The Investor May 2024

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ShareFinder’s prediction for Wall Street for the next 3 months(top) and the JSE (bottom).


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What Gold told us!

By Richard Cluver

Last month I walked readers through a Cooks Tour of the development of mankind’s now quite elaborate processes of economic thought in order to bring us to the present where, I argued, a fundamental flaw in the ideas advanced by John Maynard Keynes has brought the world to the brink of social and economic disaster.

Thus, Adam Smith (1723 – 1790) first raised the idea that wealth should be measured in terms of mankind’s accumulated productivity rather than in stockpiled gold but, adding the now famous thought that the ‘Invisible Hand’ of the market will always ensure that competition will keep everyone honest: “…because customers treated unfairly by one business can instead always patronise another competitor.”

But if market competition ensured fair prices for buyers, it demonstrably did little to protect workers in Victorian sweat shops. Thus the father of Socialism, Karl Marx (1818-1883) in turn argued that “….capitalists, in competition with each other for profits, squeeze as much work as possible out of the proletariat at the lowest possible price.” He accordingly recommended that the role of the individual capitalist be taken over by the State which could alone guarantee a fair distribution of mankind’s collective industry.

Smith and Marx of course derived their ideas in a period of stable currency in the form of the Gold Standard which used precious metals as a medium to accumulate individual productivity but, as global trade began to expand exponentially as a consequence of the massive productivity multipliers of the steam-engine and its successors during the industrial revolution, the scarcity and inflexibility of noble metal currencies ultimately plunged mankind into the Great Depression for the simple reason that governments of the day could not turn to the printing press to create money with which to stimulate stagnating markets.

That was when John Maynard Keynes stepped forward to save the situation. Keynes noted that during recessions, when public spending diminished, businesses reacted by cutting jobs and reducing spending in response to weakened demand for their products. Accordingly, he argued that in such times the task of increasing output needed to instead fall on the shoulders of the government in order to smooth out the boom and bust cycles which had come to dominate industrialised economies, otherwise known as the business cycle.

Keynesians, in a nutshell, thus believe that free markets have no self-balancing mechanisms that lead to full employment. They thus justify government intervention in the economy through public policies aimed at achieving full employment and price stability. However, that idea contains a flaw because Keynes did not spell out how, other than by running up debt, the State could afford to intervene at such times.

That is why it was only once nations individually abandoned the gold standard that they were each able to ‘print money’ in order to stimulate demand and thus emerge from the Great Depression. In essence Keynesian economics enabled central governments to effectively print more money that normally existed when the issuance of bank notes had been directly related to the quantity of gold in central bank vaults. But the unfortunate outcome of the Keynesian approach is that once economic activity is restored, this excess capital needs to be mopped up lest it disrupt the marketplace by causing inflationary pressure….but governments and their central banