Gill Marcus: Sober up South Africa

There’s trouble ahead, but South Africans are doing the ostrich act.

Despite a distinct and unusual lack of fear mongering from South African media and economists, the world is going to be a very scary, difficult place in 2009, and South Africans need to understand this and deal with it, according to Absa's non-executive chair Gill Marcus.

Marcus, speaking at the Gordon Institute of Business Science last night, said that South Africans, by virtue our banking system's virtual immunity to rotten subprime assets (see Should South Africans really not panic?), have been sheltered from the international financial storm, and have therefore not realised just how serious the situation is.

Marcus was speaking as a member of a panel of academics, economists, and politicians, who gathered at GIBS to look ahead into 2009 and make predictions about what the year will hold.

Black days

Marcus quoted some sobering facts and figures, indicating just how serious the world's problems are, and how gloomy 2009 may be.

"International deflation is becoming a problem. Japan has slid back into deflation, after escaping it for a while. The whole Euro-zone is in recession. The latest estimates from the United States are that their GDP will experience -4% growth for the first two quarters next year."

She continued, "Twelve trillion dollars of household wealth has been wiped out with this crash in the US, which is equal to almost their whole GDP [of $13,13tn]. By next year, one in ten American households will be in foreclosure."

A series of online implode-o-metres in the US have tracked the number of collapses in the mortgage lending business (304), the banking industry (19 this year), hedge funds (95), and home building companies (53). According to Fitch Ratings, so far $296,7bn worth of American corporate bonds have been affected by ratings downgrades. Morgan Stanley has announced it plans to cut 10% of its workforce, Goldman Sachs has followed suit, and Citigroup announced that it would cut 52000 jobs.

And Marcus pointed out that the problems aren't confined to the US.

The International Monetary Fund, which has around $200bn in assets, is facing demands for bailouts from half a dozen countries, bailouts that it can't really afford. So far this year, the IMF has given Iceland $2,5bn, Pakistan $7,6bn, Ukraine $16,5bn, Hungary $25bn, a total of $51,6bn. And the fund is in talks with many other countries, including Latvia and Turkey - which is looking for anything from $20 to $40bn in bailout money.

Given these crushing facts, it's likely that global GDP growth will be walloped next year. The hoped-for decoupling of emerging markets (a hope that they are no longer dependent on developed countries' markets for their growth) has failed to materialise. China has been forced to announce a $600bn stimulus plan to help the country stave off disaster, but it's still anticipated that 100 000 firms will close down this year, leading to millions of job losses.

In short, it's a ghastly mess.

The crucial point that Marcus drove home is that South Africa is not immune to the effects of this crisis. As a predominantly resources-exporting economy, South Africa's growth is strongly tied to growth in other regions and an Asian and world slowdown will hurt us.

In the last few weeks, South Africa has seen several major retrenchment exercises. Lonmin has cut 1000 contract jobs, with a further 1620 under threat; Uranium One will cut 2600 jobs at its soon-to-be-closed Dominion mine. And the financial services sector, despite not facing any subprime-related asset write downs, is also shedding staff. Today, Investec announced that it would be cutting jobs among its 600 staff, while Absa has been cutting jobs for some time.

For Marcus, the current crisis is a one-in-a-hundred-year disaster in the proportions of the Great Depression, and it demands skillful, visionary leaders to lead humanity through it, leaders who are currently in very short supply.

But there are reasons for South Africans not to despair.

Silver lining

In addition to Marcus, the GIBS panel consisted of economist Dr Azar Jammine, former DA MP Raenette Taljaard, academic and former UCT vice-chancellor Dr Mamphela Ramphele, and special advisor to the Gauteng premier Mduduzi Mbada, and they were generally more upbeat.

Jammine said that, while GDP growth is set to slow markedly in 2009, it will still be positive.

"There are four reasons why I think that South Africa will weather the downturn better than others," he said. "First, we, uniquely among the world, have the promise of the economic boost that the 2010 Fifa World Cup will give us. Second, the current batch of wage negotiations will probably result in a number of double-digit increases, which will come in at a time when inflation is set to drop like a stone. This will mean a lot more consumer purchasing power."

"Third, the rand has fallen out of bed. Although that will probably mean less interest rate and inflation relief than many hoped for, it has created enormous opportunities for manufacturers [and exporters], and it will benefit many sectors. Finally, our financial system has been immune to the direct fallout of the subprime crisis."

Of course, the economic picture is made more uncertain by the current political issues in South Africa. The emergence of a new opposition party, COPE, which includes a number of former ANC cadres, has injected a new uncertainty into South African politics.

As Taljaard said, there have been big shifts and changes in the political landscape, and they will have long-term implications.

"Perhaps the most interesting possibility is that of provincial coalition governments. Depending on whose statistics you read - all the parties have been doing their own surveys and have their own findings - there will be between four and five provinces in which it is very possible that a non-ANC coalition government will be voted in."

"This is a very interesting scenario. According to the laws of the country, provincial governments can pass their own constitutions, so there could be some very significant developments."

However, despite these shifts and changes, it's still virtually certain that we will soon be inaugurating Jacob Zuma as South Africa's third post-1994 president. What will a Zuma presidency look like? Perhaps less alarming than many expect.

"We in the ANC have a tradition of electing a leader who can be the face of a campaign," said Mbada. While Zuma is the public face of the ANC, the party's priorities - stability, economic growth and poverty reduction - will be unchanged.

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