South Africa's dire situation

RW Johnson on the processes that have driven the country to the wall

If one wishes to understand the processes driving South Africa's trajectory it is sometimes far more revealing to examine a cross-section of reality than to pay attention to what presidents and politicians say.

Take the construction industry, for example. It is no secret that most of the major players in the industry are flat on their back. In good part this is because perverse economic policies have killed growth, causing the private sector to pull back – there are enough vacant office blocks and a surplus of shopping malls. But despite Ramaphosa's brave words to his 2018 investment conference that (state) investment in infrastructure would spur economic activity, this too has been lacking – for of course the government's capital expenditure is being badly squeezed by its absurdly high salary bill which alone consumes 46% of all tax revenue.

In fact the burden on the state of public sector salaries is far worse than that. For many years now the government has been borrowing in order to pay its salary bill and thus the ever growing bill for debt interest is also largely the result of having too many and well paid public sector workers. Another large item in the government's accounts – the vast sums used to bail out SOEs – is also in good part the result of an over-padded and well paid workforce in the SOEs as well as the BEE fatcats who feed upon them. The average salary at Eskom is R800,000 a year.


Of course, the real need for construction is high. This is not simply about the huge housing shortage. The country's roads, bridges, railways and harbours are all in need of large public investment, and the country needs any number of new schools, clinics and hospitals. But due to the crazy priority given to the consumption levels of public service and SOE workers and BEE fatcats, aggregate demand for construction is low.

But let's say you somehow procure the finance to start a large construction project. What then happens is that you are quickly approached by armed gangs who make their demands at gun-point. Usually there is a demand that the construction company must employ only local labour, regardless of its lack of specialized building skills. But mainly these groups claim to represent “building or business forums” of local BEE types and they demand a 30% equity stake in the project. If these demands are not met they threaten violence against the buildings, machinery and personnel of the construction company. Since no company can possibly afford to give away 30% of its equity this generally leads to the cancellation of the project.

Over a year ago the South African Forum of Civil Engineering Contractors (Safcec) sent an urgent message to Ramaphosa pleading for his intervention in a case where two mega projects worth R4 billion had to be cancelled due to such armed threats. Given that the projects were backed by German investors of just the kind Ramaphosa was keen to entice to South Africa, one might have expected him to act. But all that happened was an agreement that in future such armed threats should be treated as organized crime. So the two projects are dead and so are 82 others all round the country for the same reasons.

In no single case has anyone threatening violence been charged and contractors report that if the police are called they often exchange hugs and shake hands with the criminals – and then do nothing. Ten times in the last four months Safcec has arranged meetings with the national police commissioner, Khehla Sithole, to discuss how to tackle these mafia forums. The commissioner has cancelled all ten meetings. In effect the state is unwilling to guarantee law and order, either because it is frightened of the mafia forums or because it is corruptly involved with them (and many of the forums are known to have links to politicians).

The fact that the mafia forums demand a 30% equity stake is interesting, This just happens to be the figure that Gwede Mantashe is trying to force on the mining industry in his new iteration of the Mining Charter. Since no new mine can possibly afford to give away 30% of its equity, we have had no new mines for the last ten years and we have seen mining giants like Anglo-American exit the country. But it's clear that Mantashe's crazy benchmark is influential.

However, let's imagine that you somehow get your new office block built. You then have to rent it out. But rents are under a lot of downward pressure at present. A large part of the reason for that is that while there has been inflation of 220% in the last ten years, in the same period rates and taxes have gone up 559%, with the fantastic result that certain retail tenants are now paying more in rates and taxes than they are in rent. Naturally, any tenant looks at a property in terms of overall cost of occupation so effectively this squeezes what he is able to pay in rent. As rental income falls, so do property values, which is why South African listed property has fallen around 50% since the beginning of 2018.

These soaring rents and taxes represent, of course, the slice that the local and national state is demanding. Because the state takes such a large slice, rents have to fall and the listed property business is near collapse. Once you disaggregate this, it is the same old story. A great deal of this huge increase in the state “take” is due to the need to pay for the ever-climbing salaries of the municipal and public service workers, together, of course, with the other needs of the state, a great deal of mis-spending and corruption, and heavy increases in charges by SOEs.

Thus the construction industry is sick almost unto death – and it is a key industry – because at every level extremely determined groups are trying to take slices out of it. At the bottom there are the mafia forums, at the top there are the public service and municipal workers, corrupt politicians and the SOEs. The duty of the state, of course, is to guarantee law and order and to ensure that the country has a healthy construction industry. But the only parts of the state that take any interest at all are the departments that charge and collect the rates and taxes. There is, effectively, no law and order and the state could well wake up shortly and find there is also no construction industry. At which point, doubtless, Ramaphosa will be “shocked”.

