A critical year for South Africa

RYK VAN NIEKERK: Welcome to this special podcast, with me in studio is Colin Coleman, he is the head of Goldman Sachs in South Africa. Colin, welcome to the show.

I want to start with Team SA’s performance at the World Economic Forum’s annual general meeting in Davos. South Africa has sent a big delegation to Davos for the past few years and again this year, and there seems to be a good message from South Africa, a unified message, we are open for business. What is your perception of what happened there?

COLIN COLEMAN: I think what you are seeing – and I have been to Davos many times but I was not at this one – but what you’re seeing is the work that we’ve done in the last year between government, business and labour in presenting a unified message about modernising and reforming South Africa has produced a good working relationship between these parties, and the people who were represented from the cabinet, from labour and from business have all been party to that. So I think it’s a united front approach and these are generally the modernisers and reformers in South Africa, absent from those delegations were the patronage network and those who have generally been attacking the reformist movement.

RYK VAN NIEKERK: But there doesn’t seem to be a unified team in South Africa, it’s easy to go to Davos and everybody agrees but in South Africa at the moment there is a lot of political infighting, there definitely does not seem to be consensus for the way forward, especially for the economy, how do you marry those two?

COLIN COLEMAN: There is effectively a sharp division within the ANC, there are two effective movements within the ANC and this is what is reflecting in your question, there are a bunch of people in the ANC, as we head into the December elective conference and into the June consultative conference and policy conference of the ANC, who are positioning themselves for hegemony within the ANC.

On the one side you have the modernist reformers led effectively by Cyril Ramaphosa and on the other hand you have a patronage network, which is effectively trying to in a traditionalist sense take control of state resources and effectively capture those resources for their political constituency. This is a worldwide phenomenon and effectively what we have is a battle for the soul of the ANC that’s playing out and we’ll see how that develops during the course of this year. This is a critical year. Depending on how this very debate works out, the future of South Africa for many decades will hinge on it.

RYK VAN NIEKERK: From an international perspective you are heading up the local operation of a big international investment bank, you don’t regard what you are seeing here as unique, it is just political turmoil like you would see in any other country, is it as simple as that?

COLIN COLEMAN: In fact, I would characterise it rather differently, I would say that if you look back a year, what you see is the evidence of the institutional strength of South Africa’s democracy coming to bear, you see the resilience of the business community, you see a remarkable trend, which is underemphasised in the narrative around where South Africa is going, which is a growing unity between labour and business interests. This is a very interesting phenomenon, particularly because we’ve seen a great division within labour and between labour and business.

As business has got more organised, as labour has seen where its interests lie in terms of what’s benefitting its members in economic growth and so on and so forth, there’s tended to be a growing working relationship between business and labour that I would project and forecast will develop, in all likelihood, in 2017 to a much stronger unity. This could be a very important factor in the politics and economics of South Africa in this coming year.

So these factors around the institutional democratisation, the strength and resilience of business and the growing working relationship between business and labour, we see it, for example, in the employment sector – and we’ll come to maybe talking about what we’re doing around employment creation and internships – may well differentiate South Africa in the emerging market world.

So when you look at some of these markets like Russia, where there is a lack of institutional strength, you have the Putin government being all-powerful and civil society effectively very weak. In Brazil you have other factors and in Turkey you have other factors. South Africa actually stands out and this is part of what has saved us from a downgrade of our credit rating. South Africa stands out as strong, notwithstanding some of this political noise.

RYK VAN NIEKERK: I just want to come back to your remarks regarding the relationship between labour and the business sector. Last year was really characterised by really low business and investor confidence levels, do you foresee or do you think those confidence levels may improve this year based on that improved relationship?

COLIN COLEMAN: I think there is a very good wind blowing around emerging markets from a point of view of a bottoming out of commodity prices. Generally a forecast for the first year we may see positive growth in Brazil, in Russia in the last three years, and in South Africa Goldman Sachs are projecting, forecasting 1.5%. So that’s not a great growth rate by any means, we should be at 3% minimum but it’s better than the 0.5% we recorded in 2016. Generally speaking there’s a much better environment out there for business confidence. I would say the backdrop, again, between labour and business may help this but it’s not in and of its own sufficient because what we need is a regulatory environment, a resolution of empowerment problems, some of this policy issues throughout state-owned enterprises and so on, that is unlikely to be resolved in this political climate.

RYK VAN NIEKERK: I want to go back to December 2015, I think it was one of the most tumultuous months we’ve had, where the president fired Nhlanhla Nene and there was this big rally from big business, including Goldman Sachs, and you personally, to engage government to try and get some stability. Do you think that this process has improved the relationship between business and government? The CEO Initiative was formed over and above existing structure such as Nedlac and Busa. Do you think another body was necessary?

COLIN COLEMAN: I think that Nenegate was a shock to the business community and a shock to South Africa. The reality was we stepped back from the brink in the appointment of Pravin Gordhan, he’s done an outstanding job, by the way. But in a way, more importantly, the rallying of the business community and through the year the rallying of labour and that culminating the national minimum wage, talking of a labour package, the creation of this youth employment services initiative, the announcement of the small and micro enterprise fund, the reappointment of a board of Business Leadership South Africa, which I am now on. These things have been very, very important to creating a much more unified, much more serious, much more focused attempt by business and sections of government and labour to come together and drive economic growth and reform.

RYK VAN NIEKERK: Goldman Sachs has a reputation of being brutally capitalistic, the challenges of South Africa, we’ve got a lot of social challenges, inequality being one of them, what is your message when you sit around the table with government?

