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Brilliant: Qhena, Coleman on Rand’s “snapback” – why SA is returning to global favour

DAVOS — As you’ll hear in this excellent contribution from two of South Africa’s sharpest minds, the “snapback” in the currency is entirely rational. Colin Coleman, who runs Goldman Sachs SA, reminds us that last week Wall Street’s more influential investment bank provided a strong endorsement. And IDC bossman Geoffrey Qhena weighs in with the practical impact of a stronger rand on job creation and economic growth. They make sense of the complexities for all of us. Brilliant. – Alec Hogg

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Colin Coleman, partner managing director Sub-Saharan Africa Goldman Sachs.

Geoffrey Qhena, of the Industrial Development Corporation of SA (IDC).

Two heavy hitters and I see the two of you are in deep conversation. Hopefully swapping notes about the good week we’ve had here as Team SA.

Yes, indeed, we’ve had a good week as Team SA,but we were talking about a charger just now, incidentally. But in fact, indeed, it was a good week. The people I’ve met with have been a lot more positive. I think the momentum is starting to build and I hope we can carry that through.

We were talking about a mobile charger and not about State capture charger.

Geoffrey Qhena, CEO, IDC and Colin Coleman, head of Goldman Sachs SA at Davos 2018.

What do you think about that State capture charges, rather than charger, the frame of reference?

On a serious note, I think the anti-corruption drive, which is really part of a platform to get structural reform in this economy, to get SA back on track. We were so out of sync and out of balance over the last 5 years with where we need to be that the opportunity really, the optimism of the country is the optimism of snapping back, and that was reflected also in the Goldman Sachs Research Report that talked about the hot emerging market of 2018, based on us effectively, getting back value in our credit markets, in our equity markets, and in our currency. You can see the currency has come back from $14.50 in October to below $12, while we’ve been at Davos, and this reflects a snapback in expectations of investors of the coming benefits of structural reforms bringing growth and bringing corporate earnings back, jobs, investment, and so on.

How important is that Goldman Sachs’ Report?

I wouldn’t overstate it. I think it’s a reflection of the views of investors and the reflection of the views of the markets that are now discounting into current reality, the future prospects, which are much better, and sentiment and confidence has improved. Markets are very good about discounting back quickly the possibility of future reforms and that’s what happened in France’s Macron, in the US with the Trump election, they’re expecting reforms, and it’s what’s happening now in respect of the expected reforms that Cyril Ramaphosa would undertake as the future president of SA.

Mixed denomination rand currency banknotes are arranged for a photograph at a First National Bank (FNB) branch in Johannesburg. Photographer: Nadine Hutton/Bloomberg

Geoffrey, the future president of SA has been very outspoken on corruption. Now, if one has a look at State capture. Certainly, the IDC would have been in somebody’s sights. Has it been a tough couple of years for you?

Well, because we go into the markets to go and raise funds because we still have to find money. Government does not fund us so when people are not sure, and they are worried, it’s not easy to access that money. Even if when you access it, it tends to be a little bit pricey because then they put in a price. Also, we’re part of government, a State-owned entity family so they look at us and say, ‘but why should we believe you guys are different?’ So that drive to say corruption – ‘no, we’re going to camp on it, we’re going to go…’ It helps us now. Also, when we have projects, which we want partners to come and invest with us and they’re not sure, so they hold back. That makes our life a little bit… We need to leverage. We have a balance sheet, which is not as big as I would like it to be but we thrive when we leverage so that leverage helps us.

Just explain that ‘leverage.’

What we’ll do is, if we look at a project and if I put in R1 ideally, I would want to get R2 or R3 more. Now, if there’s a project which is worth doing, maybe creating new jobs, or saving jobs, and if I don’t find partners I have to put in more capital than I can. Then it limits me to be able to invest in a number of new projects or to help existing ones.

And job creation, etc?

Yes, absolutely.

Colin, this Goldman Sachs Report, it hasn’t really had the airtime in SA that you would have expected, given that it is positive. Just unpack what happens to a report like that, as the hot emerging market of 2018, which is SA. We understand now as you’ve explained why it came to that conclusion but what happens from here? Who gets it and who acts on it?

Well these research reports are effectively sent around the world, to global institutional investors, foreign investors, market commentators, influencers, decision makers and it’s not just Goldman Sachs but it’s the so-called street, Wall Street and all of the financial institutions that produce these reports but they are very important because they aggregate the views and the intellectual thought leadership around where should the markets seek to invest or divest or move, and influence the thinking of trillions of Dollars of assets under management so this report is just one of, I’m sure, 100s of reports that have been written since and about the December conference and the consequences of that. But it reflects a deep, probing analysis that people around the world are doing about where SA is headed. The general consensus is that there’s a huge wave of optimism and potential, given particularly the poor performance in the last 5 years.

So the ‘snapback’ as you call it?

Yes, and this is leading to, as I said before, a much greater interest. Not just from these institutional investors but the foreign investors, the multinational corporates, and others, so if we build on this momentum through specific actions, like the Eskom Board, the Mining Charter, and various other initiatives it will give and cement the confidence wave that is taking place.

So the next big opportunity for SA is the Mining Indaba?

Yes.

We do however, have a leadership in that sector from the government point of view that appears, at least, to be implicated in the State of Capture Report. How’s this going to be played? Can you imagine, I’m just trying to think from an external point of view that you have all these foreign investors now who have read the Goldman Sachs Report. They’re excited about SA and they’ve got the Rand to below $12 because they’re buying the currency, and then they get to the Mining Indaba.

