Business 22.5.2018 05:16 pm

The Zuma disaster: What took you so long, Trevor?

The Zuma disaster: What took you so long, Trevor?

And it’s not getting any better as the policy of expropriation without compensation will cause further damage to personal wealth.

Magnus Heystek

It’s been a rather lonely and depressing journey to be one of the few financial commentators to be repeatedly pointing at the slowly unfolding implosion of SA’s financial and economic fortunes, with dire consequences for all, but mostly for the poor and former middle class. Even the rich have felt the impact of SA’s waning fortunes if one looks at the numbers. More about that later.

My articles, which can be read here, served as regular commentary on what I saw in the economic tea leaves: a Zuma presidency – with the full support of the ANC – doing untold and everlasting damage to the economic and financial infrastructure of the SA economy.

Go ahead, dear reader, and spend some 10 minutes of your time to read these articles. You will also find articles on other media websites where I tried to warn the average investor about the unfolding erosion of personal wealth. Perhaps unravelling would be a better description.

One of the reasons I felt so strongly about raising these red flags was that, firstly, it was my honest and professional opinion but, more importantly, it seemed to me that there was almost a conspiracy of silence by the cheerleaders of the SA financial and investment world: the economists and fund managers.

I have written about this before, but being negative (even if it is your honest opinion), is career-limiting in SA, especially if you find yourself being employed as an economist for one of the large insurance companies, fund managers or commercial banks. Step out of line and you could get the chop.

It became clear to me very soon after the Zuma administration took over in 2009 that the financial metrics of the country were starting to unravel, clearly as a result of a president whose only interest in the economy was to see how much money he and his party could extract from it: not to build or invest for the longer term.

My article, The Death of the Rainbow Nation, published in November 2014, was a particular turning point. I expected the normal prodding from unanimous internet trolls, calling me all kinds of names, but what I didn’t expect was the flood of damnation from the normally somnambulant FW de Klerk Foundation and even Mmusi Maimane from the Democratic Alliance.

The barrage of commentary was along the lines of: if you don’t like it, get out. I was even, more surprisingly, described on Moneyweb as a “financial pornographer” by a fellow columnist . Trust me, while the facts that cross my desk are very revealing, they are not going to excite anyone.

It is therefore in this context that I consider the comments made by former finance minister Trevor Manuel with a great deal of cynicism. Manuel, who was finance minister from 1996 to 2009 and also served briefly in the presidency of the Zuma administration until 2014, is now calling the Zuma presidency “a total disaster”. This was said last week during a speech he made at the Archbishop Thabo Makgoba Development Trust Public Lecture in Cape Town.

My first thought was: “Why did it take you so long, Trevor?” If you felt so strongly about the Zuma presidency, why did you not have the courage of your convictions to resign, and publicly call the Zuma presidency a disaster? Why only now, several years after you’ve left politics and find yourself happy and well paid, no doubt, ensconced as chairman of Old Mutual Emerging Markets and also director of Rothschild, the global money manager?

I wonder if Manuel would have made the same comments if Jacob Zuma was still in power?

Launching the same attack on Zuma while he was still in power would have been career-limiting at Old Mutual.

And why don’t you go further and add: it’s not Zuma that was the disaster, it was the whole of the cabinet and the ruling ANC that was (and still is) the disaster.

Anyone can be brave after the bully has been toppled by someone else, calling him names and pulling faces as he walks away in a sulk…

Economic scorecard

If one runs through the economic and financial metrics during the Zuma administration, all one sees is a country slowly imploding on so many fronts.

Unemployment? At record highs at 27.7% of the work force. The true number is even higher at 35%.

Credit downgrades: When the Zuma administration took over, South Africa had an investment-grade rating from all three of the large credit ratings agencies. We are now junk in the eyes of two (S&P Global Ratings, Fitch) and marginal investment grade in the eyes of Moody’s.

Residential property market? A 10-year bear market with prices on average down 21% in real terms over 10 years. Strip out the Western Cape (where growth is now at zero), and average prices in many areas are negative in nominal terms. In many parts of rural SA there is no formal property market.

Net SA FDI (as percentage of GDP): Economist Mike Schussler recently published a chart showing how net Foreign Domestic Investment as a percentage of GDP dropped from +30% in 2010 to -30.1% at the end of 2017. That is money pouring out of the country by local corporations. They now have more money invested abroad than in their own country.

The JSE? Over 10, 7, 5 and even 3 years the JSE is stone last or second to last against the major investment markets. See charts and tables below. This is wealth destruction on an industrial scale. Choose your currency: dollars or rands. It makes no difference. It is particularly noteworthy that even over three years, when the rand strengthened from R16 to R11.50, the local currency’s returns were still last.

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SA losing the investment race

Your pension? Another unfolding financial disaster. Investment returns – hamstrung by slow domestic growth and Regulation 28 – have been between 3-5% over the last three years, which is less than the inflation rate. Go and check the latest returns on your pension, provident-and retirement annuity funds if you don’t believe me.

