Have the Phala Phala findings shaken investor confidence?

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FIFI PETERS: Social media can be an interesting barometer to gauge how people are viewing a particular matter, what they’re talking about and how they feel about a particular matter. It would seem – ‘seem’ being the operative word – that President [Cyril] Ramaphosa’s decision to take the Phala Phala report on review and have it set aside by the courts hasn’t fully allayed concerns and anger, and maybe even disappointment in some corridors of South Africa society, that he is in fact, not guilty over the alleged cover-up of the stolen monies that took place at his farm.

I say this because if you look at some of the top trends on Twitter right now, they continue to be focused on [the] cause for the president to resign. Of course, we do know that not everyone feels this way. We know that the ANC as a party has decided that it will stand by the president, although again we know there are some dissenting voices within the party in itself, and that many other people believe that if Ramaphosa does go, this country will be plunged into chaos, because we don’t have a better alternative right now. Allegedly, presumably, that’s what some people are saying.

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But let’s ask Adrian Saville, a professor at the Gordon Institute of Business Science [GIBS]. Adrian, it’s so great to catch up with you and find out what you think on this matter of Phala Phala, as you’ve watched it unfold since last Wednesday when that a report was initially released.

ADRIAN SAVILLE: Great talking to you. I wish it was under easier circumstances.

FIFI PETERS: It never is, though, it never is.

ADRIAN SAVILLE: This is why an economist gets the reputation for [being] a bearer of bad news.

FIFI PETERS: Yes.

ADRIAN SAVILLE: If you look at the market reaction last week, and you saw it in at least two places – the one was the bond market and the other was the rand – the rand blew very quickly from the sixteens to almost R18/dollar. And the bond market also gave a very big thumbs-down to what seemed to be a fairly good probability that President Cyril Ramaphosa was going to resign.

The way that the rand responded and the bond market responded was a suggestion that the South African economy was going to go into a weaker place, and that our fiscus or discipline around government spending was quickly going to go into a worse place.

From there it quickly turned into wild speculation about what the different scenarios are – and whether this is that Cyril Ramaphosa stays on as a lame duck president, [or] that he is replaced.

People suggest that Zweli Mkhize replaces him at the electoral conference in December, or that he resigns and he’s replaced by his deputy [David Mabuza]. Each one of those is a bad outcome, and which version of bad do you want?

FIFI PETERS: The question is how do you see the story ending right now? Okay, this vote that was supposed to take …

ADRIAN SAVILLE: I’ll put it back to you. Which version of bad? I’m interviewing you this evening [chuckling].

FIFI PETERS: Here’s the thing, though. I’ve been reading quite a lot of business commentary, and it seems as though business is pretty neutral on this. A lot of the commentary that I’ve read from a few of the business groupings, the organisations that publish letters, have said that whatever the outcome is, just as long as we have stability and we’ve got leadership that holds itself to account – they are saying ‘whatever the outcome is’. How do we interpret that?

ADRIAN SAVILLE: I think there are at least two issues in here that are absolutely critical.

The first is the importance of certainty, a line of sight that, even if it’s bad news, let us know what the news is. The capital markets are always in search of that clarity, line-of-sight certainty, call it what you like; markets hate uncertainty, unknowability. So let’s deal with what we can regard as facts.

As things stand, there are very, very high levels of uncertainty, unknowability. Where will the ball fall on this issue? That’s the one aspect that we have to put into the equation.

The other word – I must choose my words carefully here – I would use is ‘dismayed’.

When Cyril Ramaphosa came in, and it was around 2017, we were given this assurance that all of the grey issues, the issues that left markets second-guessing, that left us as investors wondering where we stood, all of this was going to be dealt with firmly.

Here we are five years later and it remains as unresolved as then.

To me that is where we have just – I’ll use the Fifa World Cup analogy here – we have scored a spectacular own-goal in this.

