Wednesday, January 29, 2014

Land of Messi and Peronism discovers limits of populism

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29 Jan 2014 | Tony Leon | Original Publication:  BDlive

Argentina’s defiance of the economic laws of gravity invited its isolation from world financial markets, hastened disinvestment and provoked civil unrest, writes Tony Leon

IN LATE September 2012, on my last day in residence as South African ambassador to Argentina, I took a farewell stroll down the tree-lined boulevards of Recoleta, a suburb of Buenos Aires. I noticed the empty display windows in one of its up-market emporiums.

Argentinian President Cristina Fernandez
Fashion retailer Louis Vuitton — a favourite of Cristina Fernandez de Kirchner, the handbag-wielding president of Argentina — had just announced it was closing its doors. Its exit from the country, following fast in the departure of other international luxury brands, much loved by local fashion aficionados, was the latest scene, back then, of what I dubbed the long-playing melodrama: the Crisis of Cristinanomics.

Sixteen months ago, and not for the first time either, Argentina was heading over an economic cliff as the population raced to dump pesos for dollars and a zealous government fought back through draconian exchange controls, bullying tax-intrusive measures, manipulating economic data and import-suppression measures.

In an article I wrote on my return here for the Financial Times, I noted an eerie parallel between Argentina then and the apartheid government at its nadir in the 1980s.

Although, of course, Argentina had none of the racial policies then in place in South Africa that isolated this country, its stubborn pursuit of eccentric economic policies suggested some parallels. Its defiance of the economic laws of gravity invited its isolation from world financial markets, led to a dual currency in which arbitrage and round-tripping — not investment — became the names of the game, all of which hastened disinvestment and provoked civil unrest.

I was also struck how South Africa back then and Argentina more recently were increasingly detached from the world and determined to defy it, either because of racially repugnant policies or outlier economics respectively.

In the intervening period since my return, the Argentine government managed — despite political defeats in Congress, the ill health of its president and continuing investor and consumer unhappiness — to more or less avert total meltdown. In the same period, underlying the disconnect between its fantastic human capital and its poor governance, it gave to the world some outsize individuals: the first non-European pontiff, Pope Francis, football supremo Lionel Messi and the Queen Consort of the Netherlands, Princess Maxima.

Two factors helped pull Argentina back from the cliff in 2012, which strike some uncomfortable chords with South Africa today: surging growth in China (Argentina provides it with 40% of its soya bean imports) and the rapid printing of dollars by the US Federal Reserve through its programme of quantitative easing. Higher, though risky, Argentine yields provided a carry interest market for the adventurous. But with both those trends now reversing, and investors exiting emerging markets with great haste, Argentina took a huge hit. It was not alone, as the battered rand, the shrinking Turkish lira and the diminishing Brazilian real reflected.

But, on a swelteringly hot day last Thursday, Argentina led the field with the dubious distinction of posting the largest fall in a single day of any (emerging or other) currency, as its peso fell an astronomical 15%. Over the week, it fell about 18%, its sharpest descent since the country posted the biggest single sovereign debt default back in 2002.

And that default, with its consequential debt obligations, fuelled the need to preserve dollars, which in turn led to drastic remedies, ranging from "haircuts" for foreign bond holders, nationalisation of foreign companies without agreed compensation, extreme protectionism to deter imports, fudged or manipulated financial statistics, and associated maladies. But this in turn led to the country being excluded from vital foreign credit markets, and incurring the extreme displeasure of the International Monetary Fund.

Broken air-conditioners and lifts in the capital city hardly helped the mood last Thursday, which was well captured in the headline of the fiercely independent Buenos Aires Herald: "Official Exchange Rate: $8.10; Temperature 34 degrees; Unofficial Exchange Rate $12.10, real temperature, with humidity, 46 degrees!"

That headline, aside from reflecting the uncomfortable weather, was shorthand for another phenomenon well remembered here from the days of the "Rubicon rand", the uneasy existence of two parallel local currencies. In Argentina’s case, it is more acute. Its "blue" or black-market rate of exchange, always a more realistic reflection of the currency’s worth, traded at about a 40% differential from the official rate. The latter was propped up by the central bank’s determination to buy up dollars to prop up the country’s currency. But as a particular nemesis of Argentina, former British prime minister Margaret Thatcher, once famously observed: "You can’t buck the markets."

And the proximate reason for the peso’s vertiginous collapse was the central bank’s announcement that it would stop intervening in the market to defend the currency (a wise policy long practised over here). Necessity was the mother of virtue in Buenos Aires: its foreign reserves had drastically diminished due to the triple headwinds of central bank dollar purchasing, tapering by the Federal Reserve and stagnant commodity prices for its world acclaimed agri-exports.

