25 Feb 2014 | Tony Leon | Original Publication: BDlive
Finance Minister Pravin Gordhan has to reassure a much wider audience in his budget speech, writes Tony Leon
MORE than 30 years ago, then US secretary of state Henry Kissinger asked a famous question about whom he should speak to if the world caught fire: "Who do I call if I want to call Europe?"
Economically speaking, at the democratic dawn of South Africa in June 1994, then president Nelson Mandela knew exactly who to call when he needed to obtain the buy-in of the local business community.
Mandela surprised guests at the first banquet he hosted for a visiting head of state, France’s François Mitterrand, by retiring after the first course. It became known only the next day that his early departure was occasioned by the need to make four or so telephone calls. He wished to inform Anglo American’s Harry Oppenheimer, Sanlam’s Marinus Daling, Rembrandt’s Anton Rupert and Liberty’s Donald Gordon that his finance minister, Derek Keys, would announce his retirement the next morning and that the government intended to appoint Nedbank’s Chris Liebenberg in his place.
|Finance Minister Pravin Gordhan, delivers his budget speech on behalf of the Treasury in May last year.|
That vignette tells us a lot about the South Africa of 20 years ago: the economic power was overwhelmingly and tightly held by four or so megacorporations, all led by white men, and that the first black head of government, so serenely self-confident with his sure touches and grand gestures, still needed the stamp of approval from outside the government in an economic realm quite outside its control back then. Undoubtedly the government thought that replacing one business titan from outside politics — although, very notionally, Keys was a National Party member appointed by FW de Klerk — with another respected leader from the private sector in the form of banker Liebenberg, would quieten the markets, which indeed it did.
There was good reason for the first African National Congress (ANC) government’s deference to business and the market-makers. Its election manifesto consisted of large promises embedded in its Reconstruction and Development Programme (RDP), but the reality on entering office spoke of a different universe. One of Mandela’s biographers, Martin Meredith, provided a sombre snapshot of the situation: "Mandela discovered that South Africa’s economy was in dire straits. The ANC expected to inherit an economic cornucopia; its ambitious development plans were based on that notion. But the coffers … were nearly empty."
The RDP might have been inspired by the red glow of socialist thinking but it was the country’s balance sheets that were truly red: the previous government had run up a record budget deficit of 8.6% of gross domestic product (GDP) and gross foreign reserves had fallen to less than the equivalent of three weeks’ worth of imports.
Proving that even the most ideologically inspired administration could be pragmatic and adaptive, then transport minister Mac Maharaj, a communist, explained the limits of the new reality: "There was simply no money to do what we had planned…. We had to dump our plans and start from the beginning."
Longer in the tooth, Maharaj today presides over President Jacob Zuma’s spin operation and is much involved in drafting his major speeches. Strange, then, that in his response to the state of the nation debate last week, Zuma said the number of black people in senior management, at more than 40%, was "not enough". In terms of simple quantitative ethnic transformation, it’s a remarkable turnaround. But, as Finance Minister Pravin Gordhan might reveal in the subtext of his budget speech on Wednesday, there are real limits in pumping up the demand side, while the supply side issues are not addressed.
But as Investec Group chief economist Annabel Bishop noted in her budget preview, the lower than estimated fiscal deficit, expected to come in at about 4% of GDP, could be the standout item of good news, and this, more than cosy phone calls, could quieten the restive and increasingly alienated investor community.
Because while the makeup and control of our economy has undergone a dramatic change, an iron law, which dates back more than 100 years or more in South Africa — remains true: with low rates of domestic saving (at just 16% of GDP, half the figure set by the National Planning Commission and last attained here more than 30 years ago), we remain reliant, ever more so these days, on foreign investment, crucially short-term flows to fund the deficit. And then there are those pesky rating agencies, which are unsentimental or uninterested in racial bean-counting when determining the sovereign’s creditworthiness, and thus its borrowing costs.
Gordhan has had his work cut out for him — to fund an expensive public sector wage bill, an expanding welfare state funded by a relatively tiny tax base of just more than 6-million personal income taxpayers.
So while Zuma had the luxury last week of addressing a domestic constituency, Gordhan has to reassure a much wider and less forgiving audience on Wednesday.
• Leon is the author of The Accidental Ambassador (Pan Macmillan). Follow him on Twitter: @TonyLeonSA OR on Facebook: facebook.com/TonyLeonSA