Lockdown: The Aftermath

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South Africa has been in a total lockdown for 7 weeks, and will be in semi-lockdown for an indefinite amount of time to come.

During this time, the president has addressed the nation a few times, outlining what measures would be taken to deal with the corona virus. This was met with great applause from all quarters. He was seen as being proactive for taking action, and being all round presidential in a way his predecessor could not have been. People who would usually never have anything positive to say about anything ANC related praised the president for doing something and ‘speaking well’. This is to be expected since politicians’ approval ratings usually go up during times of crisis. A lot of this goodwill has however started to fade as the impact of the lockdown on the economy has become clearer. It has to be noted that people who still support the lockdown at this point most likely have savings, job security and speedy internet with a Netflix subscription. Those who stand in breadlines may have a different view of the lockdown. The government at this stage seems unable to understand that a trade-off has to be made between saving the economy (and millions of jobs) and managing the virus.

Corona virus aside, I think the praise is not deserved. Ramaphosa has been at the highest levels of government since 2014. Since then, economic growth has come to a halt, state capture took place and government debt skyrocketed. He has been president for 2 years. No one has been convicted for state capture. And more importantly, not a single economic reform has been implemented, on the contrary, every idea (with very few exceptions) this man and those around him put forward promotes more state intervention, and will push SA closer to the cliff. I am referring to expropriation without compensation, prescribed assets for pensions, SOE bailouts and the nationalisation of the reserve bank. If he and the ANC manages to push through these economically disastrous proposals, he will almost certainly go down as the worst president in the history of the new South Africa.

Ramaphosa has the public support to push through reforms, and the current circumstances should give him the ammunition required to shoot down ‘radical economic transformation’ and push through the hard reforms required.

The fact that he has not been championing reforms, or given Tito Mboweni (the most prominent advocate for reform in government) any sort of support should be telling. Either he can’t visualise a more prosperous society where government plays a smaller role in the economy (in other words – he’s not a reformer), or he finds himself in a precarious position within the ANC where he simply is not able to do what he wants. That NDZ blatantly overruled the president on the tobacco ban is very telling.

The president has announced a R500bn stimulus package to compensate for lost economic productivity and provide support to those who are in need. The big question is: how will this be paid for? We know it will be partially funded by the UIF, reallocations of the annual budget and perhaps Covid-19 specific credit facilities from the IMF and World Bank. But R500b is a very large amount of money. It is more than a third of the annual budget, and ultimately someone will have to pay for it. Our government will have no choice but to increase taxes and/or issue more debt. The concern is that if we expect GDP to decline by 10%+ this year, tax revenues will plunge. Issuing debt will also not be as easy as in the past, considering our bonds are now fully junk rated and will no longer be included in global bond indexes – it doesn’t help that the debt to GDP ratio has surpassed the 60% mark (a percentage some see as the invisible barrier where investor confidence begins to wane).

Money will be required to service government debt, and at some point, it will not be affordable to continue issuing bonds. Funding will either have come from an institution like the IMF, or the reserve bank must crudely print money to buy bonds.

Our president recently gave us a clue (see tweets below) that he has more interest in being close to despots and pariah states than building relationships with western institutions and democratic countries. Again, we don’t know whether this is what he really wants, or whether he is toeing the party line and playing the ‘long game’.

Lockdown Tweets

What this means is that the government may be antagonistic towards western institutions like the IMF, despite Mboweni declaring we should be open to all options.

South Africans have been forced for a while now to think in the short term thanks to the no growth, low certainty environment we find ourselves in. If you take a longer term view of South Africa you would have to say that if the country is to survive, it must get rid of the ANC. It is at this point inevitable, and perhaps a blessing that the government will get to a point where it will be unable to pay its bills.

It seems that in the not too distant future new factions may be formed within the ANC. Not left vs right, or Ramaphosa vs Zuma. But factions between those who favour printing money, and those who don’t. We can expect calls for the reserve bank to be ‘nationalised’ to grow louder in coming weeks and months.

In the longer term (5 years+) I am still cautiously optimistic about South Africa, I hope that our people will come to their senses and support a free and prosperous country. But I am scared for the immediate future. I am fearful about what this government and the power hungry ‘leaders’ are capable of, and what desperate citizens would do if their livelihoods are jeopardized.

Everyone should prepare themselves accordingly for difficult years. This includes doing a ‘stress test’ of your business, your lifestyle and your career and doing what you can to protect the assets you have.