JOHANNESBURG — Alec Hogg and I attended a briefing hosted by insurer BrightRock in Sandton on Tuesday where we reflected on our trip to the World Economic Forum in Davos last month. Hogg provided a brilliant presentation in which he reflected on certain events at Davos involving Cyril Ramaphosa that are now incredibly relevant in terms of the recent political changes. After Hogg’s presentation, attendees also asked him and myself several questions regarding Davos and current political and economic developments. – Gareth van Zyl
The purpose of today’s presentation really, is to give you a little overview of what the World Economic Forum (WEF) was like less than a month ago, where my colleague Gareth van Zyl and I were in attendance. It’s the 15th time I’ve been there. It’s the first time Gareth has been there. Once we’ve gone through the presentation Gareth will join me up here and we look forward to engaging and answering whatever questions there might be. The intention is to make it pretty interactive and have that kind of a discussion.
We call it the Cyril Spring because it was very clearly an uplifting experience. The first WEF event I went to was in 1993. It was just after de Klerk, Mandela, and Buthelezi had shared the stage in 1992 for the first time together – any international stage. Mandela went there as a communist and came back as a devotee to free-enterprise. We owe the WEF a great debt in this country because it put us onto a different trajectory.
Every year, since then, the president of this country has attended the event, which is in Switzerland, where there are 3,000 participants from all over the world. This year they had more participants, more heads of state, and more heavy hitters than ever before. Included this year was the first time in 20 years that an American president had gone. Some of us wondered whether it was a good idea or not, but Donald Trump was treated with rock star awe. Although what was interesting was nobody actually clapped for him when he arrived. People just looked – nobody booed, nobody clapped, it was just silence. He was more of a curiosity to the Davos crowd than a hero or a villain.
We also had, almost overshadowed by Trump, the first visit in 20 years by an Indian prime minister, Prime Minister Modi, which is now the hottest economy in the world. It’s growing faster than China, and the contrast between China and India is becoming more and more evident in the international scene because China is more of a developmental state, you heard that story somewhere, from our politicians. Whereas India is much more of a free enterprise state where they’re unleashing human potential, and India’s growth appears to be a lot more sustainable than China, and the way things are panning out at the moment. Anyways those are big stories for a different day.
Just to give you some context. The whole story about the WEF at the moment, is a focus on the Fourth Industrial Revolution (4IR) and I like to put this graph up there because it gives you an understanding that the first three industrial revolutions were driven, the first one, by steam. The second one by electricity. The third one by computers, and today, by digitisation. So it’s that kind of massive change. If you can consider how people moved in the late 1700s, off the farms and into the cities because of steam. Or how technology developed with the advent of the computer, and that was in the late 1960s – you can understand the digital world, which we now live in, is being transformed. That is always overlaying everything that goes on in the WEF right now.
But you can also overlay something else, which is the Second Renaissance. The First Renaissance was sparked in Europe in 1450, when a guy called Johannes Gutenberg invented the printing-press. Up to that point the printing-press did not exist so all of the books that were in Europe had to be handwritten, most of them were Bibles. Outside of Bibles the books in Europe that existed at the time in 1450, would have fitted on the back of a single wagon. Along came Gutenberg in 1450, followed shortly by the reformation, Protestantism versus Catholicism, and of course in a little place in Italy called Florence, where the Renaissance really took off. We had Leonardo, today’s version is Steve Jobs. We had the great explorers like Magellan and Christopher Columbus who were commercially driven and finding out about the rest of the world, new business models. Today, new business models from Jeff Bezos and Elon Musk. The Gutenberg’s equivalent today is a guy called Tim Berners-Lee who invented the internet to begin with.
So you’ve got the 4IR but overlaying that you’ve got the Second Renaissance, so when you talk about change… Brightrock has certainly found itself a very apt and very appropriate credo, because change is everywhere and change is happening around the world. Not just in SA, although sometimes we think it is. The purpose of this discussion though is to give you feedback from a SA perspective and I refer you back to Pravin Gordhan. It’s less than a year ago that he was booted out of the cabinet. Prior to being booted off the cabinet he was spending a lot of time around the world talking to ratings agencies, explaining to ratings agencies that we have a resilient country – that was his word ‘resilience.’ I’ll be in the budget lock-up today in CT for the Budget Speech and it will be a very different Budget Speech to last year no doubt. Last year I remember very clearly in the press conference that we had, plus in the Budget itself, Pravin Gordhan mentioning resilience. Perhaps believing or hoping that this resilient country would self-correct.
Well, in a year, so much has happened. We have self-corrected but as far as he is concerned, when he left the picture in March 2017, he then came out with a recommendation to us to join the dots. My word, have we joined the dots. Not just in the media industry but everywhere in business and today the impossible has happened. The Guptas are fugitives from justice. We have the second Commissioner of Police, who has been brought down by Paul O’Sullivan, who simply joined the dots and showed enormous resilience. O’Sullivan, by the way, has been shot four times. He’s got a couple of bullets in his body and when you see him you’ll see that he walks slowly because there are certain bullets that can’t be taken out of his body. So when you talk about people being brave in this period – O’Sullivan has got to be right up there, and there are many people. Peter Hain in London has played a huge role, far bigger than anyone in SA would anticipate. He’s managed to bring the SA story onto the front pages and into the headlines in the UK, which is part of a global world, which makes up 99.5% of global GDP, as against the 0.5% of SA, so people took notice and that pressure has now told. So joining the dots brought us to very much the situation that we’re in but I need to give you some background, and Shaun when you said, ‘last year was tough,’ and I have a look back at when you guys started you almost coincided with when SA fell off the rails, so the future can only be very bright for Brightrock.