But another realistic and historic spectre hangs over Argentina: the fear and reality of hyperinflation. With the government hitting the printing presses to fund its populist vote-winning social handouts and subsidies, inflation is reckoned to be about 28%, although the official, and discredited, figure places it at about a third of that. Dollar retention was thus a key reason to prop up the local currency. But, by the weekend, when the government reversed course and in effect allowed the currency to devalue, the big question in Buenos Aires remained unanswered: as John Paul Rathbone of the Financial Times put it: "If the flight to dollars is being caused by high inflation, cutting inflation means also cutting public spending and the money-printing used to finance it — which Fernandez’s left of centre government is loath to do."

Simply put, a crisis is an excellent moment to make deep structural reforms rather than ad-hoc Band-Aid measures, which the market soon discounts. Peronism is the vote-winning brand of Argentine populism and politics, but it has many doppelgangers elsewhere.

For example, Economic Freedom Fighters "commander" Julius Malema has borrowed both his beret and what passes as his economic policy from Venezuela’s late president, Hugo Chávez. Argentina in turn practices a sort of Chávez-lite policy, which is slightly less economically radical but minus the sea of oil on which Venezuela sits. Both provide a cautionary lesson in South Africa to the threadbare and impoverishing nature of populist economics in practice.

I asked Buenos Aires resident and the former head of retail and business banking at Standard Bank of Argentina (now ICBC), Johan Roets, for some local parallels. "A relatively small economy (Argentina and South Africa have roughly the same weight in the world) cannot control its own currency," he said. "Argentina’s leaders today are populists rather than leaders. Populism might help you get elected but eventually you fall off the cliff. What happened last week in Buenos Aires was simply the acceleration of a very long process of mismanagement."

A sombre note from the other side of the South Atlantic, or perhaps a home thought from abroad.
Leon is the author of The Accidental Ambassador (Pan Macmillan). Follow him on Twitter: @TonyLeonSA OR on Facebook:

Tuesday, January 28, 2014

The prospect of a weakened ANC is intriguing

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28 Jan 2014 | Tony Leon | Original Publication:  BDlive

Tony Leon: Will a panicked and diminished ANC government then decide to veer sharply leftward economically?

ONLY in South Africa, and a clutch of other one-party-dominant democracies, would the possibility that a government in power for 20 years and facing multiple crises of misgovernance might slip below 60% of the vote in the next election cause much interest.

But a conflicting emotion might apply to the 60% conundrum.

Whether you are an opposition stalwart or even a disinterested believer in the constitutional virtues, it’s a no-brainer that "cutting the African National Congress (ANC) down to size" would be an unalloyed good.

It would make politics more competitive and hold out hope for more answerable government; who knows, it might even help arrest the decline of the battered rand.

The continuance of President Jacob Zuma in high office might be in jeopardy as an anxious party, at its next elective conference, decides to commit regicide again.

But what of the other side of your brain, the economic one, if the ANC dips below 60%? Will a panicked and diminished ANC government then decide to veer sharply leftward economically?

Enthralled by the rise of Julius Malema and his Economic Freedom Fighters (EFF) — which will have to win more than 10% of the vote for the ANC-below-60% scenario to be realised — the ANC decides that it’s in a race to the bottom with its defecting left flank and lets go of the brakes. Of course, the government is hardly in danger of being accused of being business-friendly or pro-market.

But South Africa still has a long way to go until it falls off the cliff of populism a la Argentina or Venezuela, or even Zimbabwe.

Macroeconomic, if not microeconomic, policy here is still grounded in the world of reality and does not try to defy the laws of economic gravity, as is the case with certifiable failed states.

But what if the election results remove the restraints that have bound South Africa to the laws of investor attraction, give or take the tearing up of bilateral investment treaties, et al?

Then you are looking down the barrel of a spiralling current-account deficit, rampant inflation and the evils associated with fiscal and monetary incontinence. R11 to the dollar will seem like a happy memory.

But how likely is the ANC to fall below 60% of the vote?

For this to happen, obviously, the opposition in its various formations will have to get more than 40%.

The only significant double-digit contender at the moment is the Democratic Alliance (DA), which achieved 16.7% last time out, top performer in a combined opposition total of just less than 34%.

On paper, it is easy to see the EFF winning more than 7%, which means you arrive at a below-60% ANC.

But that presupposes that all previous opposition voters stay in the fold, which is unlikely, given the implosion in the Congress of the People and the continuing puncture of the Inkatha Freedom Party.

Between them, they received 12% of the total in 2009, and recent by-elections suggest that many of their voters have migrated back to the ANC.

Therefore, if the DA does not get much beyond 25%, there is a real prospect that the ANC returns at about 60%.

Of course a lot can happen over the next four months.

And the variable here, and the real focus of the campaign, is voter turnout.

If many ANC supporters stay away from the polls, then these percentages can dramatically shift.

And there could still be some blockbuster candidates to be announced in the DA’s "confidential" candidates’ slots, which could move more voters.

But assume that the ANC returns in significantly reduced form to Parliament.

