There is still more to unpack and understand about where we are economically and where we are going in South Africa. But it is not as simple as Gordhan was right and the President is wrong. The hooks of global capital are sunk deep into South Africa’s economy and no national event can ever be separated from that. By LAUREN HUTTON.
There’s a dangerous binary logic that has crept into the discourse on South Africa’s credit downgrades. Anti-Zuma critics of all forms see that the tools of the international financial markets have decided to act against a misbehaving president.
Somehow there’s an underlying feeling that the ratings agencies are representing and making real the grievances of a segment of the South African public against an embattled president. The tools of the international financial system are coming to their rescue, adding pressure to force the government to change course, to keep our leaders in line with the dictates of global capital.
While the downgrades could have enormous consequences for the everyday lives of South Africans, let’s not be so naïve as to assume that the downgrade is tied in any way to enabling more socially equitable economic growth. All the downgrade tells us is that our government is not behaving as the greedy overlords of global capital would like us to; there’s more money to be extracted from the South African state and economy and there are powerful actors at play who will maximise gains at whatever costs. It is a continuation not of state capture by just one cabal, but of a larger effort to fully corporatise the South African state and whatever social welfare assets we have left. As Jeremy Cronin pointed out, the Guptas are part of a wider ecology and I can’t help wondering if all this uncertainty is just because it’s someone else’s turn to eat.
Increased risk and uncertainty increase the potential gains to be made. We live in the world of disaster capitalism where there are billions to be made from real and manufactured crises. Indeed, the fundamentalist form of capitalism that dominates the world needs crises to advance. Milton Friedman’s idea that significant shock is an essential driver for change remains a core and widely accepted doctrine of neoliberal growth. And we should, at some point, start getting concerned that a crisis is being manufactured in South Africa to further the neoliberal agenda – and our politicians, on all sides, are not helping to fend it off.
We should all carefully ask ourselves who benefits from the downgrade before climbing on board the Zuma hate-train. The Standard & Poor’s (S&P) statement made clear that there are fiscal and structural reforms required to save the South African economy while almost contradictorily saying that the Cabinet shuffle undermines policy continuity. The agency recognises that reforms are necessary but policy changes are not encouraged.
Particularly since Thabo Mbeki’s presidency, and in a manner of continuity through the Pravin Gordhan times, is a neoliberal leaning that tries to balance the dictates of global capital with the transformational requirements of South Africa’s socio-economic reality. But we tend not to be neoliberal enough as the ANC struggles to move from its leftist core. Ratings downgrades are a way for the market to dictate what reforms are required but what S&P and such are looking for is not necessarily the type of radical economic transformation that still takes up rhetorical space in domestic political circles. Rating agencies are not concerned with reversing the challenges of poverty, unemployment and inequality as recently noted in the Mail & Guardian.
Rating agencies have become a fundamental part of the global system that at its core is concerned with the transfer and containment of wealth to limited groups of people. That they have conflicts of interest is as clear as the blue of the African sky and that their ratings are biased and lack substance is well established.
Post-2008, it is a surprise that any attention at all is paid to the “opinions” of ratings agencies. In 2012, the Federal Court of Australia ruled that S&P was not even reasonably competent in their gradings and that their behaviour was “misleading and deceptive and involved the publication of information or statements false in material particulars and otherwise involved negligent misrepresentations to the class of potential investors in Australia”.
In 2011, S&P made a $2-trillion error with the US ratings downgrade leading economist Paul Krugman to comment, “It’s hard to think of anyone less qualified to pass judgement on America than the rating agencies.” David Wyss, who was chief economist at S&P until July 2011, told a reporter in August 2011: “The credit agencies don’t know any more about government budgets than the guy in the street who is reading the newspaper.”
The ratings downgrade means that rating agencies are advising investors that South Africa will not be able to continue to meet its debt repayment requirements – a problem that these ostensibly white gatekeepers of capitalism would never actually tie to apartheid debt and the refusal of global agencies to restructure SA’s debt after 1994 or the impact of IMF and WTO regulations on the protection of our local economy.
