Friday, October 3, 2014

Nene cannot rely on parallel universe to balance books

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03 Oct 2014 | Tony Leon |  Business Day

Many of the new finance minister’s ministerial and party colleagues seem to derive their assumptions from realm of science fiction, writes Tony Leon

WHEN former finance minister Trevor Manuel presented his medium-term budget policy statements in Parliament, he used to adorn his speeches with literary bells and whistles, quoting the likes of Ben Okri, before presenting his numbers and forecasts.

New Finance Minister Nhlanhla Nene is a decent and conscientious man but far plainer spoken than Manuel. Financially, he also has a far worse set of books to contend with. If so inclined, he could draw from a rich seam of quotes, from Shakespeare to the Bible and even the unmentionable (for African National Congress ears at least, in the post-Mbeki era) Margaret Thatcher to spice up his prose when he presents his medium-term budget policy statement in Parliament this month.

Nhlanhla Nene. Picture: TREVOR SAMSON
Claudius’s lament in Hamlet that "when sorrows come, they come not single spies but in battalions" is as good as any starting point for a description of the bleak economic canvas on which Nene has to paint his projection for the next three years.

Our terms of trade have deteriorated sharply, and much worse than expected, with the August trade deficit widening to R163bn (double the market expectation), explicable by a sharp drop in exports of R77bn against a surge in imports of about R93bn. SA is caught in the classic "double whammy", in which currency weakness — the rand has been on the slide since 2009 — has not led to export growth. As we import inflation, and financing the current account deficit has become crucially dependent on foreign flows, the interest rate needs to be competitive to compensate on both fronts, hence the rise in rates in a year of very low growth.

Wage rises not tethered to productivity increases hardly help, nor does the surge in public sector jobs, which do nothing to allow us to export our way out of difficulties. They simply increase Nene’s difficulties in balancing the books with an unhealthy 5.4% current account deficit. This places us second only to Turkey of the 45 countries whose economic and financial indicators are published by The Economist. Further spending will just pile on the misery, and tax increases are hardly an option, when economist Dawie Roodt recently forecast a revenue shortfall of R15bn-R30bn, measured against the projections in this year’s budget estimates.

Actually, the higher figure in Roodt’s estimate coincides almost exactly with the figure the auditor-general identified as lost to unauthorised or wasteful or irregular spending by government departments, which suggests state failure of a vast magnitude, the rectification of which would go a long way to assisting Nene in his balancing act.

In the unvarnished warning of Investec chief economist Annabel Bishop, the once beneficent global economic environment has turned sharply against us, especially the Chinese economy, that traditional anchor of our resource exports: "As economic growth in China has moderated, commodity prices have eased…. Should China experience further slowdown, the rand will likely weaken further as commodity prices ease once again.

"Quite aside from tear-gassing pro-democracy protesters in Hong Kong and ensuring that its client states like ours keep the Dalai Lama out, the Chinese are involved in a massive attempt to reorientate their economic model away from manufacturing and saving, towards consumption and services, causing a very hard landing for economies such as our own. Especially when, as the Financial Times advised recently, the most vulnerable emerging markets, in the wake of the removal of quantitative easing (QE) and anticipated uptick in US interest rates in the US … are those ill-prepared for the change in the economic weather."

Here’s where the Bible comes in handy, although quoting Hebrew prophet Joseph might be career-limiting for a minister given the anti-Israel rhetoric of the ruling party. Still, back in the land of the pharaoh, Joseph famously could interpret his master’s dream of seven lean cows devouring seven healthy ones to mean that seven years of famine would follow seven years of abundance. His prudent suggestion to fill the granaries in the boom times to compensate for the lean period to follow not only made him the second-most powerful man in ancient Egypt but also provided a clue for today’s policy makers. SA went in the opposite direction, trying to spend its way out of its difficulties, not saving for the proverbial lean years that are now upon us.

The smart money, so to speak, is now following emerging market economies such as Mexico, Peru and Colombia, which were recently cited as having used the resource boom and the QE years, which coincide with the biblical seven, to increase their savings and reduce public debt. Our savings rate (about 13.5% of gross domestic product) and public debt (more than 40% of GDP) mean we are not in their company.

Enter Thatcher. She once famously said: "The problem with socialism is that you eventually run out of other people’s money to spend." Here, Nene is spoilt for choice. South African Airways has guzzled at the taxpayers’ feeding trough and now cannot publish its results unless it gets further state aid. This is despite, perhaps because of, its addiction to bail-outs. In the estimates of opposition MP Natasha Michael, the airline has received, over the past two decades, "R16bn in bail-outs and has been subject to nine turnaround strategies in 13 years". Further state assistance, she suggests, would be tantamount to "madness". Perhaps professional aviation and commercial management would be the ticket, but, like Thatcher, any suggestion of reviewing or cancelling the ruinous cadre deployment strategy is off limits. There was something rather touching, were the track record not so disastrous, in the proffered solution of Public Enterprises Minister Lynne Brown to the almost across-the-board rot and ruin at state enterprises. "An interministerial task team has been meeting for months," she said. Well, that should help.

I went this week to visit Nene in his Pretoria office. I was reminded that he is down to earth, has a realistic appreciation of the enormous challenges, surrounds himself with smart advisers and actually goes around the country, from boardrooms to the factory floor, to get a proper appreciation of the real economy and its ailments.

But if Nene is admirably grounded, many of his ministerial and party colleagues seem to derive their assumptions from the realm of science fiction. In the movie Star Trek, the laws of nature are different, and its citizens inhabit a parallel universe where the laws of motion and gravity do not apply. Our local inhabitants of this charmed planet are to be found everywhere. ANC policy head Jeff Radebe has decreed that the most important issue facing SA is the "power of monopoly capital". Given that the Post Office has not delivered letters for the past month and Gauteng residents are crippled by water and power cuts, evidence here on planet Earth suggests he could look closer to home, and inside his government, for the real challenges.

Another star of the parallel universe is ANC secretary-general Gwede Mantashe, who advises that the lack of investment by the private sector is evidence of a "lack of patriotism". Back in the real world, it relates to a lack of confidence and the failure of the government to provide investor certainty. The least vulnerable emerging market countries are those that used the fat years to improve poor business climates. We have gone in the opposite direction.

Nene’s speech will perhaps reveal that, contrary to sci-fi movies, the laws of gravity do apply, and you can’t defy them forever.

• Follow Leon on Twitter: @TonyLeonSA


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