What Cyril Ramaphosa can Learn from Other Emerging Economies

Earlier this year I had dinner with one of Europe’s top Emerging Market investors. We discussed how the rest of the world thinks about South Africa and how much of a difference one person (i.e. Cyril) can make to an economy. She was surprisingly optimistic and laid two out ways that the South African economy can improve based on what has happened elsewhere. Either 1) President Ramaphosa makes genuine structural improvements that deliver growth  as in the case of India and Argentina or 2) simply removing the problem (aka former President Jacob Zuma) should be enough to make things a little better, like in Brazil.

What happened in Brazil, India and Argentina?

Brazil has a familiar story: service delivery protests, a downgrade to junk status and a multi-billion dollar version of state capture called the “Car Wash Scandal” meant that the economy was shrinking at an annual rate of 5.6% by the end of 2015. In April 2016 President Dilma Rousseff, a leftist guerrilla who was tortured by the military regime in the 1970s, was formally impeached (charged and then fired) for breaking budget laws. Since then there has been a lack of credible leadership, political dramas and labour protests. All of this has made it difficult to pass reforms, but simply having Dilma out the way has allowed economic growth to creep back up to 2.1%.

Boom, bust, recovery - GDP growth rate in Brazil (Trading Economics)

Boom, bust, recovery - GDP growth rate in Brazil (Trading Economics)

The Indian economy under President Narendra Modi is growing at 7.2%, there have been credit upgrades and India leapt up 30 places in the World Bank’s Ease of Doing Business global rankings. President Modi boasts that his country is “removing red tape and laying out the red carpet” for investors and has set a goal of doubling the size of the economy in the next 7 years. Wow!

Argentina has a disastrous economic history. The country has gone bankrupt 8 times since independence, most notoriously in 2001 when it defaulted on over US$100bn of debt. In 2015 however, Argentinians elected Mauricio Macri, a former businessman, who implemented bold economic reforms including reversing government controls on foreign exchange and the prices of food and petrol. In 2017 Argentina had the world’s best performing stock market and the economy grew at nearly 4% in the 4th quarter. 

Yes, every country is different, but what can we learn from this...?

Same problems in different places - protesters in Brazil, India and Argentina (CNN, The Atlantic, France24)

1) Move quickly to deal with problems left by the previous regime… and don’t stop until the job is done. President Macri started well in Argentina, but his gradual approach didn’t fix the economic issues left by his predecessors fast enough. This left the country vulnerable to a strong US dollar and tougher global environment. The peso is now down 20% against the dollar, inflation is over 25%, the central bank just increased interest rates to 40% and the country is heading for an IMF (International Monetary Fund) bailout. In South Africa this means fixing state owned enterprises such as SAA and Eskom ASAP and then tackling job creation and economic growth!

2) Don’t do anything that could hurt small businesses.  Reforms in India have generated tangible benefits, but Mr Modi also has his share of policy disasters. Radical initiatives such as demonetisation (getting rid of large denomination bank notes that were popular in the black market) and a new goods and services tax (GST) have hurt small traders and created unemployment. Today only 3% of rural Indians now describe themselves as ‘thriving’, down from 14% in 2014. Yes, SA’s VAT increase was probably unavoidable, but we needs to make sure that labour policies in particular don’t backfire and hurt the entrepreneurs that really drive job creation.

3) Heavy-handed state intervention in the economy doesn’t work. The massive expansion of Brazil’s state role in the economy laid the ground for mismanagement and corruption, while Argentina’s serial problems often started with nationalisations, protectionism and populism. This stuff sometimes works in the short term but inevitably ends with the poor and working classes worse off. We believe that the South African Reserve bank needs to remain independent and remain sceptical that a state bank can be operated honestly and effectively. Land reform is urgent, but needs to be dealt with sensibly and without reverting to indiscriminant nationalisation.

Good luck Mr President!

(Trading Economics, Reuters, Al Jazeera, Rappler, Forbes, Business Standard, World Bank, FT, CIA, Wall Street Journal, CNBC)

Andrew LouwComment