COLIN COLEMAN: Fortunately in a place like South Africa the issues are so obvious, the issues of inequality, poverty and unemployment. No pro-market person can avoid talking about those issues and in order to solve those problems you need high levels of growth and you need job-creating growth. So the idea of having inclusive growth is not a South African issue alone, this is a very broad issue in the United States, in the United Kingdom, in Europe and others, where the issues of dealing with migration and dealing with various problems of social issues in countries, including in the Middle East, are at the forefront wherever we exist.

So I think we are able to play a very helpful role, hopefully along with the business community, more broadly in bringing to bear thoughts about how do you drive economic growth, how do you drive small and micro enterprises, how do you drive job-creating growth, how do you limit the negative consequences of technology but at the same time the recalibration of employment as technology evolves. Uber being a very interesting example of displacing taxi workers but creating a whole new industry of other workers.

If you look at how many jobs have been created in the technology, yes, they’ve displaced them from the old style industrial world but they are new jobs that are highly efficient and effective, and obviously the competition between capital and labour is very, very active. So these are classic issues but I think with creativity and smart people we solve them.

RYK VAN NIEKERK: What would you like to see happen this year? You forecast a 1.5% growth rate, which, as you say, is a lot better than 0.5% but still not what we need. What would you like to see happen this year so that we can get to that trajectory to get to 3% plus?

COLIN COLEMAN: It’s really about getting the basics right, the question of the basics being labour, state-owned enterprises, the mining regulation, all of these types of things but also political leadership. In a year where political leadership in the one ruling party is about to change we want to see a smooth political transition, we want to see a peaceful political transition and we want to see a fair contest. We don’t want to see a contest, which is corrupted by buying of votes of braches and things like that, which will cause instability and potentially violence.

So I think what you want to see is a fair, just, democratic outcome of this elective process. You want to see a sound governance and the running of the state and effective appointments in the state as possible in this period. You don’t want to see silly things happen and we don’t want to see the eye completely off the governance ball. We need to implement of these economic reform programmes and ultimately we need to save our credit rating through this period.

But, as I say, I think the overwhelming view of emerging markets, South Africa included, starts from a better place. We’ve protected our investment grade rating, there should be positive growth, there should be some reforms that we can implement and we should be able to hold the centre. If I had to say one thing, South Africa has to hold the centre through this period and enter into 2018 on a firm footing.

RYK VAN NIEKERK: A lot of ‘shoulds’ there. South Africa has been known to not ever achieve our full potential but it’s always not as bad as it seems. I want to quickly discuss another theme that came through in Davos and that is Donald Trump. There may potentially be significant changes happening in the US, regulatory changes, we’re not quite sure what will change but what are your perspectives on his election and how it will impact South Africa?

COLIN COLEMAN: It’s very difficult to say at this point in time, I think one would have to say that there are certainly very experienced people that have been put into the administration, others that I don’t personally have a view on or know. How this washes through the administration will have a big impact on the world.

There are some people and generally the markets tend to be saying that deregulation, lower tax and stimulative economic policy in the United States should drive higher growth in the United States but on the other hand you have the trade issues and you have the immigration and Mexico interface issues, which are positive and negative, and it depends how much on the positives are implemented and it depends how much on the negatives is implemented in terms of its wash-through impact on real economic growth, both in the United States and in the world.

Generally speaking our growth forecasts have been slightly revised upward for the United States and slightly revised downwards for the rest of the world. Obviously people are concerned about surprises in the world and we want to avoid them.

RYK VAN NIEKERK: But there is a movement towards a more protectionist society, we’ve seen it with Brexit, we are now hearing it from Donald Trump. Several people at Davos have warned against it, including the Chinese president. Such policies would greatly change the international dynamic and international trade and that would have an impact on developing countries such as South Africa.

COLIN COLEMAN: What you want to avoid is a trade war, you want to avoid a situation in which it’s a lose-lose, China does worse, the United States does worse because of conflicts on the trade side. There are plenty of people who are warning against negative trends on that basis, for example Nouriel Roubini and Larry Summers, both of them at Davos warned on these points.

But the Chinese president’s comments at Davos were very pro-trade, very much calling for keeping the doors of international trade wide open and the implementation of climate reforms. The more that trade is open, the greater the economic growth rates in the world, the better for South Africa and for Africa itself. What we don’t want is for China’s economy to be negatively impacted because our commodity environment, the currency and so on, is very linked into the prospects for China. Our equity markets are very linked into the prospects for the United States.

RYK VAN NIEKERK: One consequence may be that the world may see some form of deregulation in the financial sector. One example is the Dodd Frank Act which instituted some very stringent regulations in the US market after the financial crisis. The Goldman Sachs CEO Lloyd Blankfein even stated that these regulations may have had a negative impact of the financial sector. Do you expect much deregulation in the US and do you think it would flow through to other jurisdictions like South Africa, where there is also perception that the sector is overregulated?

COLIN COLEMAN: Let me start off by saying that bank regulation is a global phenomenon, so whatever happens, particularly in the United States, has a direct impact on regulation in our markets. So particularly capital regulation and around proprietary trading, those kinds of issues must be closely watched, there’s no question. Exactly how this evolves one would have to watch but I think certainly the markets in terms of trading the banks is anticipating and discounting a lower of the regulation, which should enable more business to be done by the banks and banks really should be earning greater return on equity as a result.

RYK VAN NIEKERK: Thank you, Colin. That was Colin Coleman, he is the head of Goldman Sachs in South Africa.

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