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From Venezuela with love: Lessons for SA

South Africa is treading on thin ice as it slips into a recession and remains prone to emerging market contagions.

The reality of South Africa’s economic quagmire has finally sunk in with the announcement that the country had slipped into a technical recession in the second quarter of this year, adding fuel to populist demands for greater political intervention in the economy. 

And while President Ramaphosa eventually called for calm in the wake of the news, the horse, as they say, had already bolted. The rand briefly slid past the R15.30/$ mark on reignited fears that government would not be able to deliver on its fiscal targets or promises of a ‘New Dawn’ at around the same time that the Turkish economy was tanking and Argentina’s financial markets were also convulsing.

Despite the critical need to ignite the South African economy, boost employment and redress deeply entrenched inequality, market jitters make it clear that opportunistic calls for the aggressive redistribution of wealth, short-term solutions and populist policy are not the answer.

In fact, populists needn’t look too far for evidence of the risks inherent in a dysfunctional policy programme: just across the pond, Venezuela’s socialist policies, together with rampant corruption and a hollowing out of state institutions, have brought that country to its knees.

Once one of South America’s richest countries on a per capita basis, and the envy of many developing nations, the International Monetary Fund (IMF) recently revised its prediction for Venezuela’s hyperinflation rate to an annualised rate of 1 000 000% by the end of 2018 from an estimated 13 000% predicted in January this year.

Even with this revision, the IMF may still be underestimating the severity of the situation. By comparison, Venezuelan financial firm Ecoanalítica predicts that the rate of hyperinflation will reach 1 400 000% by the end of this year.

Regardless of the exact rate of consumer price inflation, it is fair to argue that with a rate of inflation that runs into seven figures, the true extent of Venezuela’s financial crisis is anyone’s guess. But while numbers can often hide in a story, some of the figures behind Venezuela’s recent history lay bare the extent of the human tragedy of that country’s poor policy decisions:

  • 248 520 The official exchange rate of the Venezuelan bolívar to the US dollar (versus a rate of just 6:1 a mere five years ago)
  • 6 670 790 The rate you will actually have to pay via the under-the-counter market if you want one US dollar
  • 3 000 000 The number of children at risk of severe malnutrition
  • 1 200 000 The number of people who have left Venezuela in the last two years
  • 90% The poverty rate in a population of 28.1 million

That this is a man-made disaster, with ready solutions, only deepens the injustice of the situation, especially as Venezuelan President Nicolás Maduro continues to refuse international aid or the delivery of food and medical assistance.

We see a comparable situation with eerie familiarity playing out in Turkey, where President Recep Tayyip Erdoğan’s cronyism and manipulation of the finance ministry, together with a sharp rise in foreign debt and local consumption, has set that country on a steep inflationary course.

While still a long way from Venezuela’s collapse, the situation in Turkey is increasingly stressed. Consumer price inflation in Turkey is currently running at 16%, and is set to hike sharply on the back of a 50% fall in the Turkish lira this year. Notably, in defence of populist policies, Erdogan also refuses to alleviate the deterioration in economic conditions with appropriate policy measures, instead putting politics ahead of economics.

Read: Emerging-market assets on the rack as Turkey shatters confidence

And lest we forget how interconnected the global economy is, we have already seen the effects of these developments on the rand.

South Africa, with its open economy and highly traded currency, caught Turkey’s cold with the rand plunging from R13.10/$ at the end of July to as low as R15.50/$ just two weeks later because of the sharp emerging market sell-off.

And although the blame for our latest GDP results can be partially attributed to emerging market contagion, it is important to recognise that the short-termism and populist policies that have recently destabilised Turkey and Venezuela have also made a few appearances in South African politics.

While many South Africans had hoped to see the end of late-night, shock presidential statements, Ramaphosa announced late on a Tuesday evening in July that the ANC would propose constitutional amendments to enable land expropriation without compensation.

We’ve also seen government agree to above-inflation public sector wage increases, temporarily buffer consumers against rocketing fuel price increases, propose the implementation of National Health Insurance and promise to deliver an economic stimulus package that could cost in the region of R43 billion at a time when the fiscus is under real strain.

The new administration’s investment drive and ambition to reignite South Africa’s economic growth is admirable, but ultimately the lesson from our emerging market peers is clear – policies must be enacted responsibly with the future welfare of the country and its citizens in mind, rather than for short-term popularity or political points.

Tlotliso Phakisi is an investment analyst at Cannon Asset Managers.

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Just look at the comparison with Nicolas Maduro, former union leader, CR – former union leader, a vote of confidence helped Maduro narrowly win the presidency in an election in the April 2013, CR also narrowly win his election in December to oust Zuma, Maduro policies build around of nationalization, currency and price controls and social handouts, same as in SA under ANC, Maduro blames Venezuela’s crisis on an “economic war” waged by Washington, ANC and cadres blames WMC.

We do not even have to cross the pond to see the outcome of the current road the ANC is on, we cam just cross the Limpopo at Beitbridge for a 3D-image of the ANC socialist policies outcomes.

SA already a Venezuela, the future welfare of the country and its citizens not a priority, ANC copy and past the failed socialist policies and expect different results, what a bunch of remarkable 1d1ots.

