PETER BRUCE: Can Cyril change the ANC’s tune amid Moody’s blues?
Ramaphosa has to move ahead or get out of the way. Reform has to come or we all crumble, rich and poor, big companies and small
President Cyril Ramaphosa is getting the hang of this. People like to be spoken to by their leaders. Ramaphosa didn’t really have much new to say in his short address last night but to all but the most cynical it was a welcome break in the already dull routine of lockdown.
He tried to remind people to stay at home, to remind the police and army that their job is to help people, not hurt them. Slowly, the behaviour on both sides will settle. That is what we do here. He promised a vastly accelerated testing programme and new money from the private sector, including R1.5bn from Naspers. He got to thank the faceless people doing lousy jobs, to sympathise with informal traders, promised to fix mistakes as he goes along (as an ex-smoker, I’d let smokers smoke, Mr President; now is no time for petty dictates) and to remind us we had just 17 days to go.
I have my doubts about that last bit. We surely have to expect a little more, even if it’s just a week. The job here is to nail the virus once and for all in SA. If he lifts the lockdown too early he risks having to start all over again.
And it was good to hear him at least recognise that the sovereign debt ratings downgrade by Moody’s last Friday is going to make life here much more expensive and much harder. He promised to press ahead with economic reforms and he has to mean the ones being punted by the National Treasury and finance minister Tito Mboweni. Otherwise why mention them? And if he doesn’t start reforming now, while his political star is on the rise, then when?
“Within the constraints of the current crisis,” he said, “we remain committed to implementing structural economic reforms to address weak economic growth, constrained public finances and struggling state-owned enterprises.
“We are working together with our social partners to identify further measures we can take to limit the damage to our economy, and to ensure that as we emerge from this pandemic we set our economy on a clear path of growth.”
You’d be right to wait and see there. The social partners have to date been part of the problem, not the solution. But at last the government has nowhere to go but down the path of reform and, disease and pestilence aside, the real test of our ability to function as a viable nation when we come out of lockdown is in the primary bond markets, when the National Treasury, as is its routine, auctions debt this week — today (Tuesday) and again on Friday.
This is what the Treasury does. It borrows money to pay for government programmes and, increasingly and absurdly, to pay government salaries. It’s this that got us into trouble and ever since Jacob Zuma became president in 2009 our debt relative to our gross domestic product (the value of everything we produce as a nation) has risen inexorably, from around 29% in 2009 to over 61% now. Or, beyond 72% if you count government guarantees to SAA and the like. That’s money spent until the guarantee is pulled as far as the markets are concerned.
This would be manageable if we were a rich country, but under the ANC we first fixed and then plundered our wealth with a culture of corruption almost beyond measure, comprehension or description. We are broke and the ANC did it all on its own.
But down doesn’t quite mean out, however much some commentators want it to mean out. Moody’s, the last big ratings agency to rate our debt investable, downgraded us to junk status. That will force SA out of important international bond indices, meaning that big foreign institutions that buy our debt will have to sell it as they are not permitted to hold sovereign debt not included in the indices.
Selling it will depress prices and when bond prices fall, their yield (basically the interest the buyer requires to take the bonds on) rises. That means it becomes much more expensive to borrow. Much more expensive to pay for government programmes and to pay civil service salaries.
For years, practically the whole world has been telling the government these chickens would come home to roost, and the problem isn’t so much that Zuma drove the debt up. The problem is that Ramaphosa, in his two years in office, has done nothing to bring it down.
So today is the first SA government bond sale after the downgrade. We will offer about R4.5bn of debt. On Friday we try to sell inflation linked bonds. Hold your breath.
Or you could not do any holding and, as I’m afraid the scholarly and always clever RW Johnson just did, not hold anything and have a tired jab at the media. If I were still editing a newspaper in this country I’d publish Johnson any day. He’s good value. But he is stuck writing for arguably the dottiest of all the many digital “news” publications that now demand our attention — Politicsweb. Politicsweb is obsessed with the traditional SA media, me included, and almost any reading of it comes with a swipe or two at “mainstream” journalists. It’s relentless.
Johnson, though, is the best of Politicsweb. He has been predicting for years now that we will eventually end up on our knees at the doors of the International Monetary Fund, begging for a bailout, the conditions for which will be punishing. And he may well be right. But in his latest piece he makes a mess of his mandatory jab at the media. It misses.
