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The price of secrecy

Dec 02 2011 07:36 Reuters

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MASSMART HOLDINGS LIMITED [JSE:MSM]

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Last Updated: 23/07/2014 at 09:09. Prices are delayed by 15 minutes. Source: McGregor BFA

NASPERS LIMITED [JSE:NPN]

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Last Updated: 23/07/2014 at 09:16. Prices are delayed by 15 minutes. Source: McGregor BFA

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Johannesburg - As many African countries push for greater transparency, South Africa's controversial state secrets bill has unnerved investors who worry the continent's top economy may try to hide widespread corruption, driving up the cost of business.

Parliament last week passed a bill that allows any government agency to apply to have information "valuable" to the state protected. The bill also criminalises the possession and distribution of state secrets.

Critics say the bill will make it easier for the ANC to conceal graft, at time when there is growing concern about cronyism within the government.

For investors - already spooked by talk of nationalisation by the ANC's radical youth wing, and mixed messages from Pretoria about foreign investment - the bill is a sobering reminder of the cost of doing business in Africa's top economy.

"It's another nail in the coffin. It's extremely disappointing that it goes against the trend of what every other country in the continent is doing," said Daniel Broby, chief investment officer of London-based emerging markets asset manager Silk Invest.

"The fourth estate is important in keeping checks and balances in any democracy, as is the judiciary. Both of those are areas we have looked to in the past to shore up the South African economy, and to provide a backbone against the sort of political discourse that takes place."

The bill, which still needs to pass some procedural hurdles before becoming law, also allows for the protection of commercial information that "would cause financial loss or competitive or reputational injury to the organisation or individual concerned".

Opponents worry government officials would use that to hide involvement in questionable deals, such as in the multi-billion rand arms deal currently under investigation, where several officials have been convicted of taking bribes.

"The biggest single challenge in South Africa is corruption. We have to contain corruption or the economy will unravel," said Koos Bekker, CEO of Naspers [JSE:NPN], Africa's biggest media company.

"This particular protection of information bill allows the classification of information which will make it very difficult to point out corruption."

Cost of corruption

Corruption comes with a cost: Transparency International reckons that investing in a "relatively corrupt" country compared to an uncorrupt one can be 20% more costly.

South Africa ranked 64 out of 183 countries in Transparency International's 2011 corruption perceptions index, slipping 10 places from the previous year and ranking the country in seventh place in sub-Saharan Africa.

"The bad thing is the message that this type of legislation sends to investors. If you think about countries that have healthy, effective, functioning societies, they tend to be open, not closed," said Adrian Saville, chief investment officer of Cannon Asset Managers in Johannesburg.

While investors are willing to put money in markets perceived as being more corrupt or opaque, such as China or Angola, they expect higher returns for their risk.

With an economic growth rate of 3.1% expected in 2011 and an unemployment rate of about 25%, South Africa can ill afford to chase away foreign investment.

Johannesburg's benchmark Top 40 - (Tradeable) [JSE:J200] index briefly weakened on news of the bill's passage. Traders and fund managers said a bigger worry was the long-term impact.

"It just adds uncertainty to a landscape that already is looking pretty nervous. It compounds the concerns expressed by Moody's," said Devin Shutte of brokerage Newstrading.

Moody's in November cut its outlook on South Africa to "negative" from "stable", citing concern that political pressure could lead to a further deterioration in public finances.

The agency singled out the ANC's "unwillingness to definitively reject demands from certain segments of the political spectrum for more activist policy interventions".

The powerful ANC Youth League has repeatedly called for the nationalisation of mines and banks.

While youth league leader Julius Malema was recently dealt a five-year suspension from the party for sowing discord, the ANC has yet to clarify its position on nationalisation. Malema has appealed the decision by a party disciplinary committee.

South Africa has also sent mixed messages about its willingness to accept foreign capital. The government has appealed a decision by its own regulator allowing US retailer Walmart to buy a majority stake in local firm Massmart Holdings [JSE:MSM].

"At the moment, the world is searching for yield and some exciting growth opportunities. The only place they can see that is in emerging markets, so they tend to disregard a lot of the risks that are there, because emerging markets are the flavour of the month," said Nic Norman-Smith of Lentus Asset Management.

"It's not like it's going to stop people from investing, or have a massive withdrawal of capital in a heartbeat, but it certainly is another risk factor."

 
info bill  |  sa economy  |  foreign investment
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