This happened before to a ruling party, the National Party (NP), in September 1989. Its 49% of the total vote (its worst result in a generation) could have obliged it to take heed of the big gainers in that election, the ultra-right Conservative Party (30%).

Instead, in his revolutionary speech at the opening of Parliament, FW de Klerk, who was president at the time, looked straight past the Conservatives, and announced (by mentally tallying up the NP and Democratic Party vote of 20%) that "South Africans have voted irreversibly for change".

So will a diminished but re-elected Zuma announce in his post-election speech that 85% of South Africans (the combined total of all ANC and DA votes) have voted in favour of centrist economics in the form of the National Development Plan and that the government is now proceeding, full speed ahead, to implement it?

This could be as interesting as the election. Or perhaps a case of wishful thinking.
Leon is the author of The Accidental Ambassador (Pan Macmillan). Follow him on Twitter: @TonyLeonSA OR on Facebook:

Tuesday, January 21, 2014

DA faces ANC in a changed environment

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21 Jan 2014 | Tony Leon | Original Publication:  BDlive

It was the events around and after the memorial service and funeral for former president Nelson Mandela that revealed a changed reality in South Africa, writes Tony Leon

ENGLISH soccer great Gary Lineker once observed that "football is a simple game. Twenty-two men chase a ball for 90 minutes and, at the end, the Germans always win."

Give or take the ascendancy of Spain and one or two others in soccer, this seems to be a handy user’s guide for watching the unfolding general election campaign in South Africa, and predicting its final outcome.

In horse-racing terms, the African National Congress (ANC) is a dead cert to win nationally, and odds-on favourite to retain its grip on eight of nine provinces.

Gauteng has been put in play through a combination of factors — a fractious ruling party, extremely unpopular e-tolls and spiralling delivery failures, and the energetic and fresh-faced campaign of the Democratic Alliance’s (DA’s) top candidate, Mmusi Maimane. But even Maimane, the new hope for the opposition, perhaps realises how long the odds are in reality.

In the previous provincial poll in 2009, the ANC obtained 63.99% of the vote, a shade higher than it achieved in the home province of President Jacob Zuma in KwaZulu-Natal.

Even dreams of the opposition combining to force the ANC below 50% in Gauteng must yield to the reality that as far as co-operation between, for example, the DA and the Economic Freedom Fighters (EFF) goes, there is, as the meretricious Julius Malema would say, "no way, Madam". Perhaps this caution explains why Maimane himself has apparently taken a two-way bet on the outcome and reserved a place for himself on the DA’s list for Parliament as a form of electoral insurance.

But, of course, beneath the predicted headline outcome, a great deal of the small print in the results will also set the course of our political economy for years to come.

It was the events around and after the memorial service and funeral last month for former president Nelson Mandela that revealed a changed reality in South Africa.

There is no doubt that, in life, Mandela had a significant regard for Zuma.

Back in September 2002, when Zuma was still deputy president and had been obliged by the guardians around President Thabo Mbeki to issue a statement saying he had no ambition to become president, Mandela told me — and doubtless others: "JZ is the key man in the party and the movement."

I thought at the time that this showed the great Madiba to be startlingly out of touch with the national zeitgeist.

Events proved just how canny the old man actually was.

Even in death, Mandela’s touch seemed to advance Zuma further.

On December 5 last year, the ANC was due to commence a difficult national executive meeting at the very moment when Nkandla and the serial scandals around it were raising serious internal questions about the party’s president. Mandela’s passing rewrote the timetable.

It was also a moment for the country and the world to perhaps embrace the leader who stood in Mandela’s stead.

But as The Economist noted, even before the cascade of debacles at the FNB Stadium: "Without the protection of Mandela’s saintly aura" the ruling party and its leaders "will be more harshly judged".

Just how quickly the mantle proved to be nontransferable was revealed when sections of the crowd at the FNB Stadium booed the president, a moment of exquisite personal embarrassment and national shame.

But it might be of (cold) comfort for the president to know that he is not alone in this unhappy league.

I witnessed then-Australian prime minister John Howard being raucously jeered at a packed rugby stadium in Sydney, in September 2001, at the Bledisloe Cup rugby grand finale.

Tony Blair was roundly booed by 10,000 people at a women’s institute conference in London in 2000.

Although neither of them then used national security agents to filter future crowds, both Howard and Blair went on to win hefty majorities at the next elections.

By our standards of glorifying regnant leaders, the FNB Stadium wake-up call signalled the arrival of more normal and less deified politics on our shores.

Barely had Mandela been laid to rest in Qunu than the ANC’s most powerful trade union partner, the National Union of Metalworkers of South Africa, chose to announce its disaffiliation from the ruling party.

The iron unity of old is now more of a circular firing squad.

All this uncivil chatter and churn leads to the central question that remains unresolved: will the ANC be returned with a total greater or less than 60%?

More on this, anon.
Leon is the author of The Accidental Ambassador (Pan Macmillan). Follow him on Twitter: @TonyLeonSA OR on Facebook: