PETER ATTARD MONTALTO: No, it will not be all fine in the end

Posted in: Economics, i-Blog, Politics, South Africa on September 23, 2019

The government needs to stop faffing and implement change if we are to save ourselves

This column was first published in Business Day

There are two sorts of people who read my research or listen to my presentations.

The first can disagree profoundly with an argument or a forecast but still come back for more, understanding the way I work, wanting to engage and debate.

The other group, however, throws up walls. They will react negatively to any depressed outlook or scepticism. They are unable to engage when asked why they are being so negative and cannot see the difference between an unrealistic negative forecast and a realistic, constructive negative forecast. They will then retreat to (insert unpublishable colloquialism here) or a sales pitch. I don’t react particularly well to sales pitches.

Some people just don’t want to hear bad news and react instinctively against it. I was lucky recently when I had the opportunity to address a major firm’s annual general meeting. They took the depressing news pretty well, even though it made their lives a little more difficult. They recognised their clients appreciated the honesty and detail behind it.

This splitting of people is exceptionally important in the current context for business — and, indeed, right now — more so as many firms are starting their 2020 planning cycles and budgeting.

Both these types of behaviour have been exhibited in 2019. Before the elections, a majority of business were in the latter camp in public and couldn’t process a more nuanced outlook on the government (in private, there was less of a majority and this split is an interesting issue in itself).

After the election, the needle has swung in the opposite direction and people are willing to accept a realistic negative outlook, or at the very least engage rationally with it. This shift is why sentiment is ground down and speaks to the slow pace of recovery to come. Yet the alternative is not somehow possible if conjured by magic. Hence Ramaphoria collapsed so definitively soon after May.

Even those that maybe see some recovery or have a different line of reasoning on the current situation can still appreciate the strong and increasing reform pressure now being applied by business onto the government.

Those that throw up walls, however, are a danger to generating the necessary pressure for political foundations to shift the reform machine. They put up a range of arguments that simply don’t cut it. The standard line is “it will all be fine in the end”. This ignores two things.

First, even if “bad reforms” don’t happen in the end (say, expropriation without compensation or national health insurance in its most extreme form), the damage you can create in the interim (what we call fallout risk) can be so severe as to prevent a recovery.

Second, things will only be “all fine in the end” if people (fund managers, business people) actually stand up and do something about it. There is not some mysterious other force that can substitute. This is true in the context of SA’s obsession with social compacting. Within this political economy context, business has to wholeheartedly stand up for what it wants and cannot pre-compromise. It is exactly a fudged mindset on this that means the ANC believes business will always “roll over”.

IRP (integrated resource planning) is the latest example of the absurdity of social compacting through Nedlac. The behaviour of labour in objecting and holding up an entire process that was never a legal requirement in the first place, without a constructive alternative that was costed and thought through, should be the final nail in the coffin. Nedlac should be abolished.

The question for business (and ultimately the president and ANC too) is what happens if it is the case that ultimately balance is impossible and the time wasted leads to worse outcomes? Maybe there are some things (such as Eskom or indeed lowering the cost of doing business) that simply cannot be compacted. Coming to this view would profoundly affect how you deal with compacting in the short run.

I apply this to Eskom in two ways. First, there simply isn’t time to be faffing, and something needs to be done right now (by the mid-term budget speech). But second, jobs and investment maximising outcomes do exist through a Just Energy Transition, and so leadership should be applied to tell labour to back off as the real interests of their members are being accounted for in policy. This is how to cut through compacting.

Business thinking about the year ahead should be cognisant that a dead end on compacting may not be avoided. Loose monetary policy globally, comfortable SA elites, “normalised” inequality, poor equity market returns driving money into government bond auctions, weak growth keeping the Eskom system just on the right side of load-shedding — all this places the presidency in far too comfortable (and patient) a place.

This is not to say some people in power don’t “get it”. I think there is a subset of ministers who actually do understand that the country is fundamentally in the wrong place. The problem is the system itself hasn’t flipped, given the lack of political capital deployment to take the tough decisions.

One person who does get it is justice and correctional services minister Ronald Lamola. Speaking at a Kgalema Motlanthe Foundation lecture this past week, he stated very plainly that there was no time to spare and that government just needed “to act … what is implementable must be implemented”.

Exactly. Jump.

• Peter Attard Montalto is head of Capital Markets Research at Intellidex.

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