Argentina: A warning for South Africa

RW Johnson writes on the pressing relevance for us of that country's current travails

How many South Africans are paying much attention to events in Argentina? I can think only of Tony Leon, our former ambassador there. But Argentina could be all our futures and it would be as well to sit up, pay attention and think hard.

Under Presidents Nestor Kirchner and then his widow, Cristina Fernandez de Kirchner, Argentina went on a protracted populist spree with runaway corruption from the top down – very much like our own Zuma period. During that period the government flouted international financial opinion, refused to have anything to do with the World Bank or IMF, paid no attention to its credit downgrades by the ratings agencies and insisted on such financial follies as keeping the national airline, Aerolineas Argentinas, running on non-economic lines.

The government simply refused to face up to the economic damage this was causing, rather like the insouciance of our own rulers as the number of unemployed rose to 9.4 million. (Which ANC leader is willing to remember that in 1994, when the ANC posters read “Jobs,jobs,jobs”, unemployment stood at 3.7 million ?) In the Argentinian case the government carried out such pirouettes as banning all imports in some months and systematically falsifying the inflation rate. (In the end international publications like The Economist simply refused to publish the figures provided by the Argentine government.) When it felt like it the Kirchner government would simply expropriate even huge foreign companies like Spain’s Repsol (oil) company, with precious little compensation. Nothing was safe.

All good things have to come to an end, as did the rule of Cristina de Kirchner in 2015 when she was defeated by Mauricio Macri, who espoused far more conventional pro-market solutions. He paid off Argentina’s bad debts, attempted to throttle back the runaway inflation of the Kirchner era – and published the truth about it. He also attempted to curb wasteful expenditure, to reduce the budget deficit and to bring down the trade deficit. International opinion was ecstatic, just as it has been at the emergence of the Ramaphosa government here. Suddenly it was much easier to sell Argentinian (or South African) bonds and bond rates fell back a bit from the horrific levels of the earlier period. As for Cristina, the only question, as with Zuma, was whether she would go to jail.

At this point, however, the fairy story rather tailed off. Macri’s reforms had been based on the hopeful assumption that once Buenos Aires showed that it was a market-rational, indeed market-friendly place, foreign investment would flood in, lifting all boats and inaugurating a happy new period of economic growth. After all, Argentina is the world’s eighth biggest country and has enormous natural resources. That would have been just the happy ending that we all like. However, it left one or two things out of account. First, investors had been badly bitten and were not twice but many times shy. They were willing to risk investment in Argentinian bonds and shares (which they could sell the next week) but they were hardly willing to invest any long term money into factories, farms or even real estate. Investors hadn’t forgotten Repsol and things like that took a lot of getting over. And, after all, there were lots of investment opportunities in markets where such risks were unthinkable.

Secondly, developing countries like South Africa and Argentina had benefited enormously from the “quantitative easing” (QE) policies of the US and EU central banks since the 2007/8 crisis. This inaugurated ten years of very low interest rates, enabling debtor countries like South Africa to fund their deficits far more cheaply than would normally have been the case. But now that QE policies were ending at last, US and EU interest rates were rising with dramatic results for emerging market currencies and interest rates. There was no point bemoaning this. Like the weather, it was beyond anyone’s control.

The unhappy result in Argentina was a sharp drop in the peso, a rise in interest rates to 40% and finally a desperate plea to the IMF to shore things up with a $30bn. loan.

This is the context within which we should view the warning by the Treasury’s Director-General, Dondo Magajane that SA is still at risk of becoming a failed state and the accompanying warning by Deputy Finance Minister Mondli Gungubele that “we dare not relax and allow the things that took our country to the precipice to prevail”. For the truth is that we are facing a situation every bit as difficult as Argentina – and just as likely to end in a desperate appeal to the IMF.

At present publications like Business Day are happily congratulating President Ramaphosa on having made a few board changes at Eskom and suggesting that with a bit of luck we should now see some recovery. This is grossly irresponsible. The Eskom board still includes some obviously ridiculous figures and in any case the real question is when will that board face up to the urgent necessity for it to lay off some Eskom staff, decree a pay freeze for the rest, and sell off at least some of its power stations? For Eskom owes $35 bn. which it cannot possibly pay and which the government can’t afford to pay either. If the DA was truly a responsible Opposition it would be speaking out loudly now about what this implies.

Similarly, we currently see debate as to whether public servants should get an increase equal to inflation (as the government would like) or inflation +++, as the unions are demanding. This simply disregards the repeated IMF finding that our public service is enormously overpaid and over-large in comparison to all our peers. The truth is that we need to impose a multi-year wage freeze, as was done in developed countries like the UK after the financial crisis. Not just the unions but the government too is living in fairyland. And the Opposition says nothing.

However, the biggest sortie into fairyland is Ramaphosa’s absurd crusade for $100bn. of foreign investment. This appears to be based on the same happy assumption as in Argentina that since we have all sorts of resources the rest of the world is just yearning to pour money in once we tell them that we’re “open for business” again. This despite a years-long investment strike, the huge capital flight from South Africa, the abrogation of all the investment-protection treaties and the latest mantra of expropriation without compensation. To believe that one can really expect a flood of foreign (or even domestic) investment under such conditions one has to believe not just in fairies at the bottom of the garden but that Father Christmas is shipping them in in flying saucers. Yet this ridiculous initiative is treated with grave respect by the Opposition and the media. Apparently everyone believes in fairies, Father Christmas and flying saucers.

One understands why Ramaphosa wants the country to live a little longer in Dreamland before the next election (though that is no excuse for the likes of Business Day or the DA to be also so fast asleep). The reality, as with Argentina, is that all this desperate wishfulness ends, inevitably, with a humiliating recognition of reality – and a desperate rush to the IMF.

RW Johnson