Surely Venezuela learnt about inflation by now?

Please send Mr. Malema to Venezuela for one week to learn the basics of Economics.

Malema knows that Maduro is still in power despite the collapse, hence Venezuela is a reasonable model for any politician looking for power. The ordinary citizens, yeah they’re screwed, but Malema is not an ordinary citizen.

Only one single factor prevents South Africa from going over the edge, into hyperinflation and chaos. South Africa satisfies all the criteria that leads to hyperinflation. The twin deficit is high and growing, SOE debt is high and growing, government guarantees to SOE’s are high and growing, the demand for social grants, government employees wage increases, and lastly unemployment is high and growing. The stresses on the financial system and Treasury is high and increasing. The bomb is primed, the clock is ticking….

It is only the health and strength of the banking system that prevents us from spiraling into hyperinflation. In most instances, a banking crisis was the final event that triggered the hyperinflationary collapse. A banking crisis will break the camel’s back.

The problem is, countries like South Africa, who are on the brink of hyperinflation, always cause their own banking crisis. A banking crisis is set in motion when the assets of the banks are destroyed. This can happen by means of a recession/ depression or by the sheer stupidity of expropriation without compensation. Even the mere debate about nationalization or expropriation has a detrimental effect on the assets of the banking system. The lack of trust in the sanctity of property rights destroys the collateral held by banks. The debate causes property values to crash, destroying the credit-worthiness of businesses and individuals. This leads to a contraction in lending, a recession and rising unemployment. Once you go down that waterfall, there is no turning back.

As the economy contracts further, what started out as a “national debate about land reform” turns into devastating reality, as politicians lose all control over the process. “The banking system is built on trust”. Trust in what though? It is not the employees, the managers or the thickness of the walls of the vault that we trust, no, we trust the law that protects our property. The moment people begin to discuss the validity of property rights, when expropriation is on the front pages, the banking system starts crumbling.

We are casually entering into a self-inflicted disaster of epic proportions. The trend is clear, the inertia is building, and the destination is visible to those who study history. When the queue in front of the bank is longer than the queue at SARS, you know the sh#t has hit the fan.

We can still avoid this socio-economic disaster by scrapping BEE, EE and the mining charter, by relaxing labour laws, by returning mineral rights to the owners of the title deeds, by halving the public service wage bill, by privatizing all SOE’s and by incentivising birth control.

In short, there is only one way for citizens to avoid the devastation, disease and famine that follows a hyperinflationary event, and that is to vote DA without delay.

The first test for the banking system will be the debt write-off bill currently in parliament.

It will also be a test of EWC as the banks’s right to reclaim monies owed will be scrapped.

I agree with everything you say and I do vote for the DA, but seeing how they have handled the water crisis in CT gives me no comfort that they would do any better at running the country than the cANCer. A pastor as president with an education in psychology and theology and the usual coterie of inexperienced and incompetent bureaucrats whose brains will turn to mushroom soup with the first hint of power is not a recipe for success. Rather like changing the deck chairs on the Titanic IMHO.

My sentiment exactly. DA appear to be pro wealthy and far too many western ways for the new SA. All 3 dominant parties forget about starting the economy from the ground up bringing back govt. supported tax incentive training centers for trades, teachers nurses etc etc. besides for what he has already listed.

Believe what you want but there was definitely a drought (sic) and the ANC national government Dept Water and Sanitation (ha ha) was at least 50% to blame for the scrambled outcome. Now note that in terms of provinces that gave money and enabled the Gupta’s, the WC, under the DA, gave nothing, zero, nought. The DA are not perfect by any means but in pragmatic SA, streets better than a deeply crooked and incompetent ANC.

ouch. excellent comment could not agree more ewc could be our undoing. Mike Brown from Nedbank pretty much echoed your concerns. Just frustrating that the media and international governments are all buying into the narrative that ewc is a requirement for land reform! What utter rubbish.

One other bright spark for sa is that we have far less usd debt that other em,s but this will not prevent the scenario you lay out.

Well-all this (which is mostly common sense stuff, has never stopped an African liberation movement who came into political power in any country in Africa to destroy that country.Except maybe Botswana.In fact even when they destroy a country, a la Zim,the voters still vote them in.

People say that we will not be like a Zimbabwe or Venezuela. I agree wholeheartedly. When South Africa spirals into the hyperinflation abyss, the situation will be much worse than for Zimbabwe or Venezuela. People from Zim could cross the border into South Africa to find work. Where will locals go to find food and shelter when we enter hyperinflation? Will South Africans cross the border to Zimbabwe looking for work? What will they find there? The ocean to the south and devastation to the north. We simply cannot afford the ANC any longer. We need a regime change without delay.

Yes, was about to mention, the locals can still move to the country south of SA…

A regime change or break-up of SA into smaller countries.(…whether the latter will be practical, remains to be seen.)

I can see RW Johnson’s frightening book playing out in front of my minds eye.

Venezuelans probably asks themselves “How did we get into this situation?”

The answers is “be VERY CAREFUL who you vote into power!”