He starts off by wondering whether it was wise to bring South Africans back from Wuhan just as it was becoming safe there while SA was becoming dangerous. He wants to blame the government but it was the families of those South Africans who clamoured for the state to bring them home. They won the day.
But the point of the piece is in the headline and the strap on the website. “Dodging Default” is the main head and “RW Johnson writes on the massive scoop the media missed last week” the strap. The article was published last Saturday.
Forgive me while I linger with this because it helps tell a different story. He accurately describes how a flight to the safety of the US dollar left the rand and rand debt in dangerous territory. It became so difficult to sell a rand denominated bond (which most of ours are, which is a good thing because it means our debt is in our own currency) that the Reserve Bank stepped in to act as a buyer and to bring some composure to the market.
For Johnson, the Reserve Bank action was the scoop we all missed. We reported it, sure, but, well, not with enough shock and horror. Or whatever. Here’s Johnson: “It was at this stage that the Reserve Bank entered the market which, in the absence of buyers, had completely broken down. The [Bank] knew well enough how fatal it would be to the country’s financial credibility if it became clear that the market was refusing to buy SA paper.
“So the bank stepped in and started to buy bonds simply to ensure that the market continued to work. Later, the Bank was accused by uncomprehending observers of having entered the quantitative easing [QE] game. This it indignantly denied, pointing out that QE was generally carried out in order to push up the rate of inflation — and SA had no need of that, thank you. The buyer had acted as a buyer of last resort and only this desperate action prevented an effective default. Amazingly, the media missed the story completely. Economic illiteracy is not confined to the ANC.
“The story does not end there, of course. During this crisis, yields, which had been under 9%, rose to 12.38% on the R2030 long bond. Even by the end of the week this had subsided to only 11.45%. Remember that the Treasury needs to sell R1.1bn worth of bonds every single day. But at these rates the interest bill on SA’s debt would rise by over a quarter which would also push the country in the direction of default. And the Bank has announced that it plans to go on intervening because the market was ‘dysfunctional’.”
That’s quite a dressing down from the great man, but hang on a second. First of all, the Treasury is nowhere even close, I am assured by economists I trust, to defaulting on its obligation to pay the coupons on its bonds. Second, the action the Reserve Bank took, the “scoop” Johnson says we missed, was in the secondary and not the primary bond market.
That matters because a country can only default in the primary market. The Treasury issued debt successfully (though there were signs of strain, I understand) into the primary market twice last week and, like I say, will likely do so again this week, starting today. The Reserve Bank cannot legally buy bonds from the government and its actions last week in the secondary market were probably minimal. In fact, it is perfectly possible that the mere statement of readiness to enter the secondary market was enough to bring yields down.
Johnson fails, interestingly, to get his facts right when he writes that the yield of the R2030 long bond rose to 12.38%. In fact it was worse — the yield briefly touched 13.223%.
The point, though, is that the big “story” Johnson thinks we all missed never existed, other than in his own mind. We were never “near default” and clearly “economic illiteracy” isn’t confined to the mainstream media either
Having said that, Johnson is basically (though not always actually) on the right track. It isn’t exactly a new thought. Money is tight, our economy is in a state of chronic recession and the Reserve Bank is having to take extraordinary actions, given the downgrade and the spread of the coronavirus epidemic, to keep our markets and our banking system liquid. Any responsible central bank would do the same.
In fact, Reserve Bank governor Lesetja Kganyago and Mboweni gave an impromptu briefing late on Sunday night after a long meeting of the National Coronavirus Command Council, chaired by Ramaphosa. On Friday the IMF and the International Monetary & Financial Committee (IMFC) had held discussions on how to deal with shocks to financial systems brought on by Covid-19. The IMFC advises the IMF. It is chaired by Kganyago.
At the briefing Mboweni had two interesting things to say. First, he would talk to the IMF but only in so far as it might be girding itself to help fund struggling health systems in the face of Covid-19. He saw no reason to discuss our national fiscal position.
Second, he said Ramaphosa had given him the go-ahead to plan a series of structural reforms the private sector, the IMF, the World Bank, the Brics and anyone economically literate has been asking for, for years.
