State of the Nation

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When I was in Standard 9 (grade 11) our history teacher, Mr Owen, told us that he no longer watched Springbok rugby. He explained that he was too emotionally invested in the outcome, his blood pressure got too high and he slept badly. This was hard for us to understand.  Mr Owen looked like he had been a good rugby player, he was the 1st team rugby coach and had a passionate and academic approach to the game. But now I get it.

In case you missed it, SONA was a complete mess. The EFF got thrown out, the DA walked out, there was tear gas and riot police (both thankfully outside) and shouting and screaming and swearing (everywhere). Zuma spoke -  an hour and twenty two minutes late. The two biggest things that I still don’t really understand are why the poor security guards that are sent to throw out the EFF are given nothing but white shirts to protect thems and why we invite foreign dignitaries to watch what we know will be an embarrassing debacle. So... did we learn anything new?

“RET”

The buzz-phrase of the evening was “radical economic transformation”. I scribbled it down so many times that I had to start using an acronym. But what does this really mean?

“We got the vote, we voted, and it satisfied what you could call a political power. We have got the political power. Freedom, politically, without the economic freedom – it’s not a full freedom. It’s not.” - President Jacob Zuma - 11 December 2015
“Political freedom is incomplete without economic emancipation”. - President Jacob Zuma - State of the Nation Address - 9th February 2017

In 2015, just hours after he fired Finance Minister Nhlanhla Nene and sent the economy into freefall,  President Zuma gave a speech at a function hosted by billionaire, Patrice Motsepe. Zuma looked deflated and exhausted and quickly abandoned his prepared remarks. Some commentators have mocked the resulting ad-lib speech as “trot(ting) rubbish out as reality”. Yes, there were a few clangers (“all other continents can fit into Africa”), but in my opinion, this is the closest you can get to really understanding what is going on in Zuma’s head regarding the economy.

In SONA 2017, Zuma revisited many of the same themes. In my opinion, you can’t really argue with the issues that he raised. Twenty-two years into freedom and democracy white households still earn 5x more than black households, only 10% of the top 100 companies on the JSE are owned directly by black South Africans and non-white South Africans make up less than 28% of top management positions. These are facts.

SO, WHAT IS THE GOVERNMENT GOING TO DO ABOUT IT…?

According to Zuma, the state will use “all available levers” to achieve economic transformation. This includes deploying large parts of the R500bn that the state spends on goods and services and R900bn that it spends on infrastructure programs in favour of emerging black industrialists. New regulations will also make it compulsory for big construction companies to subcontract 30% to black owned businesses. This all makes sense. Expropriation of land and state involvement in mining are also firmly back on the table. This is a little more controversial, but you can see where he’s coming from.

Zuma also spoke in terms of improving South-South trade and strengthening our relationships with the BRICs nations. He also made the obligatory commitment to the PRC’s “One-China” Policy. These are the realities of the new global economic environment and something that we will need to get comfortable with in order to thrive.

The only real moment of lunacy came when Zuma welcomed the establishment of a new BRICS credit rating agency, “so that we can assist one another in assessing our own economic paths”. But even he laughed at that one.

WHAT DO WE THINK ABOUT ALL OF THIS….

From the Louwdown’s perspective, we see inequality as the biggest threat to social and political stability in SA.

In our opinion, the best recent work on inequality is by French economist, Thomas Piketty. Piketty shows that ongoing differences between the rich and poor can be explained by the simple equation “R>G”. “R” is the amount of money that you earn on your investments and  “G” is how fast the economy is growing.  If the economy is growing faster than the rate at which rich people make money off their investments, then entrepreneurs that start their own businesses can become rich in their own lifetimes. If the economy isn’t growing then the rich get richer based on the income from their existing investments and the poor stand still or go backwards. Piketty’s answer to this problem is simple...tax the living daylights out of the rich. We think that he’s misguided and that the real answer is staring him in the face… it’s all about generating massive growth!

THE DOCTOR’S PRESCRIPTION FOR GROWTH

We believe that 3 things are important

  1. Stability - political and economic stability is critical because it gives the private sector confidence to make investments, employ people and commit themselves  to the economy. (This includes having a stable credit rating.)
  2. Lack of red tape - you need to be able to open a business quickly, get the permits you need and operate in a hassel free environment if you are going to grow.
  3. Stop “macro-level” corruption (aka State Capture) - small scale corruption is unavoidable and unfixable, unless you can change society as a whole. On the other hand, the Gupta family and looting state owned enterprises infuriates us because it drives up the price of electricity for the poor, destroys business confidence and causes a top-down rot in society.

Zuma did make 3 important comments in support of these statements. He committed to reducing red tape,  he came down hard on collusion by large companies and he demanded that the cost of cellphone data come down.

SO, WHAT’S THE PROBLEM?

...that's what he said (Twitter)

...that's what he said (Twitter)

 

In 2013 I heard Dr Mamphela Rampele speak at Chatham House in London about the launch of her political party, Agang. Dr Rampele is important to me personally because of her relationship with Steve Biko and because she presided over my graduation from medical school.  At this speech she fielded a very challenging question from a journalist on policy and execution.

“How will you differentiate yourself, because you only really have two options - policy or execution. If you choose policy, then you need to be able to explain why the ANC’s very credible and carefully thought out policies, like the NDP, are in fact incorrect… or you need to explain how a political party with no track record of national governance will be able to execute those policies better than the ANC.” BBC reporter

The problem is that under Jacob Zuma the government has become poor at executing its own policies and now the policies themselves are looking dodgy. All indications are that we cannot afford a nuclear program and that it is simply part of a massive, institutionalized patronage program. That is certainly no way to generate “G”.

WHERE TO FROM HERE...

The early 1990’s were the dark days of Springbok rugby. Years of isolationism left us with a style of rugby that was hopelessly out of touch with how the modern game was played and a culture where administrators were blind to their own incompetence and poor performance. The legends of the game, like Naas Botha and Danie Gerber, had just retired and the death of Dr Danie Craven meant that we lost the saint-like leader that seemed to hold everything together. Louis Luyt was a boorish and controversial leader that presided over a group of amateur administrators that cared more about their own provinces and personal balance sheets than about the national cause. But, it wasn’t the end. Victory in the 1995 World Cup was just around the corner and  a young man by the name of Joost van der Westhuizen was about to prove that South Africa was still capable of producing the very best players in the world. Hang in there and keep watching!

DR ANDREW LOUW CFA

MARKETS

Locally, markets seem to have taken SONA in their stride. The rand is stable and bank shares are up. This week we had an agreement on a national minimum wage (R20/ hour, +/- R3,500 per month, starting May 2018). Data for 2016 showed the smallest trade deficit since 2011 (R2.9bn down from -R52bn in 2015). The number of people who completed grade 12 is up 3.7m or 11% since 1996 but the unemployment rate of people who completed matric remains high at 38.6%. Only 13% of black students enrol in tertiary institutions.

On the international front, investors are betting that US President, Donald Trump, will deliver on his promises of a stronger economy, lower taxes and less regulation. Borrowing by junk rated companies is up nearly ⅔ vs. last year (FT).