Debt has become a rather traditional tool for postcolonial economic control and we have amassed a significant amount of debt over the last 20 years, nearly doubling our debt-to-GDP ratio from 2008-2016. Hovering at around 50% of GDP, servicing foreign debt is going to become more difficult for the private and public sectors and could drive the South African economy into recession. Servicing and accessing foreign loans will become more expensive and will be tied to further conditionality. An example from the early 1990s serves well here: our $850-million IMF loan secured just before our first democratic election included a condition preventing the use of currency control to curtail speculation and a commitment to “wage restraint” to encourage foreign investment.
The legacy of this debt is not the Zuma administration – whomever the Minister of Finance happens to be. South Africa’s debt is just one arena which has been used to undermine the achievement of economic freedom alongside political liberation.
In The Shock Doctrine, Naomi Klein details how the economic shackles were tightened on South Africa during the post-apartheid transition, highlighting that of all the constraints that have been faced by the ANC-led governments, it is the market that has proven most confining – “and this, in a way, is the genius of unfettered capitalism: it’s self-enforcing. Once countries have opened themselves up to the global market’s temperamental moods, any departure from Chicago School orthodoxy is instantly punished by traders in New York and London who bet against the offending country’s currency, causing a deeper crisis and the need for more loans, with more conditions attached”.
When we opened our doors to the global financial institutions and free-market systems, we opened our political system to market forces and it was a political system already entrenched with corporatisation, corruption and nepotism. Market forces merely encourage such behaviours and reinforce closed circles of accumulation.
So why are the markets punishing us now? Because traders in New York and London have political or ideological differences with Zuma and how he is running South Africa? Doubtful. South Africa is the second largest and probably most influential economy on the continent – both in terms of services and market access. Access to South African banks, mining companies and services sectors would make a nice investment, especially if private sector actors are pushed with high foreign debt repayments and lower rand values. Africa remains a key strategic resource for future global growth and South African companies have an established track record in accessing, and dominating, markets in other countries on the continent.
Overall our exports were up some 9.4% year-on-year as measured in February 2017, even when the rand was trading high. But while this looks like good growth to us, our export markets outside of Africa, including to China, Germany and the US, all benefit from a lower rand. As the rand falls, it creates opportunities: an analyst for Landesbank Berlin Investment GmbH in Berlin tells BizNews.com that only when the rand hits 16 or 17 against the Euro will they buy South African bonds because then they’d be looking at double-digit return rates. Even with some good growth opportunities, investors were waiting for the rand to tank to maximise profits.
But overall, there has not been enough economic growth to meet the dual challenges of feeding the greed of multinational and transboundary capital as well as advancing the prospects of South African citizenry. Throughout 2016, the economy was contracting with growth rates and GDP shifting into negative zones. The mining industry’s 11.5% drop in production was the main contributor to the economy’s slowdown, brought about by a fall in production of coal, gold and ‘other’ metal ores, such as platinum and iron ore. Interestingly, large inventory drawdowns were reported for the mining industry indicating higher export than production rates of precious metals and mineral products.
Importantly, a weaker rand decreases industry costs domestically leading to an increase in production. This becomes even more important when you consider that in 2016 overall mining revenue increased by 2% alongside increases in operating and labour costs of 4% and 5.4% respectively.
The main risks to growth in this sector are the global economic conditions, fluctuations in commodity prices and high labour costs. Profits require maximisation and high labour costs interfere with that. Especially when you consider the platinum industry where South Africa accounts for 75% of the platinum produced worldwide. Some analysts are predicting as much as 34% increase in the price of platinum by year end based on the increased demand for platinum in catalytic convertors.
A catalytic converter is a pollution-control device used in cars that makes emissions less toxic for the environment; a key requirement of vehicle manufacturers around the world to curb carbon emissions. And yet, ahead of a massive boon for the platinum industry that could be translated into real growth for South Africans, the rand gets shorted and junk status tanks the overall value of our stock exchange. Rather unsurprising, platinum prices have been surging since last week, outperforming gold and silver once again.
