SA finds itself at a political and economic T-junction. Amid talk of a "new dawn", investors are largely divided into two camps – the sanguine and the sceptical. The sceptics wonder whether SA can capitalise on its political transition as India did, or whether the leadership change will be a false dawn, like the situation in Brazil. The contrasting fortunes of these two emerging market peers offers some important lessons for SA as it attempts to emerge from its multiyear funk.
For context: Brazil, SA and India all went to the polls in crucial national elections in 2014. Their economies had been rocked by the 2013 US taper tantrum and were classified as members of the "fragile five". Plagued by widening fiscal deficits, corruption scandals and the threat of downgrades to junk territory, reform was badly needed.
The countries have since followed very different political and economic paths. Brazil impeached former president Dilma Rousseff and India has emerged as an emerging market darling under the reform-minded Narendra Modi. More recently, SA finally drew a line under the presidency of Jacob Zuma, who resigned after being recalled by his party.
The common feature in all three countries was the occurrence of a "political moment" that drastically altered their trajectories.
The contrasting manner in which Brazil and India have navigated these inflection points provides some important lessons for SA:
Seize the moment. For India, the 2014 election marked the start of its "political moment". Modi and the BJP party won a resounding mandate from the electorate. In a country characterised by perennial policy gridlock and inertia due to fractured coalition governments, this clear majority represented a departure from the status quo. On a pro-business and reform agenda, Modi was able to rejuvenate a limp economy and revive "animal spirits". Financial markets reacted in a bullish manner, encouraged by India’s "red carpet, not red tape" approach.
In Brazil, however, problems persisted after the 2014 election. A rising cost of living, graft and the country’s worst recession in decades gave rise to protests and widespread social discontent. Business confidence and the president’s popularity plummeted dramatically and the country became engulfed in a political crisis that eventually culminated in Rousseff’s impeachment in August 2016.
Rousseff’s removal was the trigger for political change. Her removal resulted in financial markets rallying on the prospect of a new reformist government. The country’s currency and stock market were the best performing in the world in 2016, according to Bloomberg, improving by 21% and 63% respectively. However, this positive trend has since been hit by a new scandal that has seen President Michel Temer implicated. Many nascent gains have subsequently been reversed as uncertainty and question marks over governance and Temer’s survival have returned.
Meanwhile in SA, the second Zuma term continued to disappoint. The Economist magazine described Zuma’s tenure as a "lost decade" while Goolam Ballim, Standard Bank’s chief economist, argued that the country’s economy had foregone R1-trillion during this time. However, the ascent of Cyril Ramaphosa has raised hopes of an end to policy paralysis, a kick-start to growth and a catalytic effect on the economy. Financial market reaction thus far has been positive, but can he go beyond rhetoric and "walk the walk"?
In the short term, restoring investor confidence — which has been badly bruised following a series of cabinet reshuffles, rating downgrades and haphazard policy — will be the key priority
Prioritise reform. While India was experiencing a surge in economic optimism, large inflows of foreign capital and improvements in its sovereign credit rating, SA and Brazil suffered from a deterioration on all three fronts.
Brazil was the first to lose its investment-grade credit rating in 2015. It has since suffered several additional downgrades. Eight consecutive quarters of negative growth, continuous scandals and a deteriorating fiscal position led to this outcome.
In SA’s case, the downgrade to junk status occurred after the replacement of a technocratic finance minister by a political appointee — the second such episode of its nature. But continued stagflation, policy confusion, poor corporate governance at state-owned enterprises (SOEs), plus private-and public-sector corruption has seen the economy dip in and out of recession since 2014. Ultimately, it was the combination of "bad politics and bad economics" that placed both economies firmly in the firing line.
Against this backdrop, it is important to locate SA’s "political moment" in a global context. Brazil faced a risk-off market sentiment at the time of its downgrade to junk in 2015 (emerging markets had net capital outflows of $735bn that year), which magnified the extent of its problems and forced drastic remedial action. This ultimately accelerated its political change.
SA, by contrast, has been largely shielded by a more supportive global financial backdrop (inflows to emerging markets in the first quarter of 2017 reached their highest levels since early 2014), thus masking many of its domestic deficiencies. These trends have persisted since then. Now, given this newfound enthusiasm about the "Cyril spring", and benign risk environment, SA should not waste this opportunity for reform.
The timing is key for investors too. Shaun Hewitson, a South African-based investment analyst, notes that "from a flow of capital perspective, a lot of fund managers missed out by being underweight India and Brazil following the ‘reform rallies’ in those two countries and they will be keen to not repeat the mistake again with SA".
In the short term, restoring investor confidence — which has been badly bruised following a series of cabinet reshuffles, rating downgrades and haphazard policy — will be the key priority. Many investors are still cagey and want to see how Ramaphosa’s ANC straddles the "populist" policies emanating from the party’s December conference and the "market-friendly" outcomes they would like to see.
Fiscal prudence, improvements in the business environment, a leaner cabinet and strong anticorruption action will go a long way in achieving this.
Roll the goodwill. Much of the international investor community see Ramaphosa as a reformer. It is now important for him to take a leaf out of Modi’s book and roll the goodwill he enjoys until the political calculus is conducive for more meaningful reforms.
Here, political symbolism and messaging is crucial. By saying the right things and managing the optics around change, he can achieve a lot without having to do much. Modi was able to do this for a number of months with catchy sound bites ("Made in India", "Skills India" and "Digital India") and quick wins (opening up of certain sectors to foreign ownership) until he was able to deliver more meaningful and complicated legislative reforms such as the nationwide goods and services tax. Business confidence and the stock market rose initially on the promise of reform, rather than actual reform.
Initial signs have pointed to the fact that Ramaphosa has already grasped this. The Davos charm offensive, an aspirational state of the nation address and a series of anticorruption moves have generated optimism in and towards the country.
Brazil, India and SA, key Brics nations, are all established and influential democracies with large populations and sizeable markets. They are also all sub-regional leaders.
But in recent years the shine has faded from two of these three economies.
SA now has the chance to profit from its political change by steering towards a path of economic renewal. The high road offers the chance to create a virtuous cycle of growth and investment that could propel the country into the top league of emerging market economies. The low road would see it remain a laggard, foment socioeconomic discontent and perpetuate a vicious circle of economic weakness, creating the prospect of another "lost decade".
The outcome and manner in which it is achieved will ultimately determine Ramaphosa’s success or failure. Let’s hope this path will look more like India’s than Brazil’s.
• Gopaldas is a director at Signal Risk.
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