NOMPU SIZIBA: South Africa has a lot going for it economically. It is rich in mineral resources, it’s an already diversified economy, and it has a significantly young labour force that can be drawn upon by employers. If the country can implement sensible and sustainable policies, the sky could be the limit. But of course discussions rage about the current policy uncertainty that’s afflicting the country at the moment. One economist and market analyst says that, while they are definitely not exact parallels, it will be perhaps a good idea for South Africa to look at countries like Venezuela and even Turkey as examples of where the country would not want to end up – and that would be to focus on the reasons they got there.
I’m joined on the line by Dr Adrian Saville, the chief executive at Cannon Asset Managers. Dr Saville, before we get into South Africa’s potential to make bad policy mistakes like Venezuela and Turkey have, just give us a summary of how Venezuela has reached a situation where it is estimated that its inflation rate will reach a rate of 1 000 000% by the end of the year, and why it is some 1.2 million Venezuelan citizens have felt the need to leave the country in just the past two years.
ADRIAN SAVILLE: Well, I think Venezuela is a great example of a country that had its heart in the right place, but its head in another. What led to Venezuela getting into that circumstance was through the course of the oil price boom, which characterised a lot of the last 10 years. It afforded Venezuela, which is a large oil producer, essentially a windfall. That windfall was used to fund policy initiatives that extended from social welfare and healthcare all the way through to education, welfare benefit reforms and so on. These were very, very generous but were associated with an oil price that was elevated and simply didn’t sustain.
When the oil price collapsed, the political promises that had been made in a high-oil-price time meant that that now you had a whole bunch of promises and commitments without the available funding. And, to fill that oil-price hole – the deficit that was left by the absence of oil dollars – Venezuela started printing money. In simple economic terms, inflation happens when you have money without any base chasing goods. So the result today is this tragic, catastrophic hyperinflation that has essentially bankrupted the country.
NOMPU SIZIBA: What are the social implications, then, for Venezuelan people such that they need to leave the country?
ADRIAN SAVILLE: You’ve already flagged that out of a 30-million population a million have left. I think that number arguably is low. Venezuelans on social media block their profiles when they’ve moved into neighbouring countries because their families that have stayed home are at risk of being held hostage for a few thousand dollars and, if you need insulin or an antibiotic you simply won’t get it. The estimate of the number of children who have died of starvation runs to hundreds of thousands. It truly is an absolute catastrophe of national proportions.
NOMPU SIZIBA: Presumably in the process institutions there have broken down?
ADRIAN SAVILLE: Well, one of the most obvious institutions is freedom of speech or freedom of the media, and your ability to express your objections or protest. The consequence has been social media platforms have been closed down. The people act under the assumption that they are being tracked by government or traced by government, followed by government, and anyone who has put up sufficiently bold protest has had that met with jail time.
NOMPU SIZIBA: And what about Turkey? It has come under a lot of pressure with the Turkish lira sold off to the tune of about 50% of its value against the US dollar. Its inflation is nowhere near as dramatic as Venezuela’s, but it is standing at around 16%. So what are the particular factors that have seen this country slide?
ADRIAN SAVILLE: I think in the case of Turkey it of course, as you flag, is a very different story. But Turkey, until as recently as just a few quarters back, was enjoying extremely strong growth. It then got into a political tussle with big economies, most notably the US economy, and for political reasons sanctions were imposed on Turkey.
The consequence for Turkey has taken the shape that a lot of the way in which the economy was funded, the growth, the boom years of the last few years, was funded by borrowing in euro, funded by European banks. And when the Turkish lira collapses, and you put this into our language, this would be equivalent to the rand going from R14 or R15 to the dollar to R22 to the dollar, and all of your bank borrowing is in dollars, not rand. So your debt has just gone through the roof. Banks now face a very high risk of not being able to get those loans [paid] back, so their balance sheets are now filling with non-performing loans. That means that the collapsing currency is translating into a banking crisis, and that’s quickly feeding through to inflation – which at the moment is modest, but looks like it will easily go materially higher.
NOMPU SIZIBA: And of course independent analysts and world bodies and the United States itself have been encouraging Turkey to raise interest rates. If they do that, how is that going to help them, because they still owe that money?
ADRIAN SAVILLE: What a higher interest rate would do is it would put a brake on the extreme market reaction. Admittedly, it is what we call a Washington consensus type of reaction, and it is hard to at first blush see how hiking interest rates is going to help a system that is already under incredible financial pressure.
But the alternative that they have at the moment is to do nothing, and the policymakers in Turkey initially chose not to hike rates, the idea being that if they hike rates it was a quick way to get political opposition to lose popularity and votes.
