Residents oppose development in the Bo-Kaap because it is making property unaffordable and threatening their heritage. (David Harrison/M&G)
Know what a “risk off” is? No? Well, don’t worry, nor did I until a few months ago. I had provided a group of investment bankers and emerging-market analysts with a picture of South Africa’s political scene and likely scenarios looking ahead, when, for the last few minutes of the dinner, they turned inwards, towards their own obscure world. A question was posed. It sounded like it included the word “riscoff”. Presumably not a cheap instant coffee, but what was it? I may not have understood the question, but the answer was clear enough: it was a straight tie between Turkey and South Africa. The reason seemed to be that in both cases the “macro” was vulnerable.
In South Africa, the structural constraints were too severe and the current account made things especially delicate. “Macro” includes political risk, as well as a country’s broad economic policy and international trade story. The “current account” is the broadest measure of trade in goods and services. In the last quarter of 2015, South Africa’s current-account deficit increased to 5.1% of gross domestic product, up on the forecast of 4.4%. Why?
Because exports – so important to the South African economy – had fallen despite a rapidly weakening rand. Bloomberg reported in March 2016 that a “worsening in the trade outlook threatens to undermine the rand further, after it fell 11% against the dollar in the past six months. South Africa relies mainly on foreign investment in stocks and bonds to help fund the current-account shortfall, inflows that declined in the fourth quarter as investor confidence in President Jacob Zuma’s administration weakened.”
Which takes us back to politics and its relationship with economics and, thereby, the dinner-table conversation. A “risk off “ was a term of art, developed by market analysts and traders in the aftermath of the 2008 global financial crisis, when traditionally low-risk, reasonably high-yield developed markets no longer offered the same degree of certainty.
Investors were more inclined to take greater risks in searching for yield, and emerging-market economies were the inevitable beneficiaries, notwithstanding any macro risks attached to them.
As a result, a new lexicon emerged: “risk on, risk off”. This captured the herd-like tendency of the market to move collectively towards higher-risk markets and then, suddenly, to run away from them. So, the question that was put to the assembled traders at my dinner was this: If there is a “risk-off” retreat from emerging markets, which country’s currency would you sell first?
In South Africa, despite the comparative competitive advantages, such as the strength of its rule of law, the depth of its capital markets and the quality of its corporate leadership, economic structural constraints carry more weight.
These include what the market regards as too high a cost of labour, relative to its skills, relatedly, the poor quality of the education system, the costs of doing business and the inefficiencies in infrastructure that supports key industries such as mining – which therefore constrains exports, negatively affecting the balance of payments and the apparently critical factor, the current account.
The internal contradictions of these factors always intrigue me. Typically, investment bankers will first ask me about Zuma (Who will succeed him and when? And what will it mean for policy?), then something about the opposition. Third, a question about the unions and the price of labour (they would prefer wages to remain low) and fourth, they ask about social stability and inequality (they would prefer stable conditions in which to do business, notwithstanding the need to keep wages low).
This is not a circle that can be squared. But I have come to realise that it is not the function of such people either to be reasonable or to provide solutions to the inevitable contradictions. Theirs is a simple, hard-nosed calculation: Where, and on what relative basis, will I get a better return for my client’s money?
This analytical approach puts a country such as South Africa in a very awkward position. The year 2016 is especially awkward because of the confluence of political and economic risk.
The fact is that, although the economic conditions, globally and locally, are hardly congenial, the politics, and especially the conduct of Zuma, make things far worse. His administration shows mixed signals on its attitude to the market and to private sector enterprise specifically.
This is partly because there are free-market liberals in the Cabinet — some of them also hard-line nationalists — alongside social democrats who want to defend the welfare state the ANC government has built since 1994, and (former) socialists who not only believe in a strong state, which they now couch in terms of the Asian Tiger concept of “the developmental state”, but are also fundamentally and instinctively ill-disposed towards private profit (namely, Trade and Industry Minister Rob Davies and Ebrahim Patel, minister for economic development).
But there is ambivalence within the ambivalence. Davies and Patel often speak the “right” language of private–public partnership and the need to increase private sector participation in their industrial revitalisation and infrastructure-building projects – the two pillars that stand as the policy justification for the left’s broad support for Zuma back in 2007 – but when it comes to implementation, things often do not move as fast as they should because there is not a wholehearted commitment to using public subsidy to catalyse private sector investment, unless it comes in the form of smaller, less ideologically inconvenient packages.
But 9/12, when Zuma fired the finance minister, Nhlanhla Nene, was a wake-up call. There was a sudden realisation that you can’t sustain a big social-security safety blanket and a big public investment infrastructure strategy alongside big industrial subsidies if your public finances are in disarray. Seeing Davies, possibly the most left-wing member of the Cabinet, begin his defence of the State of the Nation address in the debate after Zuma’s speech in February 2015 with an ardent and apparently heartfelt eulogy in praise of “fiscal discipline” was remarkable evidence of this shift.
Although the finance minister’s leftist critics would say that this is because he has been “captured” by the “neoliberal” treasury and their friends in the international finance sector, Pravin Gordhan really does get it.
Writing on his return from the 2016 spring meetings of the World Bank and International Monetary Fund in Washington, DC, Gordhan wrote a strong, clear-minded piece in the Sunday Times asserting his belief that “without the private sector investment growth is a challenge” and arguing that, despite the constraints on monetary policy accommodation and expansionary fiscal policy, where South Africa can do little or nothing at the moment, there were still important structural reforms that the country could undertake.
Gordhan’s budget speech this year was one we had needed to hear for several years. It was presidential – it was, in so many ways, the real State of the Nation address, as opposed to the dull-minded one delivered by Zuma a few weeks before. What Gordhan did that Wednesday afternoon was draw a line in the sand.
Which brings me to a revealing semiotic moment, this time of the purely linguistic variety.
Halfway through a speech that showed extraordinary political leadership and courage, Gordhan, despite his previous denials, used the “P word” — not “privatisation”, but “predator”. For the uninitiated, the word might seem at best curious, at worst, confusing.
To the connoisseur, it is what one might call a “trigger” word, drawn as it is from the leftist literature on revolutionary class struggle. In that literature — some of which was ventilated, ironically, by South African Communist Party leaders such as Blade Nzimande and Jeremy Cronin, two of the ministerial beneficiaries of Zuma’s political largesse in the years after Polokwane — the notion is raised of a comprador class that eats away at the revolutionary integrity of a political movement and adopts predatory conduct in respect of the use of state power (think tenderpreneurs and public procurement).
So, by using that word, Gordhan was speaking truth to power: We know what is going on and now, finally, we are saying, no more. It represented a defiant throwing down of the gauntlet and a potential turning point. It was an uplifting moment. Indeed, sitting in the press gallery, I had feelings of pride and optimism for the first time in a long while. I felt like applauding, but I restrained myself because commentators must not only be impartial, they must be seen to be so.
Yet, inwardly, I was excited that someone was finally standing up and showing the kind of political leadership the country needs – and proud of South Africa’s ability to provide such leadership and proud of the ANC and its capacity for leadership.
It would be apt to assess Gordhan not just for his performance as minister of finance, but also as the figurehead of a revival the moderate middle and sensible left of the ANC, because it is clear that he has considerable political backing from those parts of the party and that this backing is of great political significance for the immediate future and in the longer term.
This is an edited extract from Richard Calland’s new book, Make or Break: How the Next Three Years Will Shape South Africa’s Next Three Decades. This month is Calland’s 15th anniversary of writing for the Mail & Guardian