sometimes technical terms as well, but we’re also learning that all of that achieves the kind of objectives you set initially. There’s a long line of delivery from the intent and the actual impact on the ground, and so we’ve got to learn to do a few things differently as well in terms of the kind of support that we provide to restructure. There’s no doubt that all South Africans from all classes and backgrounds need to contribute to this venture. Last Friday, we had a meeting between a handful of Government Ministers and a fairly large delegation of 40/50 people at a CEO level from the business sector. Some of them are here today. There were other discussions over the course of the last few months as well, all of which indicates that business leaders now begin to understand the importance of inclusion, the importance of social cohesion, and for us to be able to discuss the Race issue in a constructive way so that we can capitalise on our diversity and use it as a positive factor in terms of where we go.

Read also: Gordhan: We’re listening to ratings agencies, we’ll get SA’s house in order

Some of the things we need to do: de-concentrate the economy but more importantly, grow a new generation of entrepreneurs, give a lot more support to the skills development sector in our economy (although that’s a more medium-term objective), ask the private sector to absorb more people as apprentices, as part of a learnership scheme, and as part of the subsidy scheme we have as well. Those are the types of opportunities we have for private sector to come to the party and Government is doing some of its work through public employment programs as well where billions of Rands are being spent on an annual basis. The skills area, retooling, and our manufacturing sector becomes a lot more competitive and aggressive as drive to win market share because without that, what are we actually doing?

We’re only supplying consumption in South Africa. We’re not getting into the export trade as assertively as we can. The services sector is also a key opportunity area as is what is now called the ocean’s economy, where we’re now working with countries like Norway, which is offering a fair amount of technical assistance to South Africa as well. There are any number of areas, which I outlined earlier on, which we can work on. Some of that, we need to do in the short-term so that we can have what is called a demonstration effect and some will take the medium term to demonstrate its impact.

GIDEON RACHMAN: Another Financial Times columnist, I’m afraid. Gideon Rachman. Two quick questions. 1. You obviously came in after a week of apparent chaos over the appointment of the Finance Minister. How much long-term damage do you worry that that did to South Africa’s image? 2. Another image-related question. I saw what I think was a Transparency International survey, which said that 80 percent of South Africans feel that South Africa’s become more corrupt over the last year. Are they right?

MIN. PRAVIN GORDHAN: On the first one, I think if that was an event that took place in the middle of the 2000’s, it wouldn’t have mattered too much because we were on a nice swing of four percent growth, large amounts of revenue coming in, a commodity boom, and the economy doing fairly well. On this occasion, I think it gave us very useful feedback on how the markets can respond to events like this. I think it’s a compliment to the leadership of the country (a) that they listened carefully to key people in the business sector and the political organisation itself and (b) acted very quickly to stabilise the situation). Hopefully, having a ‘new/old’ hand at the wheel might actually help us to restore some of that confidence.

In statements since then, all of us (within Government and the ruling party) have indicated very clearly, that we want to continue with the fiscal prudence, fiscal consolidation, cut out waste, and begin to aggressively attend to some of the issues that I talked about earlier on as well in the sector of the economy. There’s been a slight step back, but I think we can win that if we don’t just talk the right words but do the right things as a country. That goes for the private sector and ourselves as well. Transparency International: that’s a perception index, as you know. I think there’s some petty bribery that’s been on the increase recently. Traffic officers trying to capitalise on a few hundred Rands here and there, motorists who find themselves defenceless, and some in the bureaucracy doing some of the things.

There are some issues around procurement areas as well. (a) We’re aware of it. (b) What we need to talk about a lot more – even in the FT – is how predatory behaviour is very much part of current and past capitalist systems or whatever form it has evolved through over the last 100/150 years. What kind of values, morals, and integrity do you want to set up – and checks and balances within Government itself – in order that we can undermine these phenomena? At the end of the day Gideon, we need to… There’s a significant number of us in Government and in the private sector who want to restore integrity and get the right value system going, but it’s not going to be an easy task because people will look for a quick way out. Everybody in South Africa who’s been repressed for a couple of hundred years or a couple of decades, wants to drive a better BMW than the neighbour drives and have a better house than they can actually afford.