This is from the World Bank and as you can see the downward trajectory began around the time just after the global financial crisis. That’s the global financial crisis around here. This is gross domestic product in USD. In other words, GDP in SA – how big is SA’s economy relative to other economies in the world? It’s a very good graph to look at. You can see that during the commodities boom, from 2000s onwards, SA’s GDP in USD, because that’s what counts – the ZAR can move all over the place, was doing extremely well and then you had, over here, the Jacob Zuma beginning. He couldn’t mess anything up in the first year but my goodness has he broken the place subsequent to that. So we’ve been going backwards in total GDP.
GDP per capita has been worse, i.e., individuals and what individuals are worth has been falling even faster because our population growth rate has been rising at a more rapid clip – it’s 1.6% a year, than the economic growth rate. What that means is that you take the economy, the GDP and divide it by the number of people, so we’ve been actually falling faster. This is the more worrying graph of the two, and it’s the one that I would suggest you imprint into you brain, gross loan debt to GDP. What this means is, how is SA’s debt or our indebtedness going relative to the size of our economy? So as the economy is falling what’s been happening is, in SA, we’ve been borrowing more but the borrowing has been used on consumption expenditure to have more people employed in the public sector, for instance. It has not been adding value to the country and, as a consequence, you’ve got the worst of both worlds. You’ve got an economy that’s falling and your debt rising because you have been mismanaging the place. This is the kind of graph that gives you an insight into the difficulties that the country was facing.
When we arrived in Davos I went to a couple of events. The first event that I always make sure that I get an invitation to is the Edelman’s Trust Barometer. It is released on the very first day in Davos, on the Tuesday, and is a consequence of 33,000 interviews that had been conducted in 28 countries. Edelman’s is a big reputation management firm in New York, and they then compile the results from the people they have interviewed, from those countries, on four areas. (i) How much do you trust NGOs, which is always the highest? (ii) Businesses, which is generally second. (iii) Governments, which is the lowest. (iv) Media, which is almost as low as governments now, thanks to fake news, etc.
As you can see from this graph the highest rating in the world comes from China, where 84% of Chinese trusts their government. The lowest in the world, and this is for the third year in a row, is SA, where only 14% of citizens trust their government. So in the runup to what happened at the ANC elective conference we, at BizNews, continuously said that we felt that Ramaphosa would win because the party would self-correct, turkeys don’t vote for Christmas. As a consequence of this, this was one of the reasons why we felt that it would, was because out there even though it’s a little bubble in the ANC members, those 4,700 are not reflective of what’s going on in the world but they must have been impacted by those kinds of realities.
What was interesting though, as this is heartening for the future, is that SA companies came out very well, with a 71% trust factor. What we are increasingly finding now is that companies are becoming a major source of information for the public. Media – 50% of people on earth no longer access media as they don’t trust it. They think it’s depressing and they don’t believe it’s true, which is half the people who were surveyed by Edelman’s. But the branded and/or the strong branded media brands are getting more traction. This is interesting and it also gives you an understanding that SA companies are far more believed by their citizens and by their employees than the government is – 71%:14%.
This is a picture that was taken on the 20th December, as you can see, this was immediately after the results of the ANC elective conference where 90 people out of 4,700 made the difference. It was a wafer-thin majority but we live in Africa, where the chief is dead – ‘long live the chief.’ We’ve seen in the subsequent events after 20th December that the swing-away from those who voted against Ramaphosa, or those who, i.e., voted for a perpetuation of the Zuma-Dynasty, have rapidly moved onto the other side. Gareth was mentioning earlier that there was a report on the Weekend Special – Des van Rooyen, arriving at an ANC meeting with a Cyril Ramaphosa t-shirt. My, how times have changed.
This was a watershed moment. It was a binary moment. Binary being zero and one – we were heading towards zero. I urge you to listen to Frans Cronje’s interview that I did with him last week, it’s on BizNews, where he explained why he is so hopeful. Frans Cronje is the CEO of the Institute of Race Relations, which has been fighting the good fight in SA, if you like, since 1929. For the last 10 years he’s been terribly pessimistic. In fact, I guess he’s been a little bit like a stuck record. Frans Cronje, when I spoke to him on Friday, said he is extremely hopeful. When you read or listen to that interview you will see why. It was a binary moment. It was a moment that South African history books will record and because it’s so fresh, it’s only a month since it happened. What’s happened in that month has been extraordinary.
But the first part of it is to have a look at how the markets reacted and you can see that around about mid-November there was a sudden sense in the markets that ‘this Ramaphosa guy could win.’ Up until that point the consensus, and it remained that way right up until the vote, in the media was that Zuma was going to win, and the so-called insiders kept telling us that Zuma would win. In fact, Gareth and Stuart will remember, we had a very vigorous debate within one of our editorial meetings because we republished one of these so-called experts saying that Mrs Zuma would win. I was very unhappy about that because I thought he was talking rubbish, and he was talking rubbish, thankfully but it was only 90 people out of 4,700 so give him the benefit of the doubt.
As you can see the ZAR started appreciating against the USD from around $14.50, this graph could even be updated now because we’re looking at about $11.65. That is an unbelievable move in a currency. More than 20%, as I said in BizNews Premium, which is priced in Pounds, is now 20% cheaper. The other things that are cheaper, anything imported from abroad, and we are richer. South Africans are literally 20% wealthier in global terms, as a consequence of this. The South African GDP in USD terms will have risen strongly because the ZAR has appreciated against the USD in this period. This kind of move doesn’t just happen. It happens as a result of the big money. I urge you to remember we are like a cork on the ocean, in this country. We are 0.5% of GDP. We are price-takers and not price-makers. Our commodities are priced by people elsewhere in the world. Everything that happens in this country is priced outside of this country’s borders – we are small, in a global sense. If the world suddenly decides that SA is a place to be excited about again, you get this kind of consequence, and it has continued, post-Davos.
