South Africa’s economy writhes under an international thumb, as the unpatriotic bourgeoisie flees
by Patrick Bond | Amandla! Issue No. 66 | October 2019
The rats are scurrying off a sinking ship, South Africa Inc.
Financial advisor Magnus Heystek bragged in a high-profile column in September, “I sold out my share portfolio on the Johannesburg Stock Exchange, withdrew money from my pension fund and sold some residential properties in order to build up cash and create an offshore portfolio. I was also not shy about these steps I was taking. On every platform, including radio, TV and in press interviews, I repeated these views of mine.”
Where do men like Heystek flee? According to University of Cape Town economist David Kaplan, the main financial refugee sites are the UK, US, Canada, Australia, New Zealand, the United Arab Emirates and two dozen other rich countries. He reckons that in 2000, 435,000 South Africans had taken the gap, and by 2017, “the total number increased by almost 90% to some 820,000.”
Back home, the business confidence index has lingered well below the Zuma-era average of 43, sinking below 30 in recent weeks. The annual output of goods and services – Gross Domestic Product (GDP) – keeps falling and is now well below the 1.4% yearly rise in population. Unemployment remains at a record high and the trend line of consumer indebtedness – at 70% of households’ debt to income – is painfully high, given the prevailing interest rate, which is among the world’s highest.
Fraud and corruption
South Africa’s corporate elite is exceptionally wicked, by any measure. The state is often hammered for systematic graft, but the 2019 Transparency International corruption perceptions index, measuring the reputations of politicians and civil servants, ranked the Pretoria regime 109th most corrupt of 180 countries.
In contrast, the multinational corporate consultancy PwC has a biannual economic crime report. In 2018, it continued to rate the Johannesburg-Cape Town-Stellenbosch-Durban bourgeoisie as “world leader in money–laundering, bribery and corruption, procurement fraud, asset misappropriation, and cybercrime.” This resulted in the Financial Mail’s assessment that “eight of ten senior managers commit crime.”
Thanks partly to the conniving role of major accountancy firms, fraud in government’s outsourced procurement contracts is the single largest state expenditure annually. Former Treasury official Kenneth Brown estimated in 2016 that vast shares of the annual tender budget are lost to overcharging by corporate suppliers of goods and services: “It means without adding a cent, the government can increase its output by 30-40 percent. That is where the real leakage in the system actually is.”
Revelations about the Gupta and Bosasa empires’ grasp over vital state organs, politicians and officials generated estimates of more than R100 billion in damages, but Brown’s estimates suggest that state spending transfers far more to both white-run corporations and Black Economic Empowerment firms than previously understood: R240 billion annually.
How did we sink so low, so fast?
The most profound problem is not personal or even institutional. It is hard-wired into capitalist firms’ profit motive and the facilitating state policies they demand. Many of South Africa’s economic policies – in what are termed “fiscal” (spending), “monetary” (currency and interest rate management) and “financial-regulator” (banking) spheres – are the direct result of international pressures far more devastating than countervailing pressure from local reformers.
That foreign power can be thought of as ‘state capture’ by three brothers: not the Guptas, but Moody’s, Fitch and Standard & Poor’s, the main global credit rating agencies. It is often a power far greater than domestic policy sovereignty, and one that African National Congress neoliberal elites agreed to during the 1990s.
Some specific international levers include:
- the $25 billion apartheid debt repayment agreed to in 1993;
- the relationship with the Bretton Woods Institutions (both the 1993 IMF loan and ongoing World Bank policy advice);
- the 1994 entry into the World Trade Organisation (WTO), which compelled lower protective tariffs on manufactured goods;
- removal of the main exchange controls in 1995; and
- the delisting of the main Johannesburg and Cape Town corporations during the 1990s, as they mostly moved to London.
Defenders of ANC neoliberalism point to cheaper consumer goods and stronger growth during the commodity super-cycle from 2002 until 2011, when the four main mineral exports – platinum, coal, iron ore and gold – raised the trade/GDP rate to 73%, one of the world’s highest. Unfortunately, not only did the prices then crash and trade/GDP sunk back to 58% by 2018, but the firms controlling these minerals are mostly foreign, so their profits are sent to international head offices in foreign currency.