Bear this model in mind for it is very much how things work in our kleptocracy. Take the mines. At the top we have Mantashe trying to force a Mining Charter on the industry, replete with 30% give-aways which no one can afford. ANC politicians, conscious that they are failing to provide a better life for all, are also trying to push more and more responsibilities for service provision onto the mining companies. At the bottom there is Joseph Mathunjwa and AMCU making hugely ambitious wage demands. Eskom is also forever trying to push up charges for the electricity on which the mines depend. And then beneath the bottom come the hordes of illegal miners (“zama-zamas”) and the military-style gangs staging armed raids on gold mining and processing plants. Everyone wants their rent and their slice, sometimes at the point of a gun, and so the industry is slowly dying.

The picture is thus much the same. At the core stands a key industry, central to the country's economic health, which produces real goods and value. But at every level ruthless and unreasonable and sometimes violent demands are being made in an attempt to take a far greater slice out of the industry than it can possibly afford. Again, the only part of the state that shows an interest is the revenue collectors. There is no law and order and under these pressures the industry is gradually collapsing. The state is scared of the military-style gangs and is trying to think of ways of making the zama-zamas legal, notwithstanding their lethal accident rate.

How different are the railways – another central industry? Again, on top we have crooked BEE interests selling the railways rolling stock (at a huge price) which is actually too tall for the system. We have also had any number of corrupt railway officials cutting deals with the Guptas and anyone else willing to fill their pockets. The unions have been so thoroughly bought in that they even campaigned for the reinstatement of Lucky Montana, the railway boss under whom all the shenanigans took place. At the bottom we have cable thieves immobilizing the trains and taxi bosses managing to get railway coaches set on fire so as to divert customers to the taxis. By the end of it we have a railway system under administration and working far less well than it did in 1920. Quite literally, a century of progress has been wiped out.

The state has, again, been almost wholly absent while this dereliction has been in process. It sat idly by while corruption brought the system low, does little or nothing to stop cable theft and never manages to punish those who burn railway carriages or vandalize the trains. And yet as anyone who knows South African history can tell you, this is a country which has been built on and around its railway system. There is something deeply pathetic about Ramaphosa dreaming of bullet trains while he presides over this huge unravelling.

One could go on but the model is clear. Each healthy industry or essential economic activity is being undermined – sometimes almost to the point of extinction – by the sheer weight of parasitic elements attempting to exact rents from it. The national and local state exacts some of the highest rents and, through state capture, has also facilitated much of the corruption which has taken such a heavy toll in the rail, water and electricity industries.

But the state is wholly absent from its supposed role as provider of law and order. As one surveys this situation one marvels that Ramaphosa ever thought that the answer to economic stagnation was to send a handful of emissaries around the world brightly suggesting that foreigners might like to invest heavily in South Africa. Indeed, such a gambit seems downright frivolous when one realises that the President was carefully averting his eyes from what needs to be done to halt this parasitic rent-seeking which vitiates all investment, domestic or foreign.

This is not, of course, a sustainable situation. First, Gwede Mantashe and the mafia forums may be demanding a 30% slice of the action but they are not getting it. They have simply been far too greedy and the industries in question cannot possibly afford to accommodate them: they will walk away or close down rather than give in. Secondly, the overall effect of ill-advised government policies and of this model of parasitic extraction is a shrinking economy, with a falling tax take and thus the impossibility of making further exactions from the industries concerned. Finally, the unwillingness of the state to provide law and order does not create a new stable equilibrium. Instead it steadily strengthens criminal elements, with police corruption proceeding pari passu.

All of this was true before the budget. The budget was remarkable in several ways. It signalled a recognition that the state could not keep on raising taxes: there was a limit to extraction. So, if the yawning fiscal deficit was to be narrowed, the public service salary bill had to be cut. The OECD, World Bank and IMF had all been saying this for about a decade but finally the government had run out of excuses for ignoring this advice.

Second, it was based on assumptions about economic growth which were almost instantly falsified by the revelation of a steep recession in 2019 Q4. How the Treasury could possibly have been unaware of this takes some explaining. Third, the cut in the public service salary bill had not been planned and, indeed, Ramaphosa had gone elaborately out of the way not to mention such a thing to Cosatu only days before. Since then it has become clear (surprise, surprise) that the unions will not hear of such a cut. If the cut does not happen, the budget will have amounted to almost nothing.

