RONAK GOPALDAS: As trust declines in state and business, the social contract must be rewritten or rejected
Amid concern over SA yet optimism too, investment is hobbled by continued uncertainty
The contours of SA’s political and economic landscape are subtly shifting, and are likely to look fundamentally different come 2024. Investors are confused over how to position themselves, with many expressing the sentiment that the country is forever taking one step forward and two steps back. Many see green shoots of progress, at the same time as big causes for concern. As a result they cannot decide whether they should be sanguine or sceptical about the country’s trajectory.
This uncertainty is hobbling investment. The reality is that there is evidence of both progress and failure, and cause for optimism and pessimism. This assortment of views was on display during last week’s “SA Inc — back to basics” panel at the Southern African Venture Capital and Private Equity Association (Savca) virtual conference, in which I participated. The discussion provoked a critical evaluation of where we are and where we are headed, but there was an absence of high-conviction views. The long and the short if it is that there is a divergence in political, institutional and economic trends. The pace and effects of these are varied, but they will come to a head.
Politically, the ANC could well lose its majority in the 2024 elections, which would usher in an era of coalition governments on a national level. Trends in the ANC’s general election vote share since its peak in 2004, along with recent polling data, suggest this is now a real possibility. This would be unprecedented for SA — though coalitions have been tested on a local government level, albeit rather unsuccessfully, this has never happened nationally.
Naturally, this is creating anxiety about the effects on governance. With political competition from opposition parties remaining weak, the ANC is likely to retain the lion’s share of the vote and therefore remain at the centre of any new arrangement. While this would signal a maturing of the country’s democracy and break the governing party’s complete stranglehold on power, coalition governments are often fraught with inertia, bureaucracy and complexity, leading to suboptimal outcomes.
In this context what the political configuration looks like becomes increasingly intriguing. Will the ANC align with the EFF, to which its radical economic transformation faction is more ideologically inclined, or will it consider a pragmatic coalition with the DA? Despite recent overtures from the DA, the vast ideological schism between itself and the ANC makes this outcome unlikely. In the former scenario the EFF would emerge as kingmaker and hold considerable sway over policymaking given its relative importance in decision-making. This arrangement would signal a shift to the left of the ideological spectrum, with a state-led, nationalistic and interventionist approach — a scenario that would almost certainly spook investors and rattle markets.
At the same time, if SA continues on its current economic trajectory — which is characterised by accelerating deficit and debt accumulations — it is conceivable that it will eventually fall off the “fiscal cliff”. Despite reassurances in the recent budget that the National Treasury will hold the line — and tendency towards consolidation — the credibility gaps arising from persistent missed targets have created scepticism about its execution. Based on current trends the country may be sleepwalking into an IMF programme.
This timeline will be accelerated if the country loses market confidence and if now-favourable global financial conditions take a turn for the worse. This scenario may occur in the next three years, a period that dovetails with the next election cycle. The implications for the economy would be profound since IMF programmes typically entail reformist, market-friendly and austere approaches to managing the economy. This would be completely incongruent with the economic philosophy of an ANC-EFF alliance.
It is therefore conceivable to envisage a scenario where the political veers left and the economic pivots right, creating a seemingly irreconcilable tension. How then is this circle squared? This question becomes especially important in the context of SA’s fraying social contract. To be sure, the picture is bleak. The middle class and tax base are shrinking, extreme poverty is rising, and unemployment is at crisis levels. Corruption in both the public and private sectors is rampant, while racial tensions are elevated. At the same time, the country remains among the most unequal in the world — a situation that is both untenable and unsustainable.
Resentment at the slow pace of change is building, while the government’s failure to provide basic physical and economic security — the main tenets of a social contract — have eroded public trust. Meanwhile, the private sector suffers from credibility issues of its own. Both at the top and bottom of the pyramid pressures are building, suggesting that the status quo is not sustainable. Now, in the face of declining societal trust, the social contract must either be repaired, rejected or rewritten.
For the current administration, efforts have centred on the first of these options, with the president viewing institutional reform as the bedrock of a capable, competent and responsive state. Even though this approach has invited criticism for its slow results, the efforts have not been in vain. Personnel changes in important parastatals, sound appointments in important state organs such as the National Prosecuting Authority and SA Revenue Service, as well as the impending Political Party Funding Act, are clear signs of reform progress and improving governance. Credibility has been an important feature in these developments, but arguably more important has been the process of returning legitimacy to these organs. The dividends of this approach will take time to show, but there are reasons for optimism.
In the same breath, public-private collaboration has improved, first in the immediate aftermath of the Covid-19 pandemic with initiatives such as Cobra (Covid Business Rescue Assistance) and Spire (SA Pandemic Intervention & Relief Effort), and now with the vaccine procurement. A market-friendly budget speech and changes to Regulation 28 have been well received, while progress in the energy, labour and telecoms sectors has provided further reason for business cheer. Meanwhile, Business for SA has been able to present a consistently unified business front in all engagements with the government, which has not always been the case.
There are early signs, then, that the damaged social contract is slowly being repaired, but the question is whether this slow pace of change will be enough to cope with socioeconomic pressures. With the political, institutional and economic agendas all on different tracks, how should investors be thinking about the domestic political economy? Assuming that trends persist, 2024 may usher in the advent of coalition politics, alongside an IMF programme. This potentially messy context will necessitate a different type of political and business leadership for the country to succeed.
Political parties will need to recognise that they are only part of the solution, rather than the entire solution. This will require a pragmatic approach to governance that prioritises consensus and compromise over absolutism and ideology. The private sector, for its part, will need to become proactive rather than reactive in the face of these challenges, while investors seeking clear-cut signs of reform will need to see the wood for the trees in the face of a shifting political economy.
SA is neither falling into the abyss nor on the cusp of a big turnaround. In all its complexity the country finds itself somewhere in between.
• Gopaldas is a director at Signal Risk and a fellow at The Gordon Institute of Business Science.
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