SA’s lost decade and how to fix it

First, approach the IMF for funding, then tear down the walls holding investment out.
SA will need to show concrete commitment to the protection of foreign investors. Image: Andrew Harrer, Bloomberg

Thabo Mbeki can look back on his tenure as president and rightfully say: ‘We never had it so good.’

He would be right, of course. He was ousted as ANC president in 2009 by Jacob Zuma, and it’s been downhill since then. Virtually every measure you can think of reminds us of this fact, from GDP growth to state borrowings and foreign direct investment (FDI).

Under Mbeki, foreign investment in 2008 topped $9 billion. Under Zuma – bar two years when commodity prices were surging – it dwindled to around $2 billion. The state capture inquiry, now in idle mode, tells us all we need to know as the reasons why this was so.

Source: Herbert Smith Freehills

And while foreign investment inflows were drying up, South Africans couldn’t get their money out fast enough.

Source: Herbert Smith Freehills

At a presentation on Wednesday on the investment protections needed to secure SA’s future in a post-Covid world, Herbert Smith Freehills partner Peter Leon offered some advice on how to start fixing things. It was, says Leon, a “lost decade” for SA after Zuma came to power, but this need not be the story of the next decade.

SA is approaching the International Monetary Fund (IMF) for $4.2 billion (R69.5 billion) in short-term lending under its Rapid Financing Instrument.

This must be paid off in three to five years, but chances are we will have to approach the IMF for a much larger longer-term loan of about $18 billion (R298 billion) to truly get the economy back on its feet and to get the fiscus in some kind of respectable shape.

Read: SA entitled to $4.2bn with few strings, IMF says

Big stick

The IMF’s shorter-term lending is relatively mild on conditionalities, but the longer-term loan is the one that carries the big stick.

The IMF’s Article IV report on SA, published in January this year, suggests that SA would be required to implement major microeconomic reforms, especially for state-owned enterprises (SOEs) as well as product and labour markets.

This is where it could get sticky with the labour unions, but government will be forced to take these steps and face down opposition in the ruling party.

Per the IMF script, if the economy is to grow, SOEs will have to be split up, privatised, or weaned off the state teat. The public sector wage bill will have to be shrunk. Labour legislation – and this is the tough one – may have to be revisited, particularly the extension of so-called bargaining council agreements that set wage and working conditions for all businesses in a sector, including those that are consulted on these agreements. Issues such as these are cited as reasons for SA’s low-growth trap, and the IMF will want its pound of flesh.

Life under the IMF

The IMF sees decent upside for SA under a structural adjustment programme: increased per capita income, improved business environment, lower unemployment and poverty, reducing public debt from 2022, lower inflation in the medium term with a stronger rand to offset imported inflation. With that done, there should be greater room for easing monetary policy and reducing finance costs.

Leon says the way things are headed, he doesn’t see how government will be able to not go to the IMF for a longer-term facility.

FDI flows into SA were not helped by the Department of Trade and Industry (DTI) decision to unilaterally terminate bilateral investment treaties (BITs) with our trading partners.

These treaties provided strong protections against discrimination against foreign investors; ensured them full protection against crime, civil strife and expropriation; allowed them unrestricted repatriation of funds; and gave them recourse to international arbitration in the event of disputes. These protections were reinforced when SA signed on to the Southern African Development Community (SADC) Protocol on Finance and Investment, which came into effect in 2010.

The rights of foreign investors were weakened by the termination of the BITs under then DTI minister Rob Davies, and then again by a 2016 amendment of the SADC Protocol that diluted protections against expropriation, non-discrimination and repatriation of investment returns.

SA’s own ‘structural adjustment’ plans

SA has tried to avoid its day of reckoning with the IMF for a long time, starting with the so-called Growth, Employment and Redistribution (Gear) policy in 1996, and followed up with the Accelerated and Shared Growth Initiative for SA (Asgisa) in 2014 – both of which were forms of home-grown structural adjustment programmes.