Hence the net outflows of profits, dividends and interest – what we pay foreign firms compared to what they pay South African shareholders in these categories – soared to negative 7% of GDP in 2009, and subsequently were in the negative 2-3% range. This is an embarrassing problem because, since 2014, South Africans technically have had more of their own investments abroad than there is foreign investment in this country.
Consider the accounts of one company, Naspers, which historically was a mediocre, pro-apartheid media stable. In 2001, Naspers’ Koos Bekker made an extraordinary bet. He bought a third of a tiny firm, Tencent, that soon became the Chinese version of Facebook. He spent just $34 million, and then Tencent’s value soared from $100 million to a 2018 peak of $572 billion in stock market capitalisation.
However, in September, Naspers gained Reserve Bank permission to relist its Tencent component in Amsterdam for $130 billion. The firm’s new Dutch chief executive, Bob van Dyk, argued that the move unlocked more shareholder value because in Johannesburg the company was undervalued. South Africa’s wealthy investors were delighted to find so much of their money was now offshore at a time the rand is sinking.
But from the standpoint of national interest, this move will cause dividend inflows relative to outflows to plunge, since the Tencent profits will no longer be registered in South Africa. Even before this, exchange control liberalisation permitted the likes of Naspers to retain overseas earnings in external shares or to leave those profits abroad.
Escaping profits cause debt crisis
Profits also scampered away at an ever more rapid pace after the February 2018 decision by then Finance Minister Malusi Gigaba to permit an additional R500 billion of institutional investor funds (in pensions and insurance companies) to move abroad. Exchange controls on these funds were relaxed from a 75 to 70% local investment requirement, because of Gigaba’s generosity to the people he claimed to hate: white monopoly capitalists.
How long can this financial bleeding persist? With less than R750 billion in reserve holdings of hard currency, the IMF correctly termed South Africa’s foreign exchange cushion “below adequacy” by at least 30%. In turn, this explains repeated panics in 2018-19 that an “IMF bailout” will be needed.
Often such fears arise when Pretoria’s domestic ”public debt” is discussed, because Eskom’s R450 billion debt (which the Treasury took responsibility to repay) is pushing the state debt/GDP ratio well above 60%. However, these loans were mainly made in rands. The real crisis awaits when foreign currency runs short and foreign debt – owed by the state, parastatals and private firms – can’t be repaid.
This happened in 1985, causing a national default and, in the process, splitting white capital away from the PW Botha Regime. Then the foreign debt/GDP ratio hit 41%; today it is 49%.The 1994 foreign debt of $25 billion inherited by Nelson Mandela has exploded to more than $176 billion by mid-2019. And this, in turn, requires South Africans to pay a higher real interest rate than ever before, typically amongst the top five in the world for 10-year securities amongst several dozen countries that sell these in international markets, at the same level as Venezuela.
We can expect this problem to worsen considerably in coming years. The increasing outflow of profits means South Africa retains only around 50% of surpluses held within the country compared to inflows. In contrast, the rich northern hemisphere countries generally have an inflow/outflow balance of dividends and profits of greater than 100%. By this measure, South Africa operates within a sub-imperial layer of world capitalists, alongside other BRICS countries and Argentina, Mexico and Hungary.
What should be done?
“The starting point is to accept that everything that the country has tried for a quarter of a century has not produced results,” as Zwelinzima Vavi of the South African Federation of Trade Unions (Saftu) put it.
Among Saftu’s demands are “a real stimulus package; a wealth tax and solidarity tax, and a general anti-avoidance tax act; scrap the Labour Bills; adopt industrial policy aimed at import substitution, social needs and eco-sustainability; adopt ‘Million Climate Jobs’ strategies; and nationalise land and minerals under the democratic control of workers as called for in the Freedom Charter.”
If society backs this agenda, sure, the unpatriotic bourgeoisie would flee faster – and good riddance to them.
Patrick Bond is Distinguished Professor of Political Economy at Wits School of Governance.