Economic Watch

South Africa: be afraid, be very afraid

South African situation a runaway train

“A runaway-train heading towards a deep gorge where the bad guys have set fire to the dynamite which will blow the bridge away moments before the train reaches the bridge."

This was my reaction when I was recently asked by a frequent visitor to this country to ‘describe the current state of South Africa’.

And this again was my reaction on Tuesday when the news broke that our beleaguered finance minister, Pravin Gordhan, received a summons to appear in court on2 November, on a charge(s) of fraud. That was barely a week after the National Prosecution Authority (NPA), otherwise known as the Hawks, said that there was no case against Gordhan.

This is now the ‘nuclear option’ by President Jacob Zuma, as has been speculated in various financial media outlets: it is seemingly the last resort by him and his cronies to seize control of the National Treasury, a move he was denied during the Nenegate saga in December last year.

“How stupid. How utterly, utterly stupid,”  I thought when I heard the news and saw the rand and banking shares plummet.

Even if there were a case – which by all accounts there isn’t – the timing of this announcement couldn’t be worse.

Here’s a man (Gordhan) who has just returned from New York where he and a coalition of top business people held an investment conference during which they tried to make an investment case for South Africa (already under great threat of a credit downgrade in December).

By all accounts Gordhan did a good job and was well received by the sell-out audience.

Secondly, Gordhan is currently under immense pressure to finalise the Medium Term Budget Policy Statement (MTBPS) which has to be delivered on October 26 – just over two weeks away.

How serious is this charge, trumped up or not, that it could not wait until after the MTBPS and after the announcement of a downgrade, or not, by the global credit ratings agencies?

But no, this show of force by the NPA, no doubt driven by the Stalingrad strategy seemingly being followed by Zuma and his inner circle, had to be pushed forward with questionable speed and haste.

Stalingrad defence

It’s no coincidence that it comes a day after Zuma also unveiled his new legal defence against the investigation by outgoing Public Protector Thuli Madonsela. After initially agreeing to answer all questions to be put to him by Madonsela seven months ago, he did a legal flip-flop on Monday, demanding access to any documents in her possession as well as the right for him or his legal advisors to question the whistle-blowers in person. This is clearly an attempt to intimidate any actual or potential whistle-blower and flies in the face of the spirit of the role and function of the Public Protector.

The Stalingrad defence, dear readers, is generally made in reference to the stalling tactics used by the Russian troops defending Stalingrad during the Second World War. They dug in, disregarding their heavy losses (two million Russian troops died during the battle that lasted about five months) and simply wore out the attacking Germans who expected a quick victory.

It will, according to some legal commentators, virtually bring the efficient workings of the Public Protector to a grinding halt, literally bogging down any investigation in the mud of legal defence and counter-defence.

Can you imagine what it will do to the speed and cost of Public Protector enquiries if every subject of an investigation follows the same strategy?

Oh, to be a lawyer in these times. I see even more glass and chrome buildings dotting the Sandton skyline with legal conglomerates’ names on the outside.

Fall-out, brutal and sharp

The fall-out from Tuesday’s announcement was sharp and brutal. The rand went into freefall and within minutes was down 3.5% against the US dollar. This, to my mind, could be the start of a new currency collapse, even more so if downgrades are confirmed in early December.

To make matters worse, we could also be dealing with an increase in interest rates by the US Federal Reserve Bank, also expected sometime in December. All told, we are facing a perfect storm, again. Talk about turkeys looking forward to Christmas!

This will add to the massive amounts of capital foreign investors have quietly been withdrawing from the local equity market. According to some reports on the Sharenet website, more than R128 billion has been withdrawn from the JSE over the past 12 months. This is more than the outflow during the Great Financial Crisis of 2008, yet I struggle to find any reporting on this issue.

It therefore comes as no surprise that the JSE All Share index has not made any progress over the past year, now down 3% for the past 12 months, while the overall return over two years at 9.3% is less than the inflation rate over the same time.

Ordinary South Africans with their traditional savings in residential property, pension funds and stock market portfolios, are now starting to feel the wealth-destruction effects as a result of the ANC’s economic policies in general and Zuma’s utter disregard for the economic impact of his decisions.

I have written about it before, but a great wave of poverty is descending over the middle class. The poor have always been under that wave – they remain poor, but are now joined by more people.

It’s the middle-class wealth that is now under increasing pressure, of which the #feesmustfall-campaign is just the most obvious end result.

The student uprising is but a symptom of this immense financial pressure under which the lower to middle classes are finding themselves. Medical aid rates are soaring at 10-14% per annum, food, petrol and property taxes too are rising at almost double the inflation rate.

The signs of the middle class breaking down are everywhere, most publicly in car sales (down 15% year-on-year) and declining membership of medical aid schemes. Golf courses are empty on a Saturday morning, while retail sales have come to a grinding halt as the middle class simply runs out of more easy-to-get loans from short-term funders.

I’m always a little bemused when our Treasury is described as ‘respected’ and ‘world class’. I beg to differ on many grounds – one of which is that under its watch it has allowed this massive credit binge to take place.

Expect this build-up of pressure to find outlets in other public forms of violence and anger. If I could, I would be toy-toying in front of the company that administers my medical aid. Maybe if I got Vitality points for that I would consider it, or a free smoothie.

Residential property prices have not, on average, increased in real terms in over eight years and, according to the latest figures from Absa and FNB, are starting to fall in nominal terms. The estate agency fraternity still keeps up its brave marketing efforts in trying to talk the market higher, but this donkey cannot be flogged upright any more. It’s had its day and while Zuma is in power it’s unlikely to lift its head any time soon. A moribund property market is a great destroyer of middle-class wealth.

What is the end game?

How will this all pan out? I don’t know, but I have a strong suspicion that we are not going to see wise and forceful leadership by Zuma.

My personal financial defence for many years now has not been a secret. My advice usually leads to the ‘If you don’t like it here why don’t you leave’ kind of response in some sectors. It’s pointless even responding to such infantile drivel.

“Will we see the back of Zuma soon?” I’m asked by the same foreign friend. “Could Zuma stage a state of national unrest, suspend the Constitution and run the country with the support of the armed forces, perhaps for an indefinite period of time?”

I truly don’t think so, but with this man at the helm, anything is possible. Even the unthinkable.

Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be contacted at [email protected] for ideas and suggestions.

(This article first appeared on the MoneyWeb website. Only the opening paragraph has been slightly adapted.)

by Magnus Heystek

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