“When I spoke to the president before Moody’s announced its decision he said to me: ‘We now need to move more boldly on the structural reforms programme.’ I said: ‘Hallelujah’. I’ve been preaching that agenda for a long time,” Mboweni said, according to a report in Daily Maverick by Ed Stoddard, an old hand.
He went on: “Mboweni later elaborated that a unit would be established in the finance ministry — but not the National Treasury — called ‘Vulindlela’, Zulu for ‘Lead the way’,” also the title of a popular song by the late Brenda Fassie. According to Mboweni, “The president said, ‘Let’s do things for ourselves. We need to lead the way.’ And I was encouraged by that. And I will be creating a unit in the ministry of finance, not the National Treasury, called the Vulindlela unit who are going to look throughout the government system and the private sector about whether we have proceeded in pushing these structural reforms. So, they will become the front soldiers of structural reforms in the SA economy. And I know that we are going to succeed.”
That’s encouraging but it comes with a South African or perhaps a Ramaphosian warning. Where’s the action? In order to make any meaningful reforms, Ramaphosa would have to put himself in harm’s way and thus far he has shown very little inclination to do so. He would have to fire two of his most powerful and most senior ministers, public enterprises minister Pravin Gordhan and minerals & energy minister Gwede Mantashe, along with absolute losers like the ministers of social services, small business and communications.
My bet is that he won’t and that Mboweni will have to wait. You have to go back to the night of Wednesday December 9, 2015 to remember what the fight is about and to be able to measure the scale of the opportunity lost.
That was the night then president Jacob Zuma fired Nhlanhla Nene as finance minister and replaced him with David Des van Rooyen. The rand in the next few days did a lot worse than it is doing now and society finally understood the extent of the menace Zuma posed to his own country. After a weekend of high drama, commonsense prevailed and Zuma retreated, sulking, sacking Van Rooyen after just four days in the job and re-appointing his first finance minister, Gordhan.
It was Gordhan’s subsequent tireless efforts that restored some level of confidence in the country in the international community and it worked until he was fired again by Zuma. We are in his debt but once back in the government under Ramaphosa, Gordhan has clearly been a brake on reform, preferring the endless detailed tinkering of the ideological perfectionist he turns out to be. After all the energy he spent keeping Moody’s on board, he is one of the reasons it finally jumped ship.
Mantashe, who eventually turned on Zuma, has nonetheless been abysmal at energy, a department lacking any sense of urgency or appreciation of the moment. Moody’s on Friday was clear that it regarded energy as a key reason behind the downgrade. “A strategy to stabilise electricity production has been slow to emerge and has yet to prove its effectiveness,” it said in its downgrade report.
“Moody’s assumes that while power supply will become more reliable, the restoration of full capacity will take some years to complete. As a result, after the immediate sharp downturn, growth will remain very low in the following years.” Energy needs a technocrat, not a pork barrel politician, in charge.
The fact is that Johnson’s broader point has always been right. You can either have a productive industrial economy or you can have an ANC government. You can’t have both. There may be one or two people in the ANC who understand that and Ramaphosa may very well be one of them. But will it be enough?
We are drowning now. Ramaphosa has to move ahead with purpose or get out of the way. Reform has to come or we all crumble, rich and poor, big companies and small. Now’s the time. There’s a small section in the Moody’s report headed “What Would Change The Rating Up?”
“Given the negative outlook, a rating upgrade is unlikely in the near future,” the report says. “Moody’s would likely change the rating outlook to stable if the government’s medium-term fiscal consolidation were to proceed broadly in line with the rating agency’s central expectations, with prospects of a slow but durable pick-up in growth and financing risks remaining low. In this scenario, Moody’s would likely see a gradual reduction in SA’s primary deficit in the next few years, with increasing assurance that government debt will stabilise comfortably below 90% of GDP.”
They’re being kind. Below 90% is possible but only with tough action. Moody’s simply doesn’t believe Mboweni can cut the public sector wage bill (or just public sector spending) by R160bn over the next three years as he promised in his budget.
And that’s the problem. We got downgraded because we’re not credible anymore, even to the most ardent believers. We have run out of road and Covid-19 won’t hide it. What will Ramaphosa do?