A new dawn needs continued good investment decisions

‘The new dawn is the product of an intense struggle against state capture but it’s an incomplete struggle. State capture is fighting back.’ So said Minister Pravin Gordhan at the 2018 i3 Summit, the annual independent investment conference hosted by Sanlam Investments and Glacier by Sanlam in Cape Town and Johannesburg last week.

‘Today investors have a much more complex task than a few years ago,’ said Minister Pravin Gordhan. Geopolitics are important. For example, as in 2010, with the current US-Iran conflict South Africa needs to look again at where it will get its oil from. Right-wing populism is on the rise and markets are not solely ruling the world. Rather, citizens across the globe are raising concerns that they are not benefiting from the economic growth figures published; they need a different proposition. We are also in the middle of a crisis in corporate governance. The audit profession is already in trouble and the legal profession will be too, the minister said.

In terms of good governance, Minister Gordhan argued that we’re battling not only state capture but also ‘corporate capture’, the result of intelligent business people not seeing through the fraudulent schemes of executives and directors. ‘The truth is corruption is everywhere. Elite groups all over the world have the potential to turn corrupt. We are seeing that among the oil barons in the US at the moment and in what’s happening in Iran. Can we think twice about where and in what we are investing?’

‘The modern stage of capitalism is given to extreme greed,’ said Minister Gordhan. We saw it in the build-up to the Great Financial Crisis and we’ve seen it in the behaviour of certain areas of the financial sector. In the world of state-owned enterprises (SOEs) we would typically ask the boards: what kind of incentives do you provide? What behaviour do you drive? But we also have inequality in the distribution of income inside corporates. In the private sector investors need to ask similar questions to those we pose to SOEs. We are all responsible for creating fair outcomes for all.

How did we get here and what do we need to do differently? ‘We need to limit the discretionary power of executives and governing boards,’ the minister proposed. The search for economic rent will continue; those benefiting from state (and corporate) capture will do everything in their power to keep their benefits.

‘State capture had opportunity costs. That which has been stolen is lost to the people. As we progress our clean-up, the money can be recovered. There has to be legal consequences and we need to start the process of repatriating this money.’

As far as SOEs are concerned, the minister said he’s determined to root out corruption. He is nearly done reviewing all boards, and the new boards, together with government, must review the management of SOEs. ‘In the state capture process the good guys were kicked out or marginalised and the bad guys still facilitate the capture process through procurement and consulting contracts.’ Ultimately, the minister is looking at the business models of these entities. Can they generate sufficient revenue for their own stability and cut their reliance on the fiscus? SOE management is already changing and processes are deeply investigated. ‘Some interesting announcements will follow soon,’ Minister Gordhan said.

‘As South Africans we are also captive to history,’ Minister Gordhan reminded delegates. ‘There are many fault lines in our economy. Whether it’s a land problem, unemployment or property, it’s not just about repositioning the current economy, but about addressing and healing the past.’ We need to pay attention to history’s impact on current generations. ‘In South Africa the economy remains an odd-ball pyramid and our economy can only function to its full potential if we liberate it from its past,’ stated the minister.

Minister Gordhan mentioned the following economic imperatives:
1)  inclusive growth;
2)  job creation;
3)  increased capability of the state (service delivery that makes a difference in people’s daily lives); and
4)  the end of corporate and state corruption.

‘Having three-quarters of your population outside of the economy is a recipe for disaster,’
Gordhan stressed.

‘Unemployment is a breeding ground for populist rhetoric.’ We desperately need skills training and there are a number of programmes underway, such as the government-private sector initiative, the Youth Employment Service. Once legislation has passed a million young people will be employed either by a large corporate or a small or medium-sized enterprise. ‘Once you have one job, that formidably increases your chances of getting another job.’

Minister Gordhan also said that where skills exist, there are gaps we need to bridge to make us internationally competitive, specifically in the sectors with the largest potential to compete: tourism, agriculture and new types of manufacturing. We have also fallen behind in terms of our research and development spending, currently standing at only 0.7% of GDP while the global average is 1.5%. How do we as investors encourage innovation?

The immediate challenges that we face are: fiscal constraints; tax administration problems; the burden of increased fuel prices on the poor; and low levels of investment into the country. Gordhan stated that investment in bigger emerging markets equals 30% to 50% of GDP (China at its peak). South Africa is below 20% currently. Without investment there is no growth and no job creation. For this reason government has a number of investment conventions planned for 2018.

‘If you invest in South Africa now and don’t wait for a better future, you start a virtuous cycle by creating jobs, you change the narrative and the numbers, you encourage growth and begin to solve some of the historical problems,’ Gordhan said. ‘There are interesting prospects ahead of us and an exciting period that will not be shut down tomorrow morning.’

On the other hand, the minister reminded delegates that it’s important to have a balanced portfolio. ‘Firstly, don’t put everything in cash – distribute it among the different asset classes. And secondly, geography is important too.’

‘Lastly, as investors we have to take into account our history and our current situation and prepare our new generation for an uncertain but exciting future. A new dawn does not happen with the wave of a wand. Each and every one of us have to be involved in cleansing ourselves of the recent capture.‘