Well, if Pres Maduro is still in power, then it seems the majority is still quite happy with his rule, right? Like Zim, with Mad Bob ruling the roost for a very long time….people suffer, but are still happy to allow their leaders do what they do.

Level of education of average voter to blame?

Very well written and balanced article with facts not speculation. Sadly we are approaching the abyss and when we really fall we will really fall. Bottom line is we are running out of money-tax collections too low,no growth, SOEs stolen into insolvency, shortfall on petrol price and of course crime and corruption out of control. Add in rubbish like EWC, NHI etc and we have a perfect storm. A murder every 25 minutes and a rape every quarter of an hour!

The problem is that anc-government simply does not understand or does not want to understand or is actually not capable of understanding the crisis the country is in right now and how the global economy actually works. They want to sit on several seats at the same time, trying to please everybody – the voters-seat, the foreign investors-seat, the foreign long term lenders-seat, the land grabbers’ seat where the anc’s own proposed land expropriation without compensation is like petrol on a fire, and plenty more seats. What the anc / eff does not realize is that just by making some irresponsible statements in public about land expropriation without compensation, land grab, using the term “nationalization” etc is causing so much foreign confidence harm in south africa’s credibility, (if it still exists at all), that it can not be rectified overnight. But in anc politics it is a case of “talk is cheap” as long as it the fits the situation and audience for the moment – they think the rest of the world is totally deaf and blind for a reality playing off right in front of them. Give me 1 reason why a foreign investor would be interested in investing (not lending money to sa) whilst the investor knows that the success rate with the investment is as good as nil???? China is willing to provide a loan – but it has to be paid back and for sure carries interest – The Sri-Lanka case: the Chinese developed harbour in sri-lanka who could not pay back the loan – sri-lanka had to hand the 15000 acres of harbour over to china on 99 year lease – so china is cracking the whip right on sri-lanka’s front stoep due to irresponsible loans. China iso sri-lanka is now reaping the income generated by the harbour – of cause the sri-lanka president responsible for losing their birthright income is not president any more, but the damage is done for 99 years – this looks like a possible scenario for the eskom loan from china to south africa – the debtor can’t pay, china takes and china runs the show in another foreign country, because south africa’s own government is not capable of doing it. Another fact that the anc can not understand is that once a country’s economy is down the drain, so is the country’s tax income down the drain – if there is no taxable income, there is no tax. What makes me more furious about the economical situation is that the government is directly responsible for the biggest part of the mess that south africa is in – of cause the anc will blame it on anything, but themselves, even a once off bad rainfall can cause big financial problems according to the anc. The anc’s fatal mistake is / was to think that the middle class citizen in south africa is an inexhaustible source of income in the form of direct or indirect tax ignoring the direct effect of their slipped up economical policy and corruption issues. In every area where the anc interfered to make changes to a once actual operating system and society, they made a 100% pathetic slip up without even realizing or admitting it to date – nobody is accountable if one belongs to the anc or if they break away to dubai for a taxpayers’ sponsored permanent holiday.

This is most definitely we where are headed while the country is in the hands of the suicidal ANC. An organisation that has been around for over 100 years and still has no clue why so many African and other countries have failed is incapable of learning.

True, one would think ANC govt should by now has acquired the knowledge.

But come to think of it: the ANC learned from other African states as to HOW TO REMAIN IN POWER, for beneficial gain. That’s it.

Remember Zuma that placed the “party first, and SA second”. CR’s role when taking over after Dec’17 was to “save the ANC” from splitting. And then only a secondary role, save the SA economy.

Party politics seem to come first on this continent. To the detriment of it’s people. What we’ve seen in Africa, will repeat in SA over time.

Unfortunately, socialism and central planning is in the DNA of the ANC, especially after it was captured by the SACP and this inevitably to over-dirigisme.

Despite claiming to be scientific, communism ignores the key evidence of similar cultures, starting from similar conditions with similar natural resources adopting socialist/centralised and free-market/open economies:
The two Germanies between WWII and unification, the two Vietnams and two Koreas.
One could also compare mainland China to Taiwan, Hong Kong and Macau or pre- and post Deng.

As for the claimed link between land and wealth, one only has to look at which countries have the highest per capita income (admittedly an average which says nothing about distribution) — excluding those with massive oil reserves such as Oman to see that “land” is irrelevant: Liechtenstein, Monaco, Switzerland, Signapore, Macao, Bahamas, … indeed many have ultra high population densities. What they do have is highly educated, hardworking populations.

Venezuela’s hyperinflation came about from not enough tax payers and too many grant receiptience. This in what happens when new investment is not encouraged by putting up taxes on those that are already paying top brackets and trying to win votes of the masses who can’t afford to take care of themselves. Increasing VAT is like putting a plaster on an amputation. It’s not helping anyone, merely delaying the hemorrhage.
Unless CR can come up with plan B – we are in deep trouble. You either have to cut grants and the promises you’ve made to the majority or you tax the minority more. Either way, the country will suffer in the long run.

What is also worrying is that Gigaba, during his short term as Finance Minister, employed a Venezuelan University qualified economist as an economic advisor. I wonder what influence he has had on the formulation of current economic policy if any?

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