It came as no surprise that the taskmaster of ratings agencies, JP Morgan, withdrew significant support from South African bonds following the second downgrade late last week. This move is likely to trigger a wave of capital outflows and cause the ZAR to continue its downward trajectory. A weaker rand tends to provide opportunity for investors to increase exposure to South African assets. But as one European analyst at Rabobank cautioned, the sell-off is not over yet and investors are waiting for further losses before re-engaging. Assets of state-owned companies have just started to decline as they are faced with potentially insurmountable foreign debt bills. The yield on Transnet’s $1-billion of debt notes due in 2022 rose by 5.28%. The rate of Eskom’s dollar debt increased by nearly 6% in just the last week. At some point in the near future, there will be a discussion about refinancing the debt of state-owned enterprises (SOE) or starting to sell them off.
When JP Morgan opened their doors in South Africa in 2015, it was after regulators in other African countries denied their entry. For JP Morgan, African expansion “forms the base for the next generation”. This next generation of profit-making takes the form of banking multinational companies and banking the biggest institutions in the African market. The cynic in me can only interpret “banking multinational companies” as assisting them to evade taxation and regulation in Africa and banking the biggest institutions sounds like eating them up from the outside.
In the less than two years that have passed since, JP Morgan has sunk its teeth into managing financing deals for airlines, including Kenya Airways which has long been linked to rumours of government corruption, and large-scale energy projects such as the financing of power plants in Ghana. The government of Ghana, assisted by credit letters and due diligence provided by JP Morgan, raised some $510-million to buy power turbines valued at $210-million from Greece-based MEKTA who procured the turbines from US-megafirm General Electric. The price differential has been explained as interest on the loan that JP Morgan help secure; a more than 50% increase in price over a 5-year loan repayment period.
A further indication of the questionable practices of the investment giant came in late November 2016 when JP Morgan was fined $264-million for contravening the Foreign Corrupt Practices Act for hiring the children of senior Chinese government officials to gain business in China. More than 100 interns and employees were listed as “referral hires” and the corruption was so blatant that JP Morgan kept a spreadsheet to track the more than $100-million of revenues gained against the names of the referral hires.
At the end of 2015 when South Africa was also facing a ratings downgrade, JP Morgan publicly backed our economy reasoning that the chance of a downgrade was low and that a downgrade “would not have a truly negative impact for the country.”
Not only did JP Morgan traders think that South Africa’s 49% of GDP debt level was manageable but that because most of our debt is serviced by our national banks, the government can fund much of its borrowing locally. As explained by one their senior country officers to the Financial Times, if the cross-border, long-term foreign currency rating goes to sub-investment, it will probably signal an increase in the cost to borrow offshore for corporates and state-owned enterprises but given where capital markets are today, there is ample liquidity to do that. They further cited Eskom’s massive energy infrastructure investment as well the ports and rail expansion of Transnet as the foundations for growth in the economy. This raises the question of what has changed since then.
On 15 February 2017, South Africa’s antitrust investigators urged that a dozen banks, including JP Morgan, Bank of America, Merrill Lynch, HSBC Holdings Plc, BNP Paribas SA, Credit Suisse and Nomura Holdings Inc., be fined for colluding and manipulating trades in the rand. The Competition Commission had found “(T)he respondents manipulated the price of bids and offers through agreements to refrain from trading and creating fictitious bids and offers at particular times. They assisted each other to reach the desired prices by co-ordinating trading times. They also created fictitious bids and offers, distorting demand and supply in order to achieve their profit motives.”
The commission advised that they pay 10% of their turnover from rand-dollar manipulation in fines to the South African government. The daily average worldwide foreign-exchange trading involving the rand was about $49-billion when the infractions occurred. When Citigroup Inc., Barclays Plc, JPMorgan and Royal Bank of Scotland Group Plc pleaded guilty in May 2015 to rigging currency rates, a US federal court fined them $5.8-billion. The chief Strategist at Citadel Investment Services & Cannon Asset Managers noted that the timing of the call for accountability and restitution from the South African Competition Commission couldn’t be worse for the banks and made the case for intervention to prevent the Zuma government from exerting further pressure on the global lenders.