Ask the bankers. They know what kind of loan applications they get for the next house that is to be built or bought. In that sense, these knocks that we take and rises in interest rates are a good reminder to live within your means, both as a country and as households, save as much as you can (that’s a current debate in South Africa as well), and we’ll work our way out of this but it’s not going to be easy. Greed is not an easily countered phenomenon in the upper middle-classes and elsewhere as well. All of us in our respective countries have a challenge but that’s no excuse for South Africa. Coming from where we’ve come from and the kind of struggle that we’ve put up over the years, we need to do better and we will I think, over the next few years.

OLIVER CANN: Let’s just develop that thinking about the ‘new/old’ hand. What were the key learnings and the key experiences from your previous time in Government that will help you meet your challenges?

MIN. PRAVIN GORDHAN: No economic moment is the same as the previous one, for a start. Things were very good in South Africa, if you look at the build-up to our elections in May 2014. It was three months after I got into office and the new administration of President Zuma got into office that the effect of the recession hit home. It was one of the first public announcements I had to make in late July when Parliament opened; that we were going to have a deficit R50bn on the revenue side. The second lesson is ‘speak the truth. Speak the facts to the country’. Win their confidence that there are certain measures that need to be taken in the interests of everyone concerned, and we’ll come through crises that we have. The third is that we live in a very interconnected and interdependent world as Martin and others have written endlessly.

South Africa is not a little island that you can talk about on its own. I think all of you will remember the temper tantrum of May 2013. Just a couple of sentences from the Chairman sent ripples throughout all of the emerging markets. The care with which the current Fed Chair has been communicating to ensure that emerging markets are not damaged in the same way as they were done to before, is an indication that many lessons were learned in this period as well. The thought (both then and now) is that geopolitics plays a part in economic developments as well. Either in the form of posing risks or continuing to…That’s the worry about the fourth industrial revolution. It sounds nice. Digitalisation, using modern technology, and interconnectivity etcetera.

What’s going to happen to the billions of people who are on the margin though, where the digital divide is still there in many of our countries or parts of countries as well, where everybody is not as skilled as they need to be to be absorbed into these new developments? The Economist (amongst others) has written about a jobless society and a jobless economy six or nine months ago. That’s not the scenario you want to tell young people about today, that they will face in ten years’ time. Global connectivity, in the sense of coming up with answers to inequality – the social divide, the Piketty phenomenon, the role of financial markets in relation to the economy – are all very interesting lessons of that time, which haven’t disappeared by the way. In fact, the threat that we all face is that those divides will increase and that geopolitics is presenting more and more challenges as each year goes, rather than using international institutions to dampen those challenges, regrettably.

OLIVER CANN: I’ve had several conversations with South African media over the past few days as I always do ahead of these meetings, and a lot of the questions often are about the fourth industrial revolution and the natural question is the fear of unemployment and the displacement of jobs. What is your strategy about that, bearing in mind that we are heading for a period of transformation?

MIN. PRAVIN GORDHAN: Transformation is always useful. What you want to be careful about in each instance is what’s positive for society and the economy, both within a country and around the country and how you utilise that. We were just discussing that earlier today amongst some of my colleagues. My colleague (Minister of Health) would say, “Interconnectivity is excellent.” As you know, in certain parts of the world doctors sit in one part and help nurses to do a diagnostic on a patient thousands of kilometres away. Now, I believe they’re even undertaking certain types of surgical procedures under the guidance of a doctor. Interconnectivity in terms of tracking trends around pregnancy or HIV/AIDS and tracking where the patients are compliant with their requirements to take medication at a particular time or not is another factor.

