There is a massive effort going on just beneath the surface of worsening Covid-19 statistics, finger pointing and excitable reporting. The ANC is thrashing away at an “economic reconstruction” strategy post-Covid. The alliance of communists and unions that supports the ANC has already finalised a paper of its own. The presidency of Cyril Ramaphosa is, despite all the jeering and insults it has to bear, quietly accumulating and centralising decision-making powers around itself.
And Ramaphosa is himself driving business and labour to come up with their own recovery strategies so he can launch and own a “transformed and inclusive economy”. He sees the coronavirus pandemic as the equivalent of a reset button for SA. After Covid-19, nothing will ever be the same again; SA will rise from the ashes, a model developmental state with an efficient and eager-to-serve public service, glittering new infrastructure and an expanded industrial base.
To get from where we are not, though, to there, is the thing. How? Ask that question and there are a thousand answers. Business, I’m assured, is hard at work with its proposals. And Ramaphosa has voices speaking for him everywhere. Just over a week ago it was ANC treasurer Paul Mashatile talking to Chatham House in London. “The new economy must be more inclusive, sustainable,” the Daily Maverick’s Marianne Merten reported him saying on a webinar. “In building a post-Covid economy, it’s back to the RDP [the reconstruction and development programme].” She says he spoke of plans to spend up to $20.5bn (about R342bn) on infrastructure.
It is where that money comes from that matters, of course. And there’s furious discussion about it.
Clearly the government doesn’t have $20bn to throw around, and the dispute now settles around two sources, or perhaps a combination of both. Ramaphosa would not go, now, to the International Monetary Fund or World Bank for a bailout. The conditions would be too stringent and his party and its partners would rebel against him. So while there is some direct Covid-related money available from international institutions on reasonable terms, he is going to have to find the money at home – if at all.
If you take Eskom out of the picture, things become a little clearer. Eskom needs to offload about R200bn of its R450bn debt onto someone. The most recent suggestion has been that the Public Investment Corp take on the debt and convert it into equity in Eskom. That isn’t going to happen quickly and the government pensioners whose money is being thrown at Eskom could tie the state up in court for decades.
Also, Ramaphosa, early on in the pandemic, conjured up a R500bn “rescue package” that consisted of some new money (R200bn in loan guarantees for distressed companies, very little of which has been taken up) and bits and bobs of support for welfare recipients and the unemployed as well as a repurposed R120bn or so from finance minister Tito Mboweni’s February budget being moved to the department of health.
I would not underestimate Ramaphosa’s clout here. There is a lot at stake. This is a big moment for him, and the party is his if he can make the most of it. If he gets the infrastructure spend right, he potentially ignites an economic boom out of nothing.
There are really only two ways to fund it – either he gets access to private pensions through changes to article 28 of the Pensions Act, or the Reserve Bank implements a formal programme of quantitative easing (QE) and “flattens the yield curve” on our sovereign debt so that it becomes easier to repay.
Confused? The yield, or interest rate payable by the issuer (the sovereign) to the bond buyer, is high enough (well over 10% now) to attract buyers but too expensive to keep paying. If a central bank intervened – just like the US Federal Reserve did after the 2008 financial crisis and like the European Central Bank is now with a combined €13.5bn promise to buy financial assets from member governments as Covid-19 hits its economies – heavily enough either by buying the bonds directly from the state when it auctions them, or in the secondary market, prices would rise and the yields would fall.
That’s the theory, but there’s a long argument to be had yet about which is the right way to go. In Business Times on Sunday, PSG boss Piet Mouton was clear about what he would not stand for. “I’m totally against support of the SOEs [state-owned enterprises],” he said in an interview. “They should privatise or partially privatise them so they don’t cost the country any money.”
But, he said: “We do have a massive hole now in tax collections and that needs to be filled in some way … Prescribed assets from pension funds is an interesting place to look for the money. Because I don’t know where else you can go. You either use pensions money to fill the hole, or tax me at 70% and company tax goes to 50% and then you kill the economy. And the pension fund would in any way lose the money.”
Mouton’s straight talk gets to the nub of Ramaphosa’s vision and his predicament. The pensions act already allows up to 10% of a fund’s assets to be used for “alternative” investments. Some want that cap lifted. Others point out that on average these alternative assets (things like roads and sewers that the state might use them for) only comprise around 2% of private pensions now, so raising that to 10% would be a huge jump without having to go through the pain of changing any laws.
Still, with the past decade of state corruption and mismanagement of SOEs, there promises to be something of a battle over prescribed assets if that is indeed the route the government chooses to take. Ramaphosa has a credibility problem. As part of erecting his “new economy” he is going to find a way to reassure investors that he is running an accountable state, and to do that he needs some evidence.
There’s not much of that about and his great hope must be that the National Prosecuting Authority eventually charges some of the main players in state capture soon. Without some act of correction on the state’s part, it faces an uphill battle persuading the private sector to join it in a new endeavour.
To an extent, Ramaphosa already has labour and his party on board. It is easy to underestimate how powerful he has become. Standing by Nkosazana Dlaminini Zuma as she has recently come under attack for some of the more absurd Covid lockdown rules has served him well among the party faithful.
Meanwhile, the ANC is still going through a torturous process of creating its own economic restructuring strategy, a draft of which is replete with hoary old ANC policy promises like beneficiating locally mined minerals in the country or insisting somehow on “developmental” (low) rates for any money used to finance our recovery. Reading it you’d think that state capture had not happened. At no point does the document even begin to recognise that it is the living, breathing cause of low investor confidence.
A second document finalised by the wider alliance a few days later is much softer. It might well have been written by Ramaphosa’s office.
“Business is squeezed because SA has experienced a prolonged period of very low and at times negative economic growth since the end of the global minerals commodity super-cycle following the 2008 economic crisis, in 2011,” it says, all studiously. “Economic trends in SA have largely tracked prices of its main mineral commodity exports. The growth situation was aggravated even before the Covid-19 outbreak by the rapid increase in electricity costs and load-shedding, as well as the effects of state capture.”
Finally, corruption gets a mention, but it is in the alliance that the idea that the Reserve Bank should bail the country out is most fervently argued. The governor, Lesetja Kganyago, hates the idea. He has, however, been intervening in the secondary market, mainly in short-term instruments, and as he has, the yields there have fallen sharply, giving some force to the arguments for great intervention.
The National Treasury auctions about R15bn worth of bonds a week. The Bank recently let it be known it had spent around R10bn in May intervening in the market. That’s nothing compared to the R15bn-R20bn extra that the party and others (including the deputy finance minister, David Masondo) are calling for every week. In their minds the only way to get our debt down to levels that we can afford is to flatten long-term yields to at least below 9%, and the only way to do that is for the Bank to announce and implement a QE programme.
This it does, basically, by printing money. Proponents of the programme argue that inflation is low and in no danger of rising anytime soon. But I have noticed that some government figures are not so sure. The point being, though, that if not a massive effort of our own, now, to turn this economy into something, then eventually we will collapse.
There are two big dangers here. First, some smart economists argue that we have, in fact, reached the bottom of the deflationary cycle and that the next move is up, and interest rates along with it. Some countries long for inflation because it is a sign of life. This appeared in the Financial Times last week, written by Rob Burnett, a fund manager: “With the benefit of hindsight, 1981-1982 was one of the great turning points in markets and economics. The peak of inflation and its subsequent relentless decline coincided with the start of globalisation and the greatest bond bull market in history. Central banks led by the Federal Reserve under Paul Volcker became more sophisticated, more successful and more trusted … The sharp rise in the pool of global savings pushed interest rates lower, driving down the cost of capital. All of these factors combined to deliver a rolling wave of disinflation that has washed over the global economy for nearly 40 years.
“But today appears like a mirror image of the early 1980s. We have moved from inflation peak to deflation trough. Globalisation may not be in reverse but the character of it appears to be changing. The corporate goal is no longer a single-minded pursuit of the lowest cost of production. Environmental, social and political factors are playing an increasingly important role.
“Promoting human safety is the obvious and humane response to the circumstances we face, but it goes against the absolutist belief in free markets that has been ascendant over the past 30 years. This event has the potential to change society’s priorities … Labour’s pricing power could be lifted in the years ahead for economic or political reasons.”
The second danger is perhaps more obvious. The plan, on the Left and perhaps in the presidency itself, is to find cheap money to rebuild and reshape the economy. Goodness knows how many dreams there are floating around about us becoming an industrial power again. No-one actually says how, though. It’s just a muddle. For example, here’s a paragraph from the alliance framework document of May 25: “Therefore,” it says, “while reindustrialisation, and within its ambit manufacturing expansion, diversification and growth, is critical, our effort to raise the levels of national production should be comprehensive and thus take into account the importance of upgrading our economy as a whole … Our post-Covid-19 reconstruction, development and pioneering of an inclusive growth path must therefore be transformative and fundamentally developmental in its objectives, approach and goal, to create employment and decent work, diversify our economy, strengthen the capacity of the state, rapidly roll back underdevelopment and decisively tackle inequality, unemployment and poverty.”
It is astonishing, isn’t it, how absolute nonsense like this just rolls off the tongue? I have no idea what they are talking about and, I suspect, neithe do they. Certainly no-one involved in drafting that paragraph should be allowed anywhere near actual policy.
What is clear, though, is that QE is not going to happen until the crisis at the National Treasury has actually exploded and it becomes clear they are close to default. That might be some time off, if at all.
It is also not at all clear, the wailing of the comrades notwithstanding, whether or not QE (some perfectly reasonable-sounding people suggest up to a trillion rand could be created by the Bank for the purpose) will improve or deepen inequality.
It is sort of obvious when you think about it. QE is created by elites for other elites. The central bank is buying assets, not employing the poor. There’s lots of research on this and the answers go both ways. It is also possible that QE would play out differently in different economies. It may have increased inequality in the US but not in Europe.
Quite how it would end up here is unfathomable. But surely by now we at least know how it begins. Out of the blue there’s suddenly a source of cheap money, and lots of it. Infrastructure creates millions of tenders. Before you know it there’s a feeding frenzy and growth is (again) squandered on the altar of personal enrichment.
How does Ramaphosa stop that? How does he even begin to convince the markets that he can? Another conference won’t do. Not more promises. Only action will do. In the absence of any charges from the NPA against the people who captured our state under the regime of Jacob Zuma, Ramaphosa has his work cut out for him.
He could create a special corruption tribunal, presided over by judges impervious to expensive legal teams, where your appeal is conducted from your cell, not your Sandton apartment. Something like that. Something that allows Ramaphosa to say: “Well, look, I need a trillion rand and if I have to cut a corner here and a corner there, OK, I will, and I’ll be setting an example at the same time.”
A lot of people have to go to jail before the easy money flows again – the government must surely know that. There has to be some pain. Otherwise, why would anyone trust the good old ANC not to simply repeat itself in action as it is doing today in its documents?
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