Let’s get to Davos and the WEF, there just before the meeting happened there was a report that was issued by Goldman Sachs, who are the most influential investment bank on Wall Street. They bring out this report every year on emerging markets, and this year they decided that the hottest emerging market for 2018 would be SA. This is an extraordinary decision because this information was permeated amongst the powerful ones in the world. Goldman Sachs has a very high reputation and clearly, suddenly when people arrived in Davos they had been briefed on this within their organisations. So this pariah, and I can assure you that since 2010, every year that I’ve been to the WEF we have been a polecat and a pariah. The SA events were very poorly attended. People were not interested. People do not invest in countries that are going backwards and have crazy economic policies and insecure policy regulations. But suddenly, Goldman Sachs said, ‘this is the place to be putting your money in, in 2018.’
However, it didn’t start that well. The guy on the left-hand side is the chief-economist of the International Monetary Fund (IMF), his name is Maurice Obstfeld. Gareth and I went along to that press conference. It’s the first time that the IMF has actually done its mid-year update at Davos. They’re based in Washington so they have an update every year on the world economy and now they’re doing a mid-year in Davos, which shows you that this WEF is getting more and more powerful, and it was good news all round, well almost all round. In the rest of the world they upgraded their growth forecast for this year but SA they downgraded the growth forecast. I asked him, ‘are you going to change your mind after what happened in December, in SA, with the change in the governance?’ He said that, ‘no, much too early to tell.’
Then I met Bob Moritz. We went to the PricewaterhouseCoopers (PwC), who has an annual survey of CEOs that they present on the eve of Davos, and that survey this year again, showed record confidence all around the world excepting in Africa, where it was lagging very badly. In the conversation that I had with him afterwards and in the interview that we conducted, this is the chairman of PwC Worldwide. I asked him about what had happened in December. He said, ‘no, businessmen aren’t going to do anything – they’re going to wait and see.’ So although we had, here in SA, quite an exciting exposure to changes in the ruling party the rest of the world wasn’t listening.
Then something really funny happened. On the Tuesday, SA has always held an event for foreign investors. It’s been so poorly attended in the past year and the only people who have been there have been South Africans themselves, to show some kind of solidarity. This year it was standing-room only. I wasn’t there as it’s a private session, but we do have our ways and means. Greg Beadle, who’s a photographer from CT – that’s how good he is that WEF brought him from CT to Davos to help in their pool of taking photographs. As you can see, he’s pretty talented. Greg was in there to take photographs and of course, he didn’t disclose anything of what went on but he just said, ‘it was full of people and foreigners and Cyril made an extremely good impression.’
So now, suddenly you have IMF and PwC reports, and the Edelman’s Report being very negative to SA, but they were done in the past. The Edelman’s Report was done between October and November, similarly with PwC and the IMF they can only look at economic data, which is the past (I guess), and Goldman Sachs. Then Cyril Ramaphosa addressing people, (foreign investors) and the mood turned, and boy did it turn. Zapiro nailed it with this cartoon that he did for the Daily Maverick. It really was a feeling of a Cyril Spring. It really felt, being a South African in Davos, was a good place to be. I saw people with smiles on their faces, from our delegation. Whereas in the past there were scowls. I saw them being engaged with people I didn’t recognise, i.e., people from other countries. Whereas in the past they were in their own little huddles talking to each other.
A Cyril Spring is a very good way to describe this and Jonathan Shapiro, who has been to Davos on numerous occasions. He’s globally recognised and one of the most respected cartoonists in the world – he knows Davos and what goes on there because he has visited it, and he really nailed it with that cartoon. The biggest thing for us though was on the Wednesday evening. Team-SA has a table very similar to the one that you’re sitting at now, (a long table) but it holds a lot more people. In past years it was half empty. In past years the only people who were there were South Africans, which is rational because with the ZAR the way that it was and the Swiss Franc the way that it is – food becomes exorbitant, when you’re in Switzerland so, if you get a free meal and you’re a South African you tend to rock up there. Most other people had different options but we kind of had a half empty room.
Brand-SA went to a lot of trouble to put this thing together and every year it was a real disappointment. We’ve always been asked as South Africans to please bring somebody from somewhere else in the world. I never had a taker, no way. You’d offer and try to invite someone else but they had something better to go to politely, and people over there are incredibly polite, but that was it. This year I was asked by a CEO of a major bank in London, if he could please come along with me. That’s interesting so he did and we sat along this side of the table, and saw something quite remarkable happen.
Whereas in past years we had to put up with presidents stumbling and bumbling their way through speeches in large type. This year Ramaphosa went to the podium, where the two television cameras were on him, I presume it was eTV and SABC. He took the microphone and instead of standing at the podium here he pulled the microphone and said, ‘sorry guys, you’re going to have to follow me,’ to the cameramen and cameras are heavy and you can’t hold them for that long so they didn’t record it, and he went and stood in the middle of this very long table, where they had added another table. As you can see, from this picture, there were even people standing at dinner. They wanted to hear what he had to say. He then continued to talk for 35 minutes. I know it’s 35 minutes because I had the presence of mind somehow to switch on my phone to record what he said. We transcribed that and it’s our biggest story of the year, so far, because he spoke for 35 minutes. I urge you again, to go and listen to it. It’s on BizNews. No script, no prompting, and telling us a story that he was telling to us and telling to foreign investors.
He made some very interesting points. He said that he was talking to Mnangagwa, the new president of Zimbabwe, who was amazed as he was run off his feet by foreigners and he had something like 20 meetings a day, he was complaining to Cyril. Cyril said, ‘well, he had that amount.’ He didn’t want to tell President Mnangagwa of Zimbabwe, but he had those number of meetings by late afternoon, and he still had the whole evening to go. The interest in SA cannot be overemphasized. It’s like a rejuvenation, which I saw in 1993, where the country was suddenly of interest to everybody. It appears to be exactly the same right now. His message to us was, and he only said three things to foreign/international investors.
