/ 30 December 2014

What I’ll be telling potential investors in 2015

What I'll Be Telling Potential Investors In 2015


It is a long time since I have experienced a more negative consensus about South African politics. If it is not the ­Sunday newspapers, or public discussions on radio or TV, its serious ­journals and party documents that are full of increasingly dire warnings.

Education, Eskom, strikes, demo-cracy, crime, corruption, patronage, the public protector, public finances, Guptas, Nkandla, Parliament – it’s death by a thousand cuts, it’s Johann Rupert telling the Rembrandt Group annual general meeting that “leadership of this country, quite frankly, is becoming very, very hard to defend abroad”.

You will find no words of comfort from Julius Malema, Mmusi Maimane, Bantu Holomisa, Irvin Jim and too many newspaper editors and columnists to begin to name. And the best of our political cartoonists are looking a little grim as reality bleeds across the fine line between satire and silliness.

Beware the upside
The first thing I will be saying to investors in 2015 is: beware the “upside surprise” and be careful not to be caught in the hysteria. The moment everyone is in agreement is the moment you need to be most cautious – and it seems to me that everyone is in agreement that South African politics is a dog, with no redeeming features (sorry dogs, it’s a financial market expression).

Investors might have a range of motivations for when to buy or sell, but generally the most important issue is the price.

When an investor is worried about something – say the stability and predictability of the policy environment or labour unrest – what he or she will want to know is: Is it in the price? Has the price been reduced adequately to compensate for those uncertainties?

If the answer is “yes” then the investor can buy whatever it is (I am generally talking about listed company shares and government or ­corporate bonds, but strictly that could apply to anything that can be bought or sold). If the answer is “no”, when the price remains too high for the uncertainty and risk, then the investor won’t buy.

I have a “plausible” version of the future in which the ANC reacts responsibly and quickly to the ­significant middle-class losses it suffered in May in Gauteng and moves to stem the bright red arterial blood bubbling up around its boss. Admittedly things could get worse before they get better – the national municipal elections in 2016 are going to be a tense time for the ANC, for example.

But the ANC’s national general council (NGC) from 26 to 29 June this year might start to wrestle with what has gone wrong – and I will be telling investors to look out for that.

If the NGC is just another blustery bullying defence of President Jacob Zuma that will be as important a sign of the way things are headed as anything else.

ANC’s electoral support
Second is the linked question of the ANC’s popular support. It is my impression that the main reason investors have been relatively sanguine about South African ­political risk is they generally believe the ANC’s guarantees and they trust its record with regard to the Constitution as well as macroeconomic policy and they are convinced the ANC is strong and popular enough to transform the country at a pace and in a manner that keeps all the contending constituencies together and doesn’t breach that “constitutionality”.

But an ANC that drops well below 60% of electoral support – or even worse, below 50% – would scare the financial markets silly. All the certainties of the past would be gone.

I will be monitoring the ANC’s electoral support in 2015 as best as I can. Obviously the next big test is the national local government elections in 2016 but I am sure all political parties will be quietly ­polling and making predictions throughout the year – and I will be combing the information flows for hints and pointers.

Labour instability
Number three has got to be labour instability and strikes, which have been the bane of the South African investment environment for the past three years. The industrial relations unrest has been driven in part by inter- and intra-union rivalry. With trade union federation Cosatu’s collapse some of these problems will escalate and accelerate – as, for example, the National Union of Metalworkers of South Africa (Numsa) and whatever is left of Cosatu slug it out in every industry.

Numsa integrations
Fourth, I will also be watching Numsa’s attempts to integrate vertically, from mining and smelting (or its equivalent) to manufacturing. Numsa is well organised and has ambitious plans – and is doing ­nothing more than structuring organised labour so it can maximise its ­bargaining power with vertically integrated businesses. Many production processes are globalised so Numsa will have its work cut out for it, but it is something to watch.

Legislation changes
Fifth, I am thinking the ANC might pass legislation on minimum wages but it will also start to work on plans to amend legislation to make secret strike balloting compulsory and perhaps come up with a way that can force the end of particularly damaging strikes through some form of compulsory mediation.

The ANC (or government) has started to hint that state revenue losses, infrastructure delays and some unions becoming centres of political opposition to the ruling party are moving the government closer to changing the Labour Relations Act and the Basic Conditions of Employment Act in a way that will constitute a structural change to the framework in which potential employers and work seekers meet each other in the marketplace – in a manner that favours the employer, perhaps especially when the employer is the government. 

But it (the government and the ANC) will have to deliver on transformation and a minimum wage before it takes anything away from organised labour. And even then, changes to this legislation in a manner that disadvantages unions in any way will be bitterly contested, including through national strikes.

Union demands
Number six is an impending showdown in the public sector bargaining chamber, where unions have put very ambitious demands on the table and the government, through Finance Minister Nhlanhla Nene’s medium-term budget, has indicated that inflation plus 1 (7% at a push) is the outside limit of what is possible for government to offer.