This is so because of the Ramaphosa fantasy world in which any change has to be elaborately negotiated with the social partners. This was always an absurdity, given the nature of the crisis Ramaphosa faced the moment he came to power. It is worth pointing out that after the financial crisis of 2008-9 the British government simply froze all public service salaries for two years, after which it allowed rises no bigger than 1% a year. This was maintained until 2018. This was not done by negotiation but by force majeure. The government had to act toughly in the national interest and it did so. Even now many salaries in Britain have not recovered to their pre-2008 levels. The result of this austerity is that now that the Covid-19 crisis has struck Britain has the fiscal space to apply generous remedial measures. South Africa does not. This is the direct result of Ramaphosa's feckless pursuit of a mythical consensus.

The Bretton Woods institutions reckon that for a middle income developing country like South Africa the debt ceiling should not go above 60% of GDP. However, the Medium Term Budget Policy Statement (MTBPS) of October 2019 showed that (on unchanged policies) South Africa's debt would reach 70% by 2022. However, if government guarantees to the SOEs are also counted in – as they should be – then South Africa will reach the 80% mark in 2022.

However, factor in the steep (-1.4%) recession in 2019 Q4; the high probability that the public service salary cuts will themselves get cut; and the high probability of a Moody's downgrade on March 27 – and one realises that even the MTBPS figures already look unrealistically optimistic. If there are no cuts in the public service salary bill, the budget deficit rises from 6.8% to 7.8%. (By way of comparison, the EU limits budget deficits to 3% of GDP.) On top of which we now have the Covid-19 crisis. This is already producing guesstimates that the budget deficit could end up in the 8%-9% range. Or perhaps even higher. It certainly seems likely that growth will be negative throughout 2020. Which is to say, unemployment will increase steeply (ie. more redistribution away from the poor to the less poor) and real incomes will continue to fall – for the sixth successive year.

Back in late 2014[1] I envisaged a progress of this sort inevitably leading to an IMF bail-out, an ANC split and, probably, a coalition government of the reformist ANC plus DA being saddled with the unenviable task of implementing the structural reforms which the IMF will demand as conditions for its help. Thus far events have followed more or less the path that I anticipated then. We are still on course for this showdown.

It is striking that Ramaphosa's election in December 2017 has not in any way altered the trajectory set under the Zuma regime. Indeed, Ramaphosa has embraced almost all the policy initiatives urged by Zuma – free higher education for the already-not-badly-off (a regressive policy which has, predictably, caused enormous trouble on university campuses), expropriation without compensation, a sovereign wealth fund, NHI, a ridiculous Mining Charter, even greater attempts to compel affirmative action in the private sector and so on. Indeed, one looks in vain for any policies which are distinctively Ramaphosa's – his promises to augment the power supply with independent producers and to accelerate the sale of spectrum seem to have been effortlessly brushed aside by vested interests.

However, there are now a further set of factors which affect this scenario.

First, bond rates have risen sharply. As of 19 March the rate on the R186 5 year bond was 10.04% and that on the R2030 10 year bond, 11.28%. Given that bond rates in the rest of the world are near zero or even negative, this is a formidable differential. However, even these high rates of interest have not been sufficient to protect the Rand which has fallen sharply. But of course these elevated rates will push up the debt interest burden within the budget.

Second, Ramaphosa has failed to back up his finance minister. Mboweni has made it clear that he feels the fiscus cannot afford further support for SAA but despite that and with Ramaphosa's support, the government has embarked on a further programme of subsidies to SAA. Even before the advent of Covid-19 this was extremely foolish but given the extra damage that Covid-19 will inflict on SAA and SA Express, this money will almost certainly be wasted. Ramaphosa has also made the cuts in the public service salary bill dependent on trade union agreement – which prejudices the entire strategy.

Third, the recession of 2020 which we have now entered will again squeeze tax receipts and also lead to the emigration of more of the tax base. All one can say with certainty is that any movement in the budget deficit will be in the wrong direction. This will, without doubt, cause Moody's to follow the other two rating agencies in downgrading South Africa's bonds to junk status, causing further capital flight and greater difficulties in financing the deficit.