There was no real will to push through on these plans, which contributed to the ‘lost decade’, until Finance Minister Tito Mboweni unveiled his growth plan in August 2019. Titled Economic Transformation, Inclusive Growth and Competitiveness: Towards an Economic Strategy for South Africa, it proposed relaxing labour and other regulations on small businesses, and opening the rail and energy sectors to greater private participation.

“If SA is to emerge from the economic devastation of the Covid-19 pandemic, it will need more than investment-friendly rhetoric from the president and his envoys,” says Leon.

He adds that even beyond implementing the structural reforms proposed by the IMF, SA will need to show a concrete commitment to the protection of foreign investors, by doing the following:

  • Amending the Protection of Investment Act to provide for proper investment protection;
  • If not joining the International Centre for Settlement of Investment Disputes by signing the Washington Convention, then entering into new BITs with important trading partners, especially in the EU, or with the EU as a bloc; and
  • Submitting itself to investor-state international arbitration.

The African Continental Free Trade Area (AfCFTA) kicked off last year, initially to liberalise trade in goods and services, and then to tackle the thornier issues of intellectual property rights, investment and competition policy.

This new trade area agreement provides SA with a unique opportunity to develop an Afro-centric model based on best practices, including a single continental rule book for trade and investment, and strong protections for investors while still promoting responsible investment. And, of course, a more suitable channel for dispute resolutions.

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Short Term and Small loans

What is The R70bil R300bil going to do? Not much, we are sounding a family who is obsested with gaining a few more credit cards.

Debt Consolidation

We need about R7 Trillion.
Firstly if we are going to accept a loan with many stringent conditions at least make a sizable enough to cover all the current loans, municipal loan and citizen loans.
Secondly all current debt charged at 1% interest over 30 years.
Thirdly setup a central loan authority that regulates loans and charges all new loans out at 18+1%.
4th simplify the tax system by making everything taxed at 6%

Politicans and Voting

Clearly the political system has failed South Africa and has only but created an elite class who are above the law, our votes have not done anything to improve the lives of the poor or even create stability.

Voting
All political parties to be banned, neighbours are to gather and vote in groups of 19 and select their best candidate. Then the winners gather in a groups of 19 and the process continues until the provincial level has been reached where by 18 candidates gather plus 1 Judge, they will represent the county and all its people free of political influence. The 18+1 Councillors then look to employe Ministers.

By now, we all know what went went wrong . ( and we need to recover the monies and put them looters in jail)
We all know that the ruling party contains the most corrupt and of late the most incompetent people who though they know how to run COV 19 ( get rid of them and Mr Gordhan who cannot make up his mind )
We know the unions want to run the country and we know they have no clue on how to do it

We must start to compete with the Free Market rules and “make stuff ” …Ask Elon Musk ..

Look at what we import ..replace this with local production . Such “bright ideas “like ” magic city are pie in the sky dreams . We need factories..not shops . You cannot shop without a job

Precisely! Great economies began with many small-scale entrepreneurial businesses which expanded or failed based on their abilities in a free market. Refer the USA …

In short, every condition the IMF will put in place, will be a good thing. Quite telling is it not? Fast forward a few years, and one will see the anc crying foul on the world’s stage how the IMF have racist policies….

The destructive effects on the economy started before Thabo Mbeki, who inherited a fairly functional shop, but the destruction effect started accellerating under him.

The cANCer do not acknowledge that their so called transformation policies have retarded growth and helped institutionalize corruption,but what is certain is that you can never transform off failing entities. And that is what they think they can do.

The cadres, who have stolen not just the money but the future’s of all South Africans, need ‘the big stick’.

Luthuli House is the head office of a company called South Africa Pty. Unlimited. This is not a limited liability company because the shareholders have to stand in for all the mistakes made by management. There is zero liability for management though. They are not accountable or liable for their mistakes. This situation is the opposite of any well-functioning company in the free market economy.

Therefore, the results are also the opposite of what one would expect from such a company. Luthuli House is the largest exporter of employment opportunities and the largest importer of unemployment in the world. Our unemployment stats prove this success. They export our competitive economic advantages to our international competitors via socialist conduits like the Tripartite Alliance with labour laws and violent action, the Mining Charter, BEE requirements, and the redistributive rates-and-taxes regime. Our abundance of mineral wealth remains unexplored and insulated from the market, thereby ensuring higher commodity prices for our international competitors.