He said, ‘we’re going to fix three things.’ The one thing we’re going to fix is we’re going to give you certainty of regulation and policy. When we say, ‘this is what the policy is,’ it will remain that way. Investors hate uncertainty. Tell us what you’re going to do the MPRDA, it’s going to be a 20% free-carry for government and we can make our decisions on it. Don’t change it that suddenly the government could actually expropriate you up to 80% and you’re only left with 20% because some greedy guy at some Parliamentary Committee thinks that this is what is possible. A consequence of the MPRDA was that Shell cancelled a R250m exploration project for shale gas in the Karoo, and Total cancelled their tens of millions that they were spending in exploring off the east-coast. Those are the realities of what’s happened.
Ramaphosa also knows the fight that’s going on in the mining sector where the Mining Charter has brought to a halt the development of mining. Last year mines in SA spent 30% less on capital expenditure. I saw Roger Baxter at the airport, coming back from my first visit there two weeks ago, and he said to me that they had polled their members, which was after Ramaphosa’s election. They said, ‘if there is certainty of policy and we can see proper governance in the ANC we will be investing 80%-plus in the next 5 years – we’ll be expanding our investments.’ These are real, basic things that somebody like him, who’s had exposure to the business community, understands. It wasn’t what we had in government in the past.
He said the second issue was to attack corruption. My questioning to the members of the delegation was, ‘but we had the TRC after 1994, and there were people who did awful things during apartheid.’ They could admit and then get on with their lives – ‘isn’t there a possibility of doing something similar?’ The reaction was, ‘absolutely not – we want people in jail.’ We are not going to allow anybody to admit to their crimes and then move on because we have to create a democracy and the rule of law that future generations will be able to buy into.’ So, it’s a very hard line and he gave that hard line, and you’ve seen subsequent to that, what’s already happened.
The third was to fix the State-Owned Enterprises (SOEs), so a very simple issue. There we’ve seen, since arriving from Davos, in fact, he wasn’t even back a week and he swapped the board. In fact, before he went to Davos the board at Eskom was changed and the former-CEO, who has dark clouds around him was fired. We’ve also seen the Hawks suddenly grow talons. The chief is dead – long live the chief. Those are the realities of what we’re living in. What I’d like to just finish off for this part of the conversation is that at the end of the talk, and it was really inspirational. He said, ‘I’ve always wanted to be a movie maker,’ this is our new President – SA’s new President. He said, ‘I’ve always wanted to make movies but I never got around to making movies, but this time I’ve finally done it. I’ve made a movie about 4 lions and these 4 lions – how they come together and they hunt, and how they’re successful because they work as a team.’ He said, ‘that’s a very appropriate metaphor for SA,’ where we will be relying on the 4 lions of government, business, labour and civic society. We need to pull together. We need to be coordinated as a team to fix our country.
Fascinating stuff, and I can assure you for someone who’s been going to Davos for as long as I have, it was completely different to what we’ve seen in recent years. It helped as well, that’s the Zimbabwean President, who was also courted. If you remember when he first came into power in Zimbabwe there was a lot of scepticism, this was the ‘crocodile’ and this was just another Mugabe. Again, at BizNews, we took a more optimistic attitude. I did get hold of him. I was given his cell number, I spoke to him on his cell phone but he was so run off his feet. Although he did say he would have an interview with me, I never got around to it, Gareth and I were all excited. We didn’t want to tell the guys back home that we would have this Zimbabwean interview but anyway, it didn’t happen and you can understand why. He had foreign investors who wanted to put money into it.
You cannot underestimate the impact of Zimbabwe’s turnaround for SA, for the region, for the neighbourhood – suddenly the neighbourhood is looking better and the impact on SA of a Zimbabwe that’s starting to do the right things. You can read this, just Google – Zimbabwe economic policy and you’ll see the policy document that came out in January, just before Davos that they took to Davos to show – they’re making the right choices for the first time. The whole indigenisation issue for instance is now restricted to two sectors, diamond mining and platinum mining. Outside of that it’s business as per usual. The first white farmers are now back on their farms, having being kicked-off there. Zimbabwe wants to show us how it’s done and they’ve got a lot of very smart people. My dear friend, Trevor Ncube, who you might know was the proprietor of the Mail and Guardian. He has sold up in SA and gone back to Zim. That gives you an understanding of how excited they are about it.
This is the final press conference just before they left, and they left on Thursday at lunchtime because Donald Trump arrived on Thursday afternoon, and most of the international leaders decided that they would rather not be around when Mr Trump was there. This was the final press conference, which gives you quite an interesting indication. This fellow, who is right out on the side, is supposedly the head of the delegation. These two are Ebrahim Patel and Rob Davies, the Minister of Economic Development and the Minister of Trade and Industry. They were very integrated into the Ramaphosa-Show, if you like, and I strongly expect that they will play a big role into the future, which will bring all kinds of new debates to the table about developmental states, etc. I asked them how they found Davos this year to last year, and it was pretty much incomparable. Davies did track me down afterwards and said, ‘last year the only people who I saw were people who had investments in SA and who wanted to complain and they wanted to complain to someone here at Davos.’ He said, ‘this year I was inundated by people who want to expand their investments in SA or make new ones.’ He said that it was completely different to the past.
That’s the Reserve Bank Governor Lesetja Kganyago with the red tie. This was taken during Donald Trump’s speech. Donald Trump’s speech attracted a massive crush of Davos delegates but Africans were not among them because, as you might recall, he has not yet apologised for calling Africa a ‘shithole country,’ a continent maybe but anyway, the feeling was mutual and Lesetja was outside. I don’t know if he couldn’t get in, I doubt it – he said, ‘no,’ he would rather not. The conversation we had was very illuminating in that he said, ‘last year the only meetings he had were polite ones,’ as a Central Bank governor they do talk to other Central Bank governors. It was almost as though you could see that they didn’t really want to meet with him. They met with him out of courtesy and the meetings were short. He said that this year they tracked and hunted him down. He was unable to manage his diary – it was that busy. That has been the contrast in SA, in Davos this year.
