President Cyril Ramaphosa is focusing on persuading the US and six other Group of Seven (G7) governments not to sanction SA over allegations that the country cheated with the Lady R when she docked at Simon’s Town naval base in December.
That is sensible. However, the president is ignoring a bigger, if not more urgent issue. In the short to medium term the biggest risk facing SA is not the G7 governments — the US, Britain, France, Germany, Italy, Canada and Japan — sanctioning us. It has to do with how foreign and domestic investors react to the challenges we have created for ourselves, to which we must now add SA’s friendship with Russia.
The point that is missed by most government ministers and officials concerns the importance of sentiment as a driver of investment decisions and investor attitudes towards a country. The American Economic Association describes investor sentiment as “a belief about future cash flows and investment risks that is not justified by the facts at hand”. British economist John Maynard Keynes talked about the “animal spirits”, in essence the human emotions that drive financial decisions during times of uncertainty and volatility.
SA for some time has been facing a number of challenges, mostly of its own making. Our own goals are well known: an energy crisis that has worsened over 13 years, the collapse of rail infrastructure and poorly functioning ports. Add to this the collapse of numerous municipalities and worsening security, with organised crime operating freely. Then there is policy uncertainty and inconsistency in implementation.
These and other factors have shaped investor sentiment towards SA over several years. To these factors we can add SA now being closely monitored by the Financial Act Task Force after being placed on its greylist, and the fallout from the Lady R affair.
The latter two factors have raised the risk substantially. The Reserve Bank has set out in granular detail how these risks might manifest and affect the country. From the Bank’s point of view the risk is mainly on the financial sector side. If the G7 countries were to impose secondary, or even indirect, sanctions on SA and local institutions are not able to make international payments in dollars, the financial system will be unable to function. That would lead to a sudden stop in the flows of foreign investment into SA as well as an outflow of whatever foreign funds are already in the country, squeezing SA in a classic financial pincer.
“There is also a risk that SA financial institutions may be subjected to more intensive scrutiny by foreign counterparts, even in the absence of formal secondary sanctions,” the Bank said in its latest financial stability review.
But the uncertainty goes beyond the financial sector. Other businesses, both domestic and multinational, will most likely reconsider their risk profiles. What if it were to become difficult for them to move funds around because of all the risks the Bank has outlined? Well, they will take the necessary steps to protect themselves. And those steps will worsen SA’s economic and financial position.
Three factors are worth worrying about. The forthcoming Brics summit will generate a lot of noise that will most likely worsen investor sentiment towards SA. Then there is the matter of the inquiry Ramaphosa has appointed to investigate the Lady R affair. He has opened the door to a possible legal challenge as well as a lot of political noise by announcing that its report will not be made public.
In addition, as the country marches closer to the 2024 national and provincial elections one can expect SA’s friendship with all manner of undemocratic foreign regimes to be an issue, which the ANC will seek to defend, of course. All of this is complicated by the fact that in Ramaphosa’s cabinet every Tom, Dick and Jane has the urge to comment on matters that do not fall under their portfolios, which adds to the confusion.
The sum of all this is generally referred to as “scarring”, the negative long-term effect on the economy arising from decisions investors make during either a major shock or a period of great uncertainty (like now). This has been studied in the unemployment context, whereby workers who lose their jobs during a major economic shock tend to be unemployable for an extended period.
Scarring can affect the productive capacity as well as the structure of an economy. That is the risk Ramaphosa is not paying enough attention to.
• Sikhakhane, a former spokesperson for the finance minister, National Treasury and Reserve Bank, is editor of The Conversation Africa. He writes in his personal capacity.
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