Luthuli House exports capital investments to build mines and factories in the rest of the world and imports increasing levels of debt from the rest of the world. The exported capital creates profits and fund taxes and salaries for our competitors, who lend it back to us at interest. We pay twice.

Luthuli House supports and builds retirement funds in Developed Nations by firstly exporting capital to them, secondly creating jobs for them, by boosting their economies and then by paying interest on the capital that they lend back to us. Luthuli House imports social unrest and poverty from Developed Nations, and in return, exports economic stability and food security to them.

Luthuli House is in the import/export and finance business. They export the national wealth to our competitors while they borrow money, at interest, from them to finance the transaction. This business uses shareholder capital to fund the destruction of shareholder value. Luthuli House is in this trade for the bribes that are extorted from the shareholders via the voting process.

What would we call a private company that operated like this? For how long would such a company survive? In China, the managers of such a business would have faced the firing squad long ago already.

IMHO this is not a lot different to quite a number of SA listed companies; Steinhoff, Tongaat, Sasol? and a few construction companies come to mind.The executives look after themselves first, second and third, sometimes by somewhat dubious means of “remuneration” and share “options”. The shareholders representatives are largely from “respected” financial institutions but whose members on the board investing pension, annuity and insurance monies are mostly good pals and sink Johnny Black with the best ANC cadre; also on the board.

Dodgy dealings are papered over by compliant “auditors” and the rotten ship chugs on, until, usually some external source (Viceroy for example), blows the whistle.

Tell me I am wrong. I’d rather invest in Trump’s or Johnson’s backyard to be honest.

With the calibre of leadership running the show at the moment not likely that much will change. All a bunch of Marxists and no vision!

It’s funny to me how people forget what a terrible president Mbeki really was.

It is mentioned but glossed over that Mbeki and Manuel “presided” over the most lucrative period ever for SA with an investment honeymoon and resource boom. What did they do? Squandered, wasted and misused the money (Arms Deal and Chancellor House come to mind) then sailed off into the sunset as heroes. We won’t mention colluding with Mugabe to destroy Zim and consigning a few hundred thousand AIDS sufferers to death.

There will be zero FDI whilst there is talk of expropriation without compensation and whilst there is still foreign exchange control in place- these are the REAL investment inhibitors. Why does Ciaran fail to mention them one wonders?

“SA’s lost decade and how to fix it”

You mean “SA’s lost 26 years and how to fix it”, methinks.

Well, look no further than getting rid of the knuckledraggers of the ANC, EFF(-off), COSATU, SA Commie Party and all of their hangers-on.

That should do the trick.

Not Possible (With the current rot… and with the potential future rot)

The question of how to fix the SA comes down to one simple question.

How can you persuade 80% of SA who vote for a socialist defunct government to choose something different?

Since no one has a concrete answer for this, we’ll be back another decade later in a worse state. IMF debates, fallout’s etc. will not change votes one iota.

Not surprised that capital has flowed out of RSA; I am somewhat taken aback by the sheer scale though. This can’t only be as a result of foreigners withdrawing their own funds but also savvy (and by now fed up) RSA investors who have lost all faith in RSA politics and her diseased local economy. The Trade Unions & the Comrades of the ANC and Communist party have sunk us – nothing short of a miracle required to lift us out of this “government” made economic; this quagmire is now inescapable. We had a few voices warning us, Magnus Heystek immediately springs to mind. His naysayers called him Noah and made him appear a fool – I can’t see them trying to give a credible reason as to how both government and their dismal failures at the expense of the ordinary man, woman and child in RSA. I hope those that told us that “all will be well matey” are able to wipe off the egg from their faces with our losses…

What did successful countries like Singapore and China do?

Ensure:

1) Small families,

2) Quality education and

3) Strong economic growth.

The current policy stagnation here is doing more damage to the economy than state capture.

End of comments.

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