The final picture there, which is a lovely picture because it also gives you an insight into who our new president is. This was after the press conference in the Media Centre. As you can see, Cyril isn’t surrounded by bodyguards. The driver of this buggy does that all day that’s his job, I suppose, and as he was coming around I asked them to stop so that I could take a photograph and they stopped. As you can see, he was extremely obliging, which was very different to others. I must admit that as he drove off he said, ‘I don’t always travel this way.’
That’s our story, Gareth can you join me now and let’s take questions.
Yes, I have two questions. You were talking about the 4 lions story there and two concerns – his Cabinet and then the Ministers. How do you think they’re going to work with him because it’s still Zuma’s Cabinet and Ministers?
That’s a good question. We’re not talking about what we knew in Davos. We’re now in the realm of speculation but everything that we hear is that the Cabinet will be Cyril’s Cabinet. There will be a couple of Ministers who will survive, maybe more than a couple (a few Ministers will survive) but he will be instilling a different group. I can just share with you a very respected analyst who consults to political parties as well as to big business. He said to me that with the people that were around Zuma, he said, the arrogance of ignorance was incredibly evident in that you didn’t even know where to start, where the lowest common denominator was to begin with the conversation. He said with the people around Ramaphosa – it’s very difficult to consult to them because they know, pretty much, everything that you can tell them. That’s the difference so, to have a Lynne Brown, to use her as an example, or a Des van Rooyen in a Ramaphosa Cabinet is very unlikely.
I think that Cyril Ramaphosa, in his State of the Nation Address (SONA) on Friday, also strongly communicated that there are big changes coming. He said that they’re going to reduce the Cabinet size so that’s going to inevitably result in a shake-up and a reshuffle. There’s a lot of lists doing the rounds at the moment, unofficial lists that we’ve been made aware of. I think that he’s going to have to make big changes and he’s going to have to bring in some of his side of the team into the Cabinet. It’s going to be interesting to see who those people are but I think that there are some very big changes coming. If you looked at the picture that Alec posted up on the screen of Gigaba sitting, I think, to the far left of Cyril Ramaphosa – that for me, sums up what’s going to happen. You’re going to see certain Ministers being side-lined and slowly pushed-out. I think there’s going to be some big changes. I think Gigaba will probably still deliver the ‘Budget’ but we’ll see.
Deliver the Budget, yes.
Yes, I guess our politics have been quite unpredictable of late. It’s almost impossible to predict but yes, I think that there are some big changes coming in and he’s going to have to do that. Remember that Nelson Mandela had 28 Cabinet Ministers. Zuma increased that from his first term, at about 30. He increased that to over 70 in his second term. That includes Deputy-Ministers, etc., some departments have two Deputy-Ministers so I think there’s going to be quite a bit of culling and a big reshuffle coming so I think there’s a lot of changes coming.
How big an issue is the threat of land expropriation without compensation to foreign investors and are they concerned?
We didn’t get that sense. The Ramaphosa approach has been sensible and if you read his comments on the subject they have been very sensible. The reality is that land was taken away from indigenous people and that land is a festering sore and it needs to be addressed. I was in Pietermaritzburg last Monday and talking to 80 farmers, who had come from all parts of the Province, and that was the hottest question for them. My response to them was that it will be done in a sensible manner but that justice needs to be seemed to be done amongst the people of this country. So if you own a farm that at some point in time had been expropriated it’s likely to be expropriated back. I’ll just give you a story that Professor Buthelezi from Wits University told me. My colleague and friend, Trevor Ncube, took me to lunch in the early 90s, before the transition. I was working at the SABC at the time, and he said, ‘I want this guy to explain to you about your hometown, Newcastle.’ Now, Newcastle is KwaZulu-Natal. It’s got the second biggest city of KwaZulu-Natal on its doorstep, which is a township called Madadeni and Osizweni in Mountain View, which is a massive township. Professor Buthelezi explained to me that this massive township was created when people were taken off the land after 1948, and put into the townships so that the then ruling political party could allocate land to people who voted for it. So these are the realities of the world that we’re in, and those memories are deep. As far as the international community is concerned it’s an African issue. It’s an historic issue and it’s something that’s going to be addressed.
I think that there was also a caveat that Ramaphosa mentioned in SONA on Friday, it was that they would only do it if it boosts productivity, which I think is an important caveat to bear in mind. It’s not just going to be land grabs or senseless expropriations without compensation. I think it’s going to have to be very well thought out. I also think that we’ve got a strong civil society body movement in SA at the moment, and a strong opposition movement so I think things will balance out. As Alec mentioned, there are those inequalities that we live with, which have to be dealt with. I don’t think it’s going to be Zimbabwe-style. I think it’s going to be very far from that.
The country has learnt from Zimbabwe and it’s not going to happen. You can almost underwrite that it’s not going to be craziness but there has to be restitution and this thing has dragged on for years. My advice to the farmers in KwaZulu-Natal was to have a look at those examples that have worked, and where they have worked where you have had a situation like this before. Some farmers have embraced a cooperative type of relationship with people who had been on the land in the past. That’s a huge opportunity. I was told by a Zimbabwean friend of mine, Martin Ganda, who’s got an MBA from New York. Martin was saying that in Zimbabwe there’s a white tea-farmer who, through all the troubles, has continued to export tea. The reason for that was that he embraced the local community, allocated part of what was his land, I suppose, at some point in time but their land before that and they grew the tea on their land and he handled the processing and the exporting, and everybody benefited. So it’s almost like we get caught up in the rhetoric but the solutions are there. Another good example is what happened with Tongaat Hulett because they’ve been operating in Zimbabwe throughout all of this period. They have the biggest sugar farm in Zimbabwe but the reason they’ve still got the sugar farm is because they’ve embraced the local community in the same way as they’ve done in KwaZulu-Natal, and allocated land to small farmers. Everybody has benefited because you have this partnership. That’s what Ramaphosa was talking about. He was talking about bringing people together – having a partnership and not fighting each other. Not the politics of hate but the politics of love, if you like.