FIFI PETERS: Sure. I agree with you. I thought that when he came in with the broom to clean things up, hashtag ‘Thuma Mina’ [Send me], we would have a reign of a leader that kept it drama-free, that a leader going to court to fight his case was a thing of the past. But it seems not to be the case. So let’s talk about the fact. The fact is he has gone to court, and he has gone to court because his legal team has found quite number of holes in this report. And they have gone to get the report potentially set aside – scenario talking.

ADRIAN SAVILLE: Sorry to drop in there very quickly, because it would seem to be the case that a lot of what’s in that report is hearsay.

FIFI PETERS: Okay. So it’s hearsay, and then the report is set aside and the president is absolved by the Constitutional Court. Let’s look at that scenario. Then what? Do we forget? Do we forget that anything happened and move on?

ADRIAN SAVILLE: This is a legacy that South Africa is dragging around.

What capital markets want – whether it’s domestic investors, foreign investors – what South Africa is absolutely starved of, all the way back to 2010 was the last time we saw a proper level of investment spend in this economy.

You might remember what the world felt like then. The rand was at R7/dollar, the economy was running along with 2%, 3%, 4% economic growth in the last part of the early 2000s. Unemployment was still in horrific shape, but we were talking about 20% unemployment rates, not the elevated look-at-this [situation]. But that was a different circumstance.

For that to return, for us to get back into the business of 3%, 4%, 5% economic growth, collapsing the scourge of unemployment, it is absolutely critical that investors have confidence in the stability and the structure.

And with the goings on in this political landscape, it is very, very hard to get line of sight, and it is hard to see how people think that this is a highly investible landscape.

That certainty is absolutely critical and we need to get out of the storytelling and the promises, and the investment conferences.

I’ve said this many, many times: orange overalls are overdue by years.

FIFI PETERS: Adrian, talking about the factors that influence investment – and I hear you 100% on the politics – but also growth, I’m interested in your impressions on the growth of this economy in the third quarter. It showed that it was pretty robust. I’m wondering to what degree you think that investors who are looking for returns based on economies that are showing growth – actually, dial back. When we went into the pandemic, we were told that it’s going to take a long time for South Africa’s economy to emerge from this pandemic, and we were given all kinds of alphabetic signs as to what that comeback was going to look like – V, L, U, this, that. This is looking pretty much like a ‘V’, and I’m wondering if the strong bounceback that we’ve seen will be enough for some investors to look through the political noise and invest anyway, for better returns.

ADRIAN SAVILLE: I’m not sure I’d agree with that ‘V’. I would say that it’s an ‘L’ because what we’ve achieved now is a level of economic activity of late 2019. So it’s taken us two-and-a-little bit years to get back there.

Over the same period South Africa’s population is about 3% bigger, so you have to adjust for that. You have to adjust for the size of the population, which means on a per-person basis the economy is still under water.

We could then look around the world, and see how long it has taken others to get back to their Q4 2019 level. We are one of the slowest.

I think that one of the things that has helped us to print, as you point out, much better than many had anticipated was export activity. Now, that’s not our doing. It’s the doing of the world economy and buoyant commodity prices – that export performance.

Now I don’t want to be too grumpy about it, because we must take growth wherever it comes from, but remove commodity prices from South Africa’s equation and things are not even close to as buoyant as they look in the GDP numbers that we saw today.

Read: SA’s Q3 GDP grows 1.6%

So I remain very concerned about the shape and the structure of the South African economy. The things that have helped us in recovery have been export-led, and consumer spending, and government spending.

Consumer and government spending are not sustainable, and export spending is out of our hands. The element that we critically need is investment-based growth, and that’s just been missing for a decade.

FIFI PETERS: Because of the political certainty that has been missing for a decade. Adrian, we’ll leave it there until next time. I’m not going to say ‘until next year’, because I’ve got a feeling I might bother you somewhere on your holiday after December 16. But until then, Adrian Saville is a professor at GIBS.