Investors reward strongmen in India and Brazil, but now SA must make its case
While our peers allow institutional strength to erode and authoritarianism to increase, Cyril Ramaphosa has chosen the opposite path
In 2013, SA, like the other “fragile fraternity” members at the time, notably India and Brazil, fell victim to a sharp sell-off in financial markets as speculators preyed on its weak fundamentals. But a lot has changed since then. While Brazil and India are back in vogue, SA is not — at least for now.
There are several reasons why portfolio investors have found India and Brazil attractive again, not least of which their decisive leadership and pro-business reform agendas.
In India, several growth-boosting programmes have been implemented under Prime Minister Narendra Modi’s control. But most appealing has been his recent decisions to further liberalise foreign direct investment codes and to sharply cut corporate tax rates.
Similarly, investors have been impressed by the speed at which Jair Bolsonaro, Brazil’s new firebrand president, has effected aspects of his agenda. It took the “Trump of the Tropics” — named for his courtship of controversy — just 10 months to overhaul Brazil’s controversial pension system, for example. And to not just meet, but exceed, privatisation targets.
However, these countries’ reforms have not come without costs. While putting their agendas into action, Bolsonaro and Modi have eroded the strength of non-partisan institutions and stifled dissent. Moreover, and even though Brazil and India are democracies, there are growing signs of authoritarianism at play, where checks and balances — a hallmark of SA’s constitutional democracy — continue to be undermined.
Yet despite these worrying scenarios, portfolio investors have turned a blind eye to that piece of the picture: rather than disinvesting, they have chosen to embrace the “good news” of reform by buying billions of dollars of equities and bonds, all the while ignoring the potential negative, and not insignificant, long-term consequences associated with the strong-arm tactics taken by both leaders.
Closer to home, it is clear something significant must shift to arrest SA’s economic decline. This is particularly so given the realities of slowing global growth, stable to falling commodity prices, and the prospect of little, if any, further fiscal and monetary policy stimulus. Without these traditional growth-drivers, it is obvious that SA will no longer have a choice but to course correct.
Enter finance minister Tito Mboweni’s growth strategy, released in August. It contains old (as well as new) recommendations. These range from proposals such as cutting red tape, liberalising travel restrictions and deregulating the energy sector, to promoting greater competition in government sectors and using more public-private partnerships to fast-track infrastructure investment. In short, it is a pragmatic — and certainly more comprehensive — plan than the one put forward in 2017.
But despite several similarities between Mboweni’s “Going for Growth” strategy for SA and the reform agendas of India and Brazil, financial markets have not been impressed. Why not? We think there are three reasons.
First, the political configurations of the relevant countries are quite different. In India and Brazil, leadership was transferred from left-leaning parties beset by corruption scandals to opposition parties promising change. By contrast, in SA the ANC retained its power after the May 2019 general elections, but with the difference that President Cyril Ramaphosa inherited a party with features similarly dysfunctional to those of the Congress Party in India, which lost power in 2014, and to the Workers’ Party in Brazil, which was defeated in 2018.
Also, some of those still in the Jacob Zuma encampment remain in influential positions, enabling them to continue to stymie the president’s goal of eradicating corruption while simultaneously frustrating his efforts to reform.
Second, Ramaphosa’s leadership style contrasts with that of his peers. He tends to be steady and measured, seeking to build consensus rather than division. The contentious tactics and “big bang” approaches employed by Modi and Bolsonaro, while finding favour with financial markets in India and Brazil, are unlikely to be a hallmark of Ramaphosa’s presidency.
Third, and related to the above point, given his narrow victory at the ANC’s national elective conference in December 2017, the president has yet to fully consolidate his power base within the ANC. Until then he is left with limited room to manoeuvre, being forced instead to continue making policy compromises.
These differences are real. But their reality does not entirely justify portfolio investors’ indiscriminate selling of SA assets. Given evidence of institutional strength being eroded in India and Brazil, Ramaphosa (through notable management changes) has already celebrated some success in rebuilding the credibility of the SA Revenue Service, the National Prosecuting Authority, other key corruption-fighting institutions and some state-owned enterprises. Having reinforced the independence of the Reserve Bank is another crucial differentiating factor relative to India, for example, where political interference in the workings of its central bank continues to prevail.
And these are only some of the directional shifts many portfolio investors have ignored. There are more. While it is true that the ANC’s national executive committee in September did not accept the finance minister’s latest growth strategy in full, some business-friendly policies have been endorsed. Though not ideal, this partial adoption is at a higher rate than the status quo of just a few months ago. And while the SA government has been poor in implementing even existing policies, there has been progress on a variety of fronts, nonetheless.
As for the president’s consensus-based leadership style, some might even interpret it as refreshing compared with the otherwise authoritarian-like ethos in India and Brazil.
So, there we have it. Portfolio investors have been buying vast amounts of financial assets in India and Brazil, despite some obvious negatives in the making. Simultaneously, they have been huge sellers of SA equities and bonds, despite some obvious positives unfolding. With Wednesday’s medium-term budget policy statement, Mboweni has a unique opportunity to help correct this apparent discrepancy.
Indeed, a credible fiscal consolidation plan, coupled with a viable salve for Eskom’s financial and operational woes and a reliable implementation strategy (which for now focuses on the growth-boosting policies that there is consensus on) could be just the tonic needed to revive business confidence and awake the economy from its slumber.
Who knows? The same portfolio investors who have been shunning SA might well be the first to return. Whatever the case, here is an opportunity the government cannot afford to squander.
• Gopaldas is a director at Signal Risk and Le Roux is chief economist at Rand Merchant Bank.