Thank you, Alec, two short questions. The one is, a country runs as efficient as its Receiver of Revenue runs, and we know there’s a lot of very good guys that were put out of business. Do you think he can get our Receiver of Revenue back on track? The other thing is, the possibility of a coalition government from next year is not out of bounds and can that happen in SA?
I’ll give you two responses to this. The first press conference that Pravin Gordhan gave, because remember he only came back into power after Nenegate so, it was on the 14th December 2015, (it seems like a world ago) so, the very first press conference that he gave in Davos was very well attended. My question to him there was, ‘what are you going to do about SARS?’ Remember, Pravin was the Commissioner of the SA Revenue Services, he spent 10 years there. The people who have been wiped out of the system are all his people. The top-100 people at SARS have been wiped out and we look back and say, ‘are we surprised there’s a R50bn hole in the budget that we’ve under-collected to this huge extent?’ His response was, ‘that’s something that he’s going to be looking at.’ That was two years ago of course, he’s no longer there. He tried. You know, straight after he came back from Davos in January 2016, he went to war and threatened to resign if Tom Moyane didn’t leave. Then he backtracked on it because he saw that he wasn’t going to win that. That has got to be one of the number-one priorities. If you remember in SONA Cyril Ramaphosa did say that he will be installing a Commission of Enquiry into SARS. I am, and there’s not many things I’m certain about in this amazing turbulent country, but the one thing I’m certain about is that Moyane will not be there in a year’s time, and that there will be a reinstatement of those who actually know what they’re doing at SARS, who do not accept or promote fake news reports from KPMG and that the revenue collections will be back on track because as you accurately say, if you are unable to collect revenue then you can have whatever tax policy you like but it won’t work.
Just an interesting point on that Commission of Enquiry. Gigaba actually tentatively announced it late last year. I think he was reading the political winds, and he was seeing the way that things could go if Ramaphosa came in that this Commission of Enquiry could give him some political capital. I think that Gigaba was also on an interesting CNN interview recently as well, trying to put forward his case. So I think Tom Moyane’s days are numbered and I think a big clean-up is definitely on the way at SARS. Just on the point of the coalition government as well. I think with Ramaphosa in charge of the ANC it’s going to be very hard for the DA or EFF to get over the 50% mark. I think that the chances of a coalition government has probably decreased, if Ramaphosa does what he’s promised to do in the next year as well.
Yes, on our coalition government – I’m aware of a think-tank that’s been spending a lot of money on trying to explain to politicians how a coalition government works. I think they’ve wasted their money. Remember, the ANC – it was described to me once like a football team. If you support Kaizer Chiefs you might not go to the games if they’re playing badly or if they’ve got a bad coach and/or bad players, but you don’t suddenly start supporting Orlando Pirates, and that’s a very nice metaphor for the ANC. The voters from the ANC, who have shifted across, have been very minimal and remember, when they’ve got 14% of citizens trusting their government. If that number goes to 60% to 70% – the turnout for the ANC is going to be a very different proposition so a coalition government might take a while to go. Of course, the DA have certainly not helped themselves by attacking the two women who’ve created the party so it’s’ a very strange approach from the opposition party.
Alec, in terms of the actual Budget Speech that happens (today), the fundamentals that determine the budget takes ages to compile. With the changes now with Cyril coming in and all that, in terms of Gigaba, when he starts to talk about the budget – what fundamental changes could have happened or may transpire with the budget, going forward – that was in place or possibly in place before the actual change in Government?
I’d urge you all to get onto BizNews at 14:01, because Gareth and Stuart will be processing everything. I’ll be in the lock-up from 06:00, and then you’ll get the whole speech and everything there so, the answers will be made then. Gigaba did give us a very sensible medium-term Budget Speech in October where he outlined the problems. Fixing those problems – we’ll get an idea tomorrow. The optimists believe that we should allow the Ramaphosa effect to take hold. Remember, tax receipts are determined by two things, your ability to collect the taxes, but also by economic growth. With the transformation or this watershed that occurred in December, if you can give that some time the economy, according to the optimists anyway, is likely to rebound. I think the feel-good factor that you see around you will also tell you that.
Remember, SA companies are sitting on R1trn in cash on their balance sheets that they haven’t been investing. Forget about the foreigners, only they need to open those taps a little. As far as moving room is concerned well, what we do know from Roelf Meyer, who sat on the other end of the table to Ramaphosa during the CODESA negotiations, is that he is an extremely astute negotiator. He plays his card very close to his chest, and he’s smart. There’s no question that he’s smart. He reads a lot, he understands what’s going on in the world and going on in his country. So to expect him to make any knee-jerk reactions and changes tomorrow on something as important as the budget, would be out of character. He is now the President. He now has the most powerful position that he probably will have in his whole Presidency because we’re in the honeymoon period. The chief is dead – long live the chief. People have moved sides.
Last week’s critic is today’s imbongi. You have that kind of a move. We’ll know if there are significant changes in tax, which affect the poor we’ll know that there’s big problems in the country and we’ll know that the problems are far bigger than we anticipated. However, the hope of our tax expert, Professor Matthew Lester from Rhodes University, is that Cyril will breath. He’ll stay away from raising VAT by 2% points, which is pretty much the consensus view at the moment. That he will do that because VAT affects the poorest of the poor and if you are aware that the number-one priority for him, as he said at SONA, is addressing poverty. So when you put it all together if we do see a VAT increase it will be because we’re in a very dark hole, much darker financially than we had anticipated. If we don’t see a VAT increase we will see things undoubtedly in the top marginal rate. I’m expecting that to go to 48% or maybe even 50%, which is a big one. Probably capital gains tax – those are the issues that are likely to be the areas.