Well we’ll see. I think the Deputy President spoke well yesterday, and committed to say that the Eskom thing is not just a flash in the pan as a process. I would imagine, because there will be a Cabinet Lekgotla that some of those issues have to be raised to say, then how do we keep the momentum. Now, if we go to the Mining Indaba indecisively, he’s actually looked at those. He said, yes, there was an appreciation to say there are certain things we have not done well and there are things that we have to correct decisively. Mining is one of those – that policy uncertainty has said so, there’s an opportunity now with the Cabinet Lekgotla that is going to be next week so that it actually flows quite well into that. If we miss that opportunity that uncertainty will indeed prevail.

Read also: How Cyril could return economic sanity to the mining sector – IRR’s Anthea Jeffery

Can I just add on to that. The good news here is that there’s low-hanging fruit, and mining is one of them. We really need a minister who’s going to say, we need to settle this question of ‘once empowered always empowered,’ the level of equity and the obligations of miners. In order to unlock both domestic investment in mining, and foreign, new investment in mining.

Is it there, ready to come in?

I think it is, if people are doing their homework. They’re awaiting obviously, for these developments but look what happened around Eskom. We were desperately asking for intervention and in the end, it happened very quickly, and I believe this is what will happen in the mining sector. It may or may not come in before the Mining Indaba, let’s hope that it does, but once it comes then I think that clarification will help rejuvenate interest in mining investment.

File photo of a general view of Driefontein Gold Mine shaft, near Carletonville, South Africa.

Just getting back to the Mining Indaba. Given the leadership role that Cyril Ramaphosa has played here, in Davos, if there is no change in the cabinet one might assume that he would play a similar role, given his own background in the mining sector or knowing the mining sector as he does, at the Mining Indaba or is it too small for that?

No the Mining Indaba is a big show. It’s not only about SA but it’s about the Continent, and that’s an opportunity. I think that’s why Colin says that it’s a low hanging fruit. It’s an opportunity to use that because let’s remember, people who invest in mining are long-term investors. It’s not guys who come in, and go out 2 months later or a year later so, for them to get that assurance and that comfort that there’s certainty – it will assist us greatly.

Colin mentioned earlier the impact of the Goldman Sachs Report – Davos, I suppose, is like that as well but with many people. There are many power mongers here. Have you found engaging with them that, first of all that they’re more interested in talking to you? Secondly, if they’re interested that they’re interested in putting money into SA, whereas they weren’t over the last 5 years?

Yes, in fact, in the meetings I’ve had the people who’ve been encouraged. Some of them are already there and they’re saying, how do we continue to be there. Naturally, they’re all saying, is this momentum going to continue so there’s that? I think they are watching and let’s face it, SA is an opportunity. I met one African person who is coming from the Continent and he said, ‘the past years have been painful for them as Africans watching SA not being relevant.’ They say, if Africa becomes relevant the rest of the other countries on the Continent feels it, and they are encouraged to see that we are indeed starting to come back.

So the Zimbabwean transition is also an exciting positive for the region and for the Continent?

Absolutely it is because let’s face it, it’s close to us. It’s important for us as IDC because we also have exposures there. We want certainty there but also, it will help alleviate some of the pressures that we see in our country. People will always want to go to where they think there are opportunities. Now, if we can get those countries to also get their act together it will help.

I would just like to add a bit of caution that people shouldn’t expect and then journalists shouldn’t ask us in 6 months that there was all this promise and nothing has happened. I think it will take a little bit of time and I think people should protect themselves with that expectation. However, I do believe, standing here today that SA’s future for the next 5 years is very bright. When I say, ‘5 years,’ I think we can snapback with not shooting ourselves in the foot and fixing some basic, low hanging fruit – we can achieve 3% growth rates. The Goldman Sachs formal Research Report projects 2.3%. We’re one of the higher growth forecasters on the street for 2018, and the Cyril Ramaphosa campaign did suggest, or his new deal proposal did suggest 3% in 2018, which is not far from the 2.3% that Goldman Sachs has forecasted, and growing to 5%. The 5% requires us to really get things right. It requires some synchronisation, I think is the fashionable word, between good policy in the government, investment in the private sector, realism and rationalisation in the labour sector, and the social compact working and functioning, as Cyril Ramaphosa has suggested, which I think is within our means. So, a 3% to 5% growth rate is what we’ve got to target.

What are you taking home?

A great amount of optimism. I was very impressed with the Deputy President last night and his leadership, and the sentiment – not just here, outside of SA, but within the SA delegation. It’s really palpable that South Africans here, who are very important players in the SA economy, are very encouraged by what the dynamics are here and determined to go back home and make this work.

Former CEO of Standard Bank Jacko Maree. Bloomberg News/ Photo Pieter Bauermeister.

It was interesting to note who came this year, from the SA delegation and again, the Deputy President mentioned this last night that it was a record turnout from the business community, Jacko Maree from Standard Bank hasn’t been here for 8 years and he came back this year, and there were others of his organisation as well, which I suppose is sending a signal but what is the signal you’re going to be taking back to the IDC?

Well, the signal I’m going to be taking back is that we need to support government in the implementation so we need to play our role as a development finance institution to really help stimulate this economy so that can happen when all of us, I think, we have to play a role. I think if that momentum is kept it will enable us to be able to access more capital. In fact, those partners that we’ve seen in some instances where they were not expressed expressively, whether they want to invest or not, I think that will be a little bit easier but as Colin says,, it’s not going to be a quick fix but I think we’re on the right path.

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