But this requires tough policy decisions, and it requires discipline. Higher interest rates would stabilise the banking system, tame inflation and at least stand some chance of retaining capital. In the absence of higher interest rates the banking system spins out of control, what little capital is left flees the country and a 50% Turkish lira collapse turns into a 75% or bigger collapse. It’s the lesser of two evils.
NOMPU SIZIBA: Now we come to South Africa, where our inflation rate is 5.1% – that’s within the Reserve Bank’s inflation target band – and the rand has depreciated between 15% and 20% against the US dollar this year. That’s not all due to internal country factors. And, while there have been calls for the government to keep a check on its debt levels, a big proportion of that debt is not denominated in foreign currency, like Turkey, for example. What is it about South Africa that makes you worry that we could head in a similar direction to our country case studies?
ADRIAN SAVILLE: We need to be careful not to draw too strong a parallel, but I would venture that in each case they ring some warning bells.
In the case of Venezuela, the most obvious warning bell that is rung is that policy promises are all good and well. They point to a rosy future, to desirable outcomes and – make absolutely no mistake – South Africa needs pointing to a much brighter future. We sit with elevated unemployment, gross inequality, and per-capita incomes have been stalled for a decade. But, pointing to rosy policy promises is very different from delivering them. And in the case of South Africa we have a lot of pointing, a lot of I guess agenda-driving, that there are easily available outcomes. But when it comes to delivery and you don’t have high oil prices and you have a filled environment with policy promises, you are quickly met with social accident.
NOMPU SIZIBA: I was going to say, Dr Saville, in our case it’s not [having] high commodity prices, because that’s been a factor.
Don’t expropriate land without compensation
ADRIAN SAVILLE: Sure, it has been. And in the case of Venezuela, maybe South Africa’s equivalent is land. I’m going to say the exact opposite of what I think the narrative is right now. The narrative is whatever you do, don’t expropriate land without compensation. If you can put in place the right mechanism, South Africa sits on an incredibly valuable resource in the form of under-utilised land that can potentially translate into output and balance-sheet improvement.
The Turkish story is a reminder that you are part of a bigger system, and at a time when South Africa is trying to attract $100 billion in foreign investment, you don’t want hot money that can leave the way the money has left Turkey. You want the money to come in a level-headed, stable way, with high degrees of confidence in the policy and regulatory environment. Turkey I think has squandered that. South Africa is in pursuit of $100 billion. We can look to Turkey as what not to do.
NOMPU SIZIBA: How tricky is it going to be for South Africa to keep its budget deficit in check, do you think, especially in light of overspending on the public-sector wage increases, for example, and of course this big push to establish programmes like the NHI, the National Health Insurance?
ADRIAN SAVILLE: The NHI is deliverable. Public-sector wages are not out of hand if they are matched with productivity. So in good economic fashion, I’m putting qualifiers into your red flags. South Africa has a very bloated public-sector wage bill. We can add into this combination the fact that we have a desperate need for infrastructure spending to kick-start the productive sector of the economy. But the SOE [state-owned enterprise] coffers are empty. So there are a number of deficit holes that have to be filled.
NOMPU SIZIBA: I just want to interject there and say, it’s very tricky, though, isn’t it? A few weeks ago, a couple of months ago, there were headlines about possible job cuts in the public sector, and threats came with that to the ruling party, that, hey, if this is the route that you are going to go, next year is election time and your voting fodder won’t be there. It’s just very difficult, isn’t it?
The coming election
ADRIAN SAVILLE: It’s incredibly difficult. I think the ANC administration sits on the horns of a dilemma. It is a very, very difficult environment to be going into a key election, with an economy that’s on the back foot. In the same breath I guess what’s required is policy certainty. Policy certainty by definition, is like any strategy, requires tough choices, and I think that’s what’s being required here is tough choices is that the state-owned enterprises need to be refinanced, but how they are refinanced, the productivity across the public sector is a critical lever that has to be pulled. We need to get economic growth kick-started, and that growth needs to be transformative. You can put “radically” in front of it, if that grabs your political appeal, but what I mean by transformative is that it establishes jobs and it lifts people out of poverty – which, by itself, then redresses inequality. These are big asks going into a critical election.
NOMPU SIZIBA: In your view, do you think South African capital assets are going to remain vulnerable until the outcome of next year’s election?
ADRIAN SAVILLE: Business investors of every shape and form – I don’t think they need to be South African, but everywhere – what investors are after is certainty. The more certainty and stability you can give them, the better investors sense that they can see further over the next couple of hills, to see here South Africa, just like [with its] land, I think, sits on an incredible potential – and that is our corporate balance sheets. We have an exceptional banking system, world-class financial markets and superb regulations, but investors are anxious. I think if you can point to clear policy direction, it’s a great way to untap this latent potential that sits on corporate balance sheets in the form of lazy cash.
NOMPU SIZIBA: Thanks to Dr Adrian Saville from Cannot Asset Managers.