You can almost underwrite that the fuel levy will be significantly increased because part of the Cyril Spring has seen a 20% improvement in the ZAR, which has an immediate impact on the petrol price or the landed oil price so there’s a lot of room there to move. My hope would be that they only stick to giving back no fiscal drag benefit. That alone is worth R20bn, if you just don’t adjust tax rates for fiscal drag, and that has been a standard policy in the past. Then maybe get another R10bn or R15bn or so from the fuel price and maybe a 5% or 6%, from an increase in the marginal tax rates. That’s coming – we can’t sit on a marginal tax rate in an unequal society like this one, where it is at the moment, just believe it. Last year went from 42 to 45. It’s going to go higher but then there are, and as you guys always do when you watch the Budget – there’s always the little nuances around and hopefully, there’s not too many naughty things that are allowed to get put on that side.
Yes, I think you’re right on the VAT point that if Gigaba had to announce VAT increases tomorrow it would make him the most unpopular person in SA, and it will give Ramaphosa the political capital to boot him out quicker, but yes, I think you’re spot on with that assessment.
I don’t want to ask a question but I just want to make an interesting remark on something I’ve heard in a series that’s on BBC called Gunpowder. This one guy wanted to overthrow the king, he wanted to murder him so another guy said to him, ‘only God overthrows king.’ That’s interesting – so you see what happens many years ago, thinking back, and suddenly everything happened in Zimbabwe and in SA – just one after the other.
I agree with you. I think there’s a Divine Plan for this country but if you bring it down to a more secular basis. We like to quote Ernest Hemingway, who said in his book, ‘The Sun Always Rises.’ He said that how does a man go bankrupt, gradually, then suddenly? We’ve been saying this about SA. That’s’ why, if you do get my newsletter every morning, quite often I throw in ‘hope springs’ because it’s gradually then suddenly. During the gradually-phase it’s hard to believe that a change will happen. Thankfully, the gradually-phase didn’t go for another 5 years, which was very possible at the elective conference had those 90-people decided that the time wasn’t right yet. But maybe the Divine Intervention was required at this stage rather than later.
Can you imagine, just think of a different scenario, and Zimbabwe was always going to go, with or without SA intervention or whatever happened here. But if Zimbabwe had become as it has, throwing off the yolk of 37-years of dictatorship to become a liberal democracy driven by free enterprise, and SA had continued along its crazy path – you might have seen a mass migration of people from this country to Zim in time to come so everything happens for a reason and it’s only with hindsight that we understand that, but in this instance I’m on the same page of you.
I think that there’s also the Southern African Spring, which I think is a great description of what’s happening right now. I think people in the region have realised what doesn’t work. We’ve had several decades of that now, and people just want to be uplifted out of poverty and they want sensible policies. They want policies that are going to make sense to their lives, and that are going to help improve things for themselves. So I think that there’s a great level of rationality that is beginning to emerge within the Southern African region. I think the politics of extremities is now beginning to get side-lined and starting to disappear. I feel like we’re even starting to see that within the ANC. It may still be early days but I think that there is a sense of a rational perspective beginning to emerge.
The naughty kids have trashed the place and they’re out of the room now. Now the good kids are in and they’re starting to clean-up. They really trashed the place bad though so there’s a lot of cleaning up to do.
If I could just comment on that. Last year I actually fulfilled a ‘bucket-list’ wish where I rode my motorcycle up to Zambia, basically up Broken Hill, now Kabwe, which we left in 1969, on my 6th birthday. I didn’t know what to expect. I hadn’t really paid much attention to what was going on up there but what I found was a country, which yes, had bounced off the bottom. Kaunda and his mates are now either dead or out to pasture. The country is being run by a generation of managers in their 40s and 50s. I had the pleasure to meet the Head of Public Relations in the Railways because my late-father used to work on Garratts. This man and I were talking and Zambia has a national plan to be a second-world country by 2030. People were saying to us, ‘we’ve had enough of living off mangos and being right at the bottom, and being broken and we realised the only way was up.’ The only way to do that was to actually chuck away all this African socialist stuff, realise how the world actually works, and get on with it. My hope is that Cyril and his friends have seen that, and now we’re going to go upwards, as Zambia has. I was telling people that until recently that young men, clients of mine, who happen to have colleagues at work, ‘well, go and have a look at Zambia – I think you could do well there,’ because there are a lot of South Africans there. They’re exporting grain because they welcomed all those white Zimbabwean farmers. Now we’re telling them to stick around don’t go to Zambia, I think we’ve got a chance here again – I certainly hope so.
A good comment.
Alec, on a very different topic. Last year a lot of the Davos content that was interesting to me was on the new technology side, in talking about the 4IR and Blockchain and what that is going to mean in terms of economies and how we transact. Then last year, we obviously saw the big rise of cryptocurrencies and all that kind of hysterical optimism at some levels and then maybe some of the correcting of that. But I’d be curious just to know, in the Davos space, what the discussions were this year, relative to last year’s discussions around that kind of technological underpin and how are we going to transact with each other going forward?
Last year I spoke to a guy who was very fringy on Blockchain, etc., although Don Tapscott has been going to Davos for years and years, and has been talking about it. He’s been very quiet. Remember, there are 400 sessions and Blockchain – although it was starting to emerge last year, it was not really on the main agenda. Now Gareth is our resident expert on this so he’s going to have a lot to say about it, but what I can tell you is the main drag or the main road, it’s called the Promenade in Davos, has no shops at this time of the year because people or companies from all over the world come in and they pay a year’s rental for hiring the shop for a week. So as a shop owner you get your years rental from some company that wants to display its wares in Davos during that week. This year there were a lot of cryptocurrency related companies that were there but Gareth is actually our man on this so, go for it.