What all this means is that the moment of truth over an IMF bailout has been brought significantly closer, almost certainly within the life of the present Parliament. It is very difficult to see how South Africa can bear a debt burden of 80% of GDP or more. But at the end of this road there lie not just one but three possible scenarios:-

(1) The first scenario, as already sketched, is that of as a rump Ramaphosa administration petitioning the IMF for substantial support, supported by the DA but fiercely opposed by the EFF, the Zuma camp, Cosatu and the SACP. This would be the most rational choice: having itself failed to carry our structural reform the government would turn to a creditor who would compel such reforms. But, as we know, South African politics is often irrational.

(2) A second scenario is that this opposition bloc carries the day, perhaps even carrying Ramaphosa with it. One must remember that even those ANC MPs who support Ramaphosa include many ill-informed populists who will go in any direction that patronage imperatives dictate. Ramaphosa seems to have few fixed ideas or principles, is hesitant, dithers and is mainly concerned to stay afloat himself. He will float with any tide. The real question is whether such a coalition would allow him to keep his titular position.

Economic literacy is a scarce commodity throughout the ANC but is almost entirely lacking within this bloc, which will be motivated mainly by general dislike of the IMF (for them = international capitalism) and a specific dread of the liberalization of the labour laws and cutting back the pay and numbers of the public service which would be bound to be among the IMF's conditionalities.

Thus this bloc, should it gain the ascendancy, would have no fixed policy goal other than to avoid the IMF. Faced with the fact of very high debt exerting downward pressure on all the groups which they wish to reward/protect, this coalition would consider a variety of populist solutions:

Default on debt interest payments, perhaps even declaring the debt noxious;

Magashule's “quantity easing” - printing lots of extra money a la Zimbabwe;.

Somewhat wishful appeals for help from China.

In fact default would immediately have the effect that further borrowing became impossible so this would imply printing extra money to fill the void thus created. This would collapse the currency and be highly inflationary. As in Zimbabwe, the absence of international credit and the devaluation of the Rand would cause exporters to South Africa to demand payment in hard currency. Since such hard currency is by definition limited, in Zimbabwe this rapidly led to absolute shortages of many kinds of goods.

(3) Inevitably the Reserve Bank, the Treasury and the business community would react with horror at any thought of default and, even more, of simply printing more money. Thus the political arm-wrestling and positional warfare over these options would be intense. Ramaphosa would desperately (and hopelessly) attempt to hammer out a consensus between the contending groups.

This thus produces a third scenario, in which there is no political leadership willing or able to take decisive action. So the country neither pays its debts nor defaults but tries to cox and box with a whole variety of trade-offs: a bit of debt restructuring here, promises to protect this or that group from labour law liberalization, a resort to prescribed assets, perhaps a two-tier currency again, bold promises of future reform (it's always next year) and so on.

Conceivably this sort of non-decision making could hold things together long enough to scrape through the next national election (2024). But it could not last beyond that. The fiscal squeeze will simply be too great. Moreover, this sort of government means the avoidance of decisive reform and without such reforms South Africa cannot again get onto a growth path.

At present no one can be sure of what the effects of the Covid-19 pandemic will be. It will, of course, cruelly expose the shambles of the public health system. It is likely, though, that the better-off sections of society will also be those who are most able and willing to retreat into isolation. This is much less of an option for those living in high density settlements.

Economic necessity will drive them out in search of work and their environment does not easily allow for isolation. But the wealthier third have most of the spending power and this will be withdrawn from all but supermarkets and pharmacies, threatening a huge number of jobs in other sectors. At the same time, if Covid-19 establishes itself in, say, Soweto, Umlazi or Khayelitsha, it will be very hard to prevent large-scale community infection.

Steve Mnuchin, the US Treasury Secretary, has warned that Covid-19 could see unemployment zoom up to 20% in the States. But the US, like other developed countries, is throwing huge amounts of money into society in an attempt to soften the blow. In South Africa that is not an option. So, logically, we should expect a huge surge in unemployment. This will have diverse and chaotic social effects which are likely to include a climbing crime rate. Politicians will, of course, try to blame the “black swan” of Covid-19 for everything, though really the political elite which has left South Africa defenceless in the face of this crisis, bear a heavy responsibility.

For the moment Ramaphosa is probably very grateful to the corona virus. It has enabled him to be solemn and presidential and it has resulted in the cancellation of the ANC National General Council which the Zuma-ites were apparently planning to use for an attack on the president. So he lives to fight another day. This seems to be about the limit of his ambitions. But the numbers are building up ominously and even this president is going to have to face the consequences of that ere long.

R.W. Johnson

[1] RW Johnson..How Long Will South Africa Survive ? (Jonathan Ball) Although this book appeared in May 2015, the manuscript was finished by December 2014.