Earlier this week someone who has a substantial amount of money in one of the country’s largest private pension funds showed me his statement; average growth of 2% per year over the last three years. That to me, dear reader, is currently where the financial crisis is unfolding. There is very little public scrutiny of our pension funds. Returns are never discussed in public but that is where the biggest quantum of money, which belongs to its members, resides.

The rand? When Zuma came to power in 2009 the rand was trading at around R7.40 against the US dollar. Today, in spite of the weakening dollar from R16/1 in January 2016, is at around R13/$ (still 72% weaker).

And so I can go on.

But do you ever see any such discussion by formal economists of the large banks and insurance companies? There seems to be an unwritten conspiracy of silence to keep this discussion out of the public domain.

Where are our rich people going?

Even the so-called rich are feeling the pinch and becoming fewer in number.

Some two weeks ago New World Wealth published its so-called Wealth Report, which received widespread coverage in the media. “SA has 44 600 dollar millionaires”, was among the headlines I read.

But one had to dig a little deeper into the numbers to get to the actual numbers: SA had lost 5 000 dollars millionaires over the past three years – more than 10%.

This is an astonishing number in any country. While it has been countered by an inflow of approximately 1 800 millionaires from Africa, mostly from Nigeria, it still leaves SA with 3 200 fewer dollar millionaires in just 3 years.

Where have they gone? I have no idea but I would suggest Australia, New Zealand, Britain and, more recently,Mauritius. A British university – Middlesex – has recently opened a new campus in Mauritius in the Cascavelle area and already I am bumping into SA parents who have sent their kids there for their university education. Expect this trend to continue as word starts spreading.

Not buying ‘Ramaphoria’

I have refrained from commenting on the so-called Ramaphoria-effect, which, according to some in the popular press and certain business websites – will galvanise the SA economy, stimulate economic growth and result in a flood of money pouring into the country. I simply don’t buy that narrative. I would need significantly more information backed up by real and quantifiable data to come out and say: yes, things are changing for the better.

The damage done to the economic fibre of the country by the Zuma disaster has been so deep and enduring that it will take many years for the wounds to heal.

State capture, we are told by Pravin Gordhan, has cost the country R100 billion and more. That is merely scratching the surface.

How much investment did we not get as a result of policy uncertainty, state capture, corruption – which has been facilitated by cadre-deployment – maladministration and downright theft?

Take a look at our mining industry, for example. South Africa often brags that it has the largest treasure trove of mining resources in the world. But government’s policy with regard to ownership of mining rights, BEE quotas and other restrictive policy issues has driven most new foreign investment away. The Australian Stock Exchange (ASX) has 578 listed mining companies, well over 500 of them junior miners. Canada’s Toronto Stock Exchange (TSX) has over 200 junior miners. The JSE has only 43 listed mining companies, of which 24 qualify as juniors.

Junior miners play a pivotal role in prospecting and developing new mine fields, before they either sell off to the large mining companies or get taken over. More than 70% of all gold discoveries made between 1950 and 2016 were by junior miners.

New president Cyril Ramaphosa is taking special care to try to convince investors, local and abroad, that expropriation without compensation (EWC) will not damage the economy. The land issue is real and needs to be dealt with, but the current state of affairs is more a reflection of government’s failure over 24 years to deal with this issue in a forceful manner. It was only when its own research, as reported by the Sunday Times, indicated that the ANC would lose support on the left (EFF) and right (DA) to below a 50% majority, that it embarked on this radical approach.

There is enough land in the hands of government, municipalities, tribal chiefs and provinces that can be used to satisfy a great deal of the  hunger for land. There is also an enormous willingness from our country’s 35 000-odd commercial farmers to cooperate and assist aspiring black farmers to obtain land, capital and experience to truly become farmers.

But if government is going to start expropriating viable commercial land without any compensation, then the markets will show their displeasure. It cannot take place in a modern-day economy without damaging investor confidence.

Many valuable commercial farming enterprises throughout the country are owned by foreign investors. They invested real money into this country and any attempt to expropriate foreign-owned land will be met with fierce resistance.

Take for instance Analjit Singh, the billionaire Indian investor, who has plowed a reported R1 billion into the country to build up the Leeeu Collection, which consists of various farms and guest houses in the Franschhoek area. Shall we start EWC with Singh?

I spent some time on the Landbou.com website this week and found more than 20 000 farms and plots for sale. While some are merely large plots and in some cases just homes in farming areas, it does show an avalanche of properties flooding the market, many marked with “reduced prices” as owners scramble to get out of this market.

People in the farming community tell me farm prices have collapsed and most farms and plots cannot be sold for love or money, considering the massive uncertainty created by the policy of EWC. Nobody is buying.

So my question, to end the article, is directed again at Trevor Manuel, as chairman of Old Mutual Emerging Markets, the custodian of the wealth of millions of South Africans: What are your views on EWC? And will this policy cause any damage to the wealth of your policyholders and investors? We don’t want to hear – years later and after much damage – that you too thought it was a disaster. Then it will be too late. They deserve to be told the truth now in order to protect their wealth.

*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached at magnus@heystek.co.za for ideas and suggestion.

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