So I was fortunate enough to interview two people on Blockchain at WEF. The first person was a lady who’s working within the Blockchain division of WEF in San Francisco, and I think the quote from her that stood out in my mind was that Blockchain is bigger than Bitcoin. So,last year we had this absolute craze on Bitcoin. Everybody from your plumber to your hairdresser was buying Bitcoin. The price shot up to $20k – it’s corrected massively this year but I see this morning it’s heading up towards $11k again. The focus has purely been on the price around cryptocurrencies. If you look at all the major news stories it has just been about the price, but actually, the Blockchain underneath it is the most revolutionary part of this whole cryptocurrency thing. It’s what’s going to change everything, from finance through to identity.
I went to one session held by a company called ConsenSys, which is a major Blockchain company based in San Francisco, and what they were talking about is why do we have this whole concept of Nation State? Why do I have to have a SA ID and a SA passport if I am just as skilled as somebody in the USA, or China, or Australia – why must it be that I earn less than them because of where I’m based? It makes no sense so I think Blockchain is potentially going to change all of that because it could do away with your whole concept of Nation State because your identity could be registered on the Blockchain and we then have a real, true global village. You can then travel wherever you want because all your information is on the Blockchain – the airport can check it. They can check your security status. They can check where you’ve recently been. They can see if you have any debts anywhere or if you’re like the Guptas and on the run, so they can analyse all of that. Also, it decentralises the whole system.
Currently, our identity system is very centralised, even our banking system is very centralised. If something goes wrong with one bank, with one database, it can potentially have a knock-on effect. If somebody hacks Home Affairs and steals all their identities in there – you’ve potentially got 55 million people that are completely compromised. Whereas, Blockchain makes that almost impossible. It’s virtually impossible to hack the Blockchain because of its decentralised nature. You’d have to hack millions of computers to do that and that’s the way in which the whole system has been designed. I think that the talk at Davos for me, was really about how important Blockchain is and how it’s more important than the craze around cryptocurrencies.
This craze around cryptocurrencies have just purely been a bubble. We don’t know if 90% of those over 1,000 cryptocurrencies are even going to survive 10 years from now. So I think Blockchain, for me, was definitely a major theme coming out of Davos. I think bankers are switching onto Blockchain but they’re switching off from Bitcoin. They’re not interested in Bitcoin. They’re more interested in Blockchain and what it can do for them as banks. I think that that’s the direction that it’s going. I think it’s very exciting. I think the next 20 to 30 years, will be very exciting in the Blockchain space and I think it will revolutionise the world like the internet has.
I like the way a professor from MIT put it. He said that the ultimate objective is that everything is on the Blockchain so if you own that glass you can actually transfer 100th ownership of that glass for a cup of tea, which is an interesting concept. It’s hard and it’s mind boggling to us now but we all have our own individual numbers, and those individual numbers will have assets and all of our assets will be part of that individual number. Instead of using currency to transact with we will use assets that we have on the Blockchain. Remember, currency is only there to stop barter but if you think about it if everything is on the Blockchain and you can barter electronically then it’s the same as currency. That’s why what Gareth is saying about Bitcoin.
It’s almost like Nouriel Roubini, who I saw in Davos in 2007, before the global financial crisis. He was the only international economist who predicted it. While he was sitting on this panel I will never forget, there was a lady there called Professor Tyson, I called her ‘Sunshine Tyson’ in my writing in the follow year, and she was saying and repeating just what everybody else believed was that the economy was in a new era, and it was growing and economic growth was going to get stronger, and Roubini said ‘there’s a problem about to happen,’ and that something is going to hit the fan soon. Anyway, Roubini’s take on cryptocurrency is that it is the biggest fraud to have been perpetrated on mankind in our life time.
But we get Blockchain.
We get Blockchain, yes. Actually, there’s something very interesting that’s been developed on top of Blockchain, which is called the Lightning Network. Currently, the whole issue with Blockchain is that even if you want to use Bitcoin or any cryptocurrency to transact it can take relatively long, sometimes up to an hour or several hours. The Lightning Network though is creating a side chain, apart from the Blockchain that essentially speeds up transactions, and makes it faster than Visa or Mastercard so that’s something else to also keep an eye on. But I totally agree, I think the whole concept of cryptocurrency is dead. Maybe we’ll settle on one or two, or maybe even the Rand will go the cryptocurrency route or be on the Blockchain, but I think that the Blockchain is the most fundamental element to come out of the cryptocurrency craze.
Remember, as we sit here in our naive, South African environment thinking only the best things and we don’t dig into the fact that criminal networks are massive around the world. Read Freakonomics and you’ll see what Dubner has to say about how they’re the biggest corporations but we don’t know that they exist. Now, if you’re a big corporation and you have a problem in washing your loot and you have this thing called Bitcoin that comes along then you have a massive incentive to keep the hype going because it’s the easiest way in the world to launder money. It would be surprising to me if the Guptas didn’t click onto that a while ago. Maybe they’re big fans of Bitcoin as well, but those are the realities of what we’re dealing with. All is never what it seems. Life is an onion – you peel off a layer only to discover a whole new world exists there and you peel off that layer and there’s a whole new world that exists there as well. As far as all of this is concerned – what we’re trying to do is we’re trying to keeping an open mind and follow the money. When you follow the money – who benefits the most from Bitcoin? It’s the illicit economy. It’s the crooks – the real, big crooks. If you then unpack that you realise that, at some point in time, the good guys have got to win, as they did in this country.