Shake the Baobab tree!

It is time for real and decisive reforms

By Stephan van der Walt

At Pallidus during the past year, we have seen significant demand from clients to invest their money offshore.

South Africa has vast problems that we shouldn’t ignore, such as the collapse of many important state-owned entities, a possibility that we will need an IMF bailout and youth unemployment of 54.7%. These real issues have a direct and profound impact on South Africans, who have become demonstrably poorer compared to the rest of the world.

If you are in a position to invest a meaningful amount of money overseas, it makes financial sense to hedge your South African risk in this way. A word of caution though. You should not be blinded by sensational media reports and social media hysteria. Neither should you create your company’s long-term strategy based on recent events only. The fact remains that economic cycles change over an extended period of time.

In a recent article Discovery CEO Adrian Gore makes the very true statement that we often fail to appreciate our own country’s progress. “South Africa is becoming a fundamentally better place as time progresses. Our GDP is 2.5 times the rate it was in 1994 on a dollar basis, formal housing has increased by 131% from 1996 to 2016, new HIV infections are down 60% from 1999 and the murder rate per 100 000 is down 50% from 1994 to 2017.

“Our economy is substantial,” Gore says. “In terms of shares traded in 2017, South Africa trumps the Middle East, North Africa, Singapore and Norway and holds 82% of the pension fund assets in Africa, 18 times that of Nigeria, its second-ranked peer. It’s clear that our market also enables the building of massive companies.”

Economist Dr Roelof Botha also remarked recently that South African mineral sales for the first six months of 2019 was at an all-time high. During 2018 we experienced the third highest value of direct foreign investment in the history of South Africa. He also mentions South Africa created two million jobs since 2010; this during the recent “lost decade”. Imagine what can happen in a high-growth environment such as the period pre-2010, when we achieved five percent growth per annum for four years in a row.

At four percent our inflation rate is now at a relatively low level. Coupled with a lower interest rate trend it provides the foundation for future growth.

When change happens it can be profound and if one doesn’t adapt, you will be left behind. Of the top 40 JSE companies in 1990 only nine still exist today. Just three are now listed in the JSE Top 40. However, during the same time hugely successful new companies emerged. Many were founded during times of significant economic uncertainty. Outsurance (1998), PSG (1995), Discovery (1992), Atterbury (1994) and Vodacom (1994) are some examples.

At Pallidus we believe that amid the plethora of bad news positive change is coming. This view is based on our conviction that state enterprises are being turned around and that government in general is getting its act together, albeit slowly.

Finance Minister Tito Mboweni’s recently released Economic Strategy Paper also gives us hope. This policy framework is based on evidence and it provides an authoritative blueprint with real prospects for success if it’s implemented as intended.

Competitiveness is Mboweni’s central theme. He sets out a series of growth reforms to promote economic transformation and to support labour-intensive growth that can create a globally competitive economy.

Sustainable long-run growth

The five fundamental building blocks in the Economic Strategy Paper:

  1. The modernising of network industries.
  2. The lowering of barriers to entry through addressing distorted patterns of ownership, increased competition and small business growth.
  3. Prioritising labour-intensive growth in sectors like agriculture and services such as tourism.
  4. Focused and flexible industrial and trade policies.
  5. Export competitiveness and regional growth opportunities.

The state and its enterprises also need to reform through actions such as these:

  • Unbundle Eskom.
  • Create an independent transmission company, which will buy electricity from independent power producers.
  • Sell telecommunication spectrum at auction, with a small controlled network set aside for government.
  • Allow competitors to use Telkom’s infrastructure.
  • Leverage private-sector expertise for broadband roll-out.
  • Provide third party access to the rail network to encourage private participation.
  • Introduce private competition at ports.
  • Introduce the best practises gained from the independent power producers programme for bulk water supply and wastewater management systems.
  • Remove red tape administrative burdens for SMEs.
  • Improve access to financing for agricultural development.
  • Enhance trade promotion, provide market access and allow access to water for irrigatable land.

As expected Cosatu and other trade unions do not agree with Mboweni as his policy reforms contradict doctrines of the socialist state they may prefer.

South Africa’s current challenges are not entirely unique. Reversing Britain’s long-term economic decline in the 1980s was the daunting task faced by Margaret Thatcher after a traumatic decade that, surprisingly enough, resulted in a bailout from the IMF in 1976.

Under the leadership of Thatcher, the 1980s saw the crushing of trade unions, council house sales, the privatisation of large chunks of industry, the encouragement of inward investment, tax cuts and attempts to roll back the influence of the government on the economy. These reforms paved the way for a 16-year economic boom from 1992 to 2008, which illustrates the length of time it can take to see the positive impact of real change.

Thatcher’s economic policy of the time was based on the following core principles:

  • Control inflation, rather than the pursuit of full employment.
  • Shift the power balance in industrial relations decisively in favour of employers.
  • Abandon an industrialised state. The state should retain control of some nationalised industries such as the railways, but privatise British Telecom, British Airways, British Steel, British Gas and the British Airports Authority.
  • Direct policy reform at those who want to “get on in life”. Introduce big tax cuts for those with the highest incomes, because this will encourage entrepreneurship.
  • Introduce the right of council tenants to buy the homes they live in and encourage people to operate outside the welfare state.

The similarities between what Thatcher inherited and where we find ourselves are self-evident. What is more important though is that real and decisive leadership is required from our government. The President needs to ask the hard questions and implement the required reforms. As Minister Mboweni tweeted, we need to “Shake the Baobab tree”.

“It’s always darkest before the dawn” is how the saying goes. After our decade of economic winter, it’s easy to become pessimistic. Just as spring is now all around us, we believe the sustainable change we are all longing for is coming. All we need to do is work hard and stay positive. As Boris Becker once stated: “I can’t change history. I don’t want to change history. I can only change the future. I’m working on that.”

Stephan van der Walt is a co-founder and managing director of Pallidus