In education, where we have a shortage of skills in the mathematics and science areas… Again, if you were an excellent mathematics teacher, we could have you in Davos but you could be teaching children in 1000 schools in South Africa. A one-hour lesson on how to undertake a particular mathematical exercise. I think that those are the pluses we need to build on as well. Robots will also increase productivity and make both companies and a country look good. That curve can’t be an endless curve because somewhere along the line, the costs at a societal level begin to come in. I think we must anticipate some of that and ask ourselves, “How do we mitigate those risks when they do arise?”

OLIVER CANN: We’re perilously close to running out of time, but the gentleman did have his hand up. Can we just have one more question, please?

TERANI: I’m from the Japanese newspaper Sankei Shimbun. I wanted to ask about the BRICS Corporation. After the financial crisis, we enjoy the economy thanks the BRICS economic growth but now China has a problem. The economy is slowing. Russia and South Africa also have the same kind of problem. How do you see the possibility of members of BRICS incorporating a response to the current price?

MIN. PRAVIN GORDHAN: I think many of you will remember that when global growth was impacted quite seriously 2008/2009/2010… It’s quite strong, similar packages that China, Russia, India, South Africa, Brazil and others put forward including the kind of measures that were taken by the Monetary Policy authorities that actually helped us to keep the world away from a Great Depression. We now have a situation where parts of the developed world (not all of them as Japan is just above the deflationary level) are beginning to find their way out of the crisis. I was at another session a while ago, where a commentator said that if the United States – during that period of 2008 to 2012 – had borrowed $10trn and invested it in infrastructure, they would have grown faster and once again become an important engine room together with India and China growing in the six to seven percent region.

That would have still kept global growth above the kind of estimates that we’re actually seeing today. The second is that this fluctuation in sentiment, which is accompanied by these massive capital movements – often back to the United States and out of and into emerging markets – is one that we… Let’s be frank. We haven’t found an answer to it as a globe, despite endless discussions and G20 taskforces that are going out of control to address one or other element of the financial aid elements that we’re suffering as a globe. We’ve got no answer to some of those questions. In that panel session, there was an Asset Manager from a fairly big U.S. bank who was saying trillions of Dollars were sitting (as she put it) in various corners of the world, waiting for a moment when there will be sufficient confidence to invest that money.

Read also: Leslie Maasdorp: BRICS bank – bringing development finance to the 21st century

The question for policymakers at a global level and in the big leading economies – both emerging and developed – is, “How do you inspire confidence in a global environment?” How do you minimize these financial sector volatilities? Corrections, expansion and corrections again: you’ll have different analyses about how these things work. The way in which the divergence is taking place between Central Bank policies (just in the developed world) is another area of instability – potentially, or in real terms at the moment – that people are concerned about as well. G20 was actually set up to get some level of economic cohesion in policy terms. It’s coming apart in some ways and it needs to find its essential mission again in the current moment, when we need new answers. Where is new demand going to come from?

How do we get growth, (but inclusive growth because that’s the direction we need to go in)? How do we stop the divide increasing between developed and developing? Although, the net effect over the years is that we have a better class across the world today than you’ve ever had before, but you also have a very significant group of people that the World Bank talks about – the bottom 40 percent -, which still needs to be attended to so the globe as whole has some tough questions to answer. We hope that taking a different strategic approach (and if developing countries can manage their politics better in some instance), and maybe claw back or recover from some of the policy mishaps they might have had at some stage in the recent past. Then you can have a world where both developed and developing big countries are once again, taking us to 5/6/7 percent global growth.

That will impact positively on others as well. Trade is also depressed at the moment as a result of these growth numbers and demand numbers, which means that your demand factor is not there to generate the kind of trade that we actually require.

OLIVER CANN: Driving inclusive growth. Investing in skills and education. It’s going to be a busy year, Minister. Thank you very much indeed for joining us. Thank you for joining us here in Davos.