There will be good economic reasons for rejoicing should Zuma go. The rand would strengthen — it would move back in line with its emerging currency market peers; today that would have meant a rate of approximately R12.60 to the dollar.
Lower inflation will follow a stronger rand and bring lower short-term interest rates in its wake. Cheaper-than-otherwise goods and services and credit would encourage households to spend more — as would the higher house prices and equity in homes that accompany lower mortgage rates and a more hopeful outlook for SA. And the firms that supplied them would be much more inclined to add, rather than contract, capacity and hire more rather than fewer employees, as they have been doing. The South African business cycle would turn up rather than down.
The first Zuma attempt to control the Treasury in December 2015 took the yield on South African 10-year bonds from 8.5% per annum in early December that year to about 9.6% by early January 2016. This move also widened the spread between South African and US debt by about the same 100 basis points (see figure below) from about 5.7% per annum to 6.7%. The latest Zuma intervention in the Treasury has seen this risk premium rise further, but not dramatically, from a still unsatisfactory 6.46% level in early 2017 to the current 6.6% per annum level.
This spread may be regarded as the extra returns in rands that all South African investments have to be able to offer to justify their viability — in addition to their covering the additional business risks associated with a particular enterprise. This extra return is also the rate at which the rand is expected to depreciate over the next 10 years. And the weaker the rand, the more inflation expected.
The cost of insuring South African five-year dollar-denominated debt against default, an accurate measure of real sovereign risk, has followed a similar pattern rising from 1.82% per annum at its lowest earlier this year to the current 2.15% per annum. That is when calculated in dollars; an investment in a South African asset would be required to return more than 2% per annum more in dollars than an equivalent US investment to justify its value.
More risks demand higher returns, and the higher the required returns the fewer investment projects will qualify — to the grave disadvantage of the economy and its growth prospects. The object of economic policy should be to reduce such risks rather than to raise them — something the Zuma presidency has clearly failed at. Yet given the reactions of the credit rating agencies that have down-rated SA’s credit, indicating a higher probability of default on our debt, these market reactions must be regarded as surprisingly subdued.
The rand, and the market in South African bonds, clearly benefit, to a degree, from the prospect that Zuma might not survive the campaign to remove him. Were Zuma to go the benefits could extend well beyond the promise of a revival of fiscal rectitude and less inflation and lower interest rates. It would offer the prospect of a radical economic transformation, by which I mean the cleaning of the Augean stables that the state-owned companies (SOCs) have become. It would not require any Hurculean effort to do.
A few investment bankers could do the job of converting the SOCs into a number of ordinarily valuable and well-managed businesses that compete with each other. That will be run efficiently and deliver their goods and services at competitive prices — as business have to do to survive the market test.
Can any South African seriously believe, given the evidence, that these SOCs with monopoly powers are essential to the purpose of developing the South African economy? Or fail to understand that their actions are inevitably driven by the narrow interests of their managers and employees and what their suppliers can extract from them?
The proceeds from their privatisation could be used to pay off much of SA’s debt and dramatically reduce the interest burden of serving it and open up the prospect for genuine poverty relief. This transformation — turning great weakness into strength — would help raise the growth potential of the economy and truly transform the economic prospects of all South Africans.
• Kantor is the chief economist and strategist at Investec Wealth & Investment; he writes in his personal capacity
Source – Financial Mail