While you may not like the Eastern capitalists who currently have influence within our leadership circles, don’t be fooled into thinking that by making our government a slave to a more Western-oriented neoliberal free-market economic growth, we will achieve any form of positive results. Whereas the self-declared Thatcherite Mbeki administration leaned West in their expansionist capitalist orientation, the more populist Zuma administration has looked to their traditional alliances in the East. But post-1989, looking East is very much the same as West: Beijing, Delhi and Moscow are home to the modern oligarchies that have been home-schooled in the lessons of economic shock therapy and disaster capitalism.
It then becomes no surprise that the trigger for the recall of Gordhan from London was his public distancing of South Africa from the Russian nuclear deal. And it was not in response to Gordhan’s recall that the ZAR began to fall but well before that as investors shorted the rand from its record high. People made billions by betting against the ZAR before any political turmoil had occurred and as one analyst noted, it “doesn’t look like general trading response to the news”. A second analyst noted that “(I)t would require large firms acting in volume to get this type of impact.” This is the same investor behaviour that happened in December 2015 before the Des van Rooyen debacle and again before it was reported that Gordhan was under investigation last year.
Mandela noted at the ANC national conference back in 1997 that the mobility of capital and the globalisation of capital make it impossible for countries to decide national economic policy without regard for the response of the market. The ANC regularly makes statements about the market dictating policy and the need to take back national control of the economy. But we can’t separate the market forces from the ecology of corporatism that has infected governments around the world and the more the ANC has fallen prey to greed and accumulation, the further they have undermined their ability to protect South Africans and to use the institutions of state as a bulwark against the musings of the market. As much as the factionalism within the ANC extends through its history, its geographical basis and ideological differences, what is tearing the party apart is the competing corporatist agendas of domestic and international power brokers.
The corporatist neoliberal agenda requires massive state investment and privatisation, regardless of the social spending impacts. But there’s more than just monetisation of rights at stake; for South Africa, the big cheeses on the table in terms of state investment and profit extraction are energy infrastructure and our SOE. In the days since the credit downgrade, we’ve seen the government green light the fracking of our precious Karoo and set a time table for the awarding of a massive nuclear energy deal. Never mind who will build the nuclear plants, it is yet to be seen who will facilitate the credit letters and due diligence for the R1-trillion energy deal and that’s where the roots of the corruption will be laid.
Mismanagement and the historical use of parastatals as mechanisms for protected employment and patronage, place the SOEs at heightened risk. Political meddling and favouritism does not help protect these key national assets and what we stand to lose is immense. Look at the waves of privatization that have occurred in countries such as Honduras, Guatemala, Nicaragua and Sri Lanka where popular support for privatisation was low until a major crisis – in all cases natural disasters – opened the space for the mass privatisation of nationally owned airports, highways, telephone, water and energy companies at rock bottom prices. In Nicaragua, the World Bank and IMF added privatisation as a condition for post-hurricane aid and debt relief. What follows privatisation is not increased jobs or more effective social service delivery. What follows corporatisation is debacles like with Sassa where government incompetence combines with foreign owned profit seeking interest to whittle away the resilience and coping mechanisms of the poor.
There is still more to unpack and understand about where we are economically and where we are going in South Africa. But it is not as simple as Gordhan was right and the President is wrong. The hooks of global capital are sunk deep into South Africa’s economy and no national event can ever be separated from that.
As Daniel Silke summarised on Fin24: “As December’s elective conference approaches, the factional divide in the ANC won’t just be about personality clashes and who gets what position. It is increasingly also about two different visions of South Africa’s place in the global financial community. We are a society now deeply polarized across a host of interlinked and intertwined political economy issues.”
The tendency of some within the ANC to spurn the global financial system speaks to a need to protect ourselves from the hyper-growth oriented neoliberal system that is just waiting for a crisis significant enough to sink its teeth into the guts of our state and extract profits without conscience. To the Save SA campaign and the protestors who took to the streets last week, be careful what you wish for. When global capital dictates policy, you may get short-term protections of your privilege but don’t pretend to be marching in defense of our institutions and people. You are being played like privileged pawns of the middle class. There’s no denying that you march for the dominance of the market and capital – but just not for the capitalists that our President has currently chosen. DM
Photo: Traders work on the floor of the New York Stock Exchange (NYSE) at the start of the trading day in New York, New York, USA, 07 January 2016. EPA/ANDREW GOMBERT
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