‘State capture’ leads to debt trap

It isn’t “white monopoly capital” that stands to lose the most from the attempts to oust Finance Minister Pravin Gordhan and take control of National Treasury.

This was a “common misperception” about the economic fallout that could result if vital institutions like Treasury or the SA Reserve Bank were compromised, said Association for Savings and Investment SA (Asisa) CEO Leon Campher at a round table discussion at Asisa’s Cape Town offices this week.

Asisa has warned that the apparent campaign against Gordhan could see the rand drop to R25 against the US dollar, while all the hard-won ground from the past 20 years of sound fiscal management could be lost, causing the country’s deficit to spiral out of control.

If this were to happen, the poor and working class would be the worst affected, said Campher.

The caution came in the wake of the ongoing threat of Gordhan’s arrest by the Hawks for establishing a “rogue” investigative unit at the SA Revenue Service in 2007, when he was in charge.

Asisa has been dragged into asset manager Futuregrowth’s announcement to the media on August 31 that it would no longer lend money to six of South Africa’s largest state-owned enterprises (SOEs), including Eskom and Transnet.

Futuregrowth stated they intended to engage with other investment managers through Asisa to jointly communicate concerns.

While Campher said Futuregrowth was entitled to its decision and, indeed, had a fiduciary duty to protect their investors’ money, the impression was created that Asisa orchestrated Futuregrowth’s move, which would be tantamount to collusion.

“We can’t do that. It would be illegal,” he said.

Futuregrowth is a subsidiary of Old Mutual and, at the event, Ralph Mupita, CEO of Old Mutual emerging markets, said Futuregrowth should have discussed its concerns directly with the SOEs, rather than going to the media.

Last week, Mupita already issued a statement saying Futuregrowth’s stance is not Old Mutual’s, but that Futuregrowth is an independent entity.

Futuregrowth’s pulling of the financing plug was just the latest indicator of the investment industry’s growing concern over President Jacob Zuma’s apparent moves to hijack Treasury.

Strong and well-functioning institutions, such as Treasury and the Reserve Bank, among others, were required to underpin investor confidence and enable economic growth, said South Africa and Africa fixed-income co-head at Investec Asset Management, Nazmeera Moola.

Moola is one of the new proposed nonexecutive directors of SAA, chosen by Treasury.

South Africa’s growth forecasts would continue to deteriorate to the 0% predicted for 2016, she said.

Currently, South Africa’s debt was at 46% of its GDP, twice as much as the 23% of debt to GDP achieved before the global downturn in 2008.

According to Asisa, the massive debt-fuelled government expenditure of the past decade resulted in no obvious long-term benefits such as infrastructure or service delivery.

The deficit is fast heading back to the 50% level inherited from the apartheid government in the early 1990s.

At that point, we would be in danger of falling into a debt trap where our money was increasingly used to service debt interest payments, said Moola.

This is because just servicing the debt becomes such a large part of the budget that it forces a large deficit – leading to more lending.

Moola pointed out that South Africa had a debt-service level of 25% in 1994, meaning one rand of every four was used to pay off interest on loans.

The Treasury under Trevor Manuel whittled this down to just 6% in 2008, but it has grown back to 9% with an expectation of it rising to 11% or 12% in coming years.

This would result in government services being scaled back, increasing service-delivery protests, a falling rand, petrol and food inflation surges and eroded savings, all of which would hit the poor and working class citizens hardest.

Even a ratings downgrade was not to be feared, she said, as long as the long-term economic trajectory was turned upward.

But in order for such a turnaround, South Africa’s institutions, including the Public Protector’s office, needed to be supported, rather than subjected to sustained attacks.