The main unions involved in the negotiation are key “pro-alliance” unions from Cosatu, including the South African Democratic Teachers Union, the National Education Health and Allied Workers’ Union and the Police and Prisons Civil Rights Union. So the union leadership might by sympathetic to the fiscal straightjacket South Africa is in but they cannot afford to make sweetheart deals with the government. Their unions are under attack from competition (unions have become a source of real wealth for their leaderships and there is much dissatisfaction from members who want better service from their unions – they are paying for the pleasure, after all).

My clients who buy government bonds would be worried that the government can “hold the line” on its wage offer – because caving in (remembering that the public ­sector wage bill is about 40% of noninterest government spending) will almost certainly lead to downgrades by some of the ratings agencies. Obviously this raises the sensitivity of some clients to any indiscipline in government spending so they will be watching the fiscal position – including how the ANC resolves its e-tolls impasse.

Other clients will be worried about the impact of the suspension of the normal functions of government during a potential big and protracted public sector strike. The operating environment of companies is affected in a number of ways – and suspended government services never makes for a happy investment destination.

I will be telling my clients to prepare themselves for the government seriously upping the ante on transformation.

It is clear that the ANC is under tectonic pressure (from its own restive middle-class supporters in Gauteng, for example) to deliver on the ­promise to make the economy representatives of the demographics of the country. Broad-based black economic empowerment and employment equity legislation and the various industry charters, government purchasing criteria, and whole lot of other mechanisms are going to be given teeth.

The government will have to find ways of more effectively delivering education and health (among other resources) to the black population.

Businesses can embrace the agenda, fight it, grin and bear it or try to sneak off to geographies where similar constraints don’t apply, but this is rushing down on them (as it is on the government) like the proverbial runaway train. It has to be dealt with; it cannot be finessed.

Louder opposition voice
The eighth factor I am going to be suggesting is that we have to watch for the government ­panicking and scrabbling after the policies of the new and vigorous opposition groups. Most obvious is the Economic Freedom Fighters (EFF), but the Democratic Alliance and Numsa’s “movement for socialism” are also worth watching.

The ANC has stated that its guiding policy is the National Development Plan (NDP) and, in general, business, the markets and the global agencies have assessed the NDP to be a thoughtful and thorough approach to development. The ANC leadership has made the policy the centre of party and government economic planning – in word, if not yet in deed. But there will always be investors worried that the ANC will panic and start to follow the radical populism of the EFF, for example.

If the ANC lost three more
metros in 2016 and dropped below 50% of the vote in 2019 (conceivable if unlikely outcomes) the question of the stability and predictability of policy would have to be reassessed. But for now I am sticking to my view that the ANC has had a fairly stable approach to the macroeconomic policy issues, the independence of the South African Reserve Bank and property rights. I see no reason to change these views just yet.

Power out
In ninth position is Eskom and other infrastructural constraints. These have been excellently covered by some newspapers and notable journalists so there is not much new I can tell my clients. The power deficits are as serious as they have been for 40 years and this is unlikely to change for the next five years. Eskom cannot take on any new major contracts, which means there is an absolute barrier to growth in certain sectors.

There are similar constraints in ports, rail and road – and ironically we have had the crises moderated by the Great Recession of 2008 and our own anaemic gross domestic product growth.

Power questions
The tenth issue is succession indications in the ANC. which are all the rage right now. Will Zuma retire early? Will Cyril Ramaphosa become president? If Zuma controls the succession will that mean things will just keep getting worse? Will Ramaphosa reinvigorate the NDP? Will he save us?

I understand why such questions might be asked, given the relentlessly negative news flow out of Parliament and other seats of power – particularly the one on which Zuma sits.

But I don’t think Zuma is the (only or most significant) source of our troubles nor do I think Ramaphosa would be the knight who could ride to our rescue. The question is much more complex and requires developing a view of the ANC as a whole, but also the operations of the state, Parliament, the judiciary, other political parties, the growth of different classes in the society – and, well, the universe and everything (remembering all the while that we are a small open economy tossed on the seas of global turbulence).

I will be suggesting to my clients that, although the fortunes of Zuma and Ramaphosa (and Zwelinzima Vavi, Jim, Nkosazana Dlamini-Zuma, Malema, Helen Zille, Zweli Mkhize and a host of others) might signal something, there is no shortcut to understanding what is actually going on. Each instance will require a reanalysis of the configurations of power.

There is so much more, ­including creepier and more speculative strands to explore (like trying to work out who’s the rider and who’s the ridden between the South African Communist Party and Zuma; just how abused the criminal justice system has become; what exactly we are doing in Brics; and how we intend to conduct ourselves in relation to the United States and China).

I expect 2015 will produce its own black swan that will have us all scrambling to find ways of understanding what is going on and how it might affect our financial markets. Most years do.

Nic Borain is an independent political analyst focusing on Southern Africa who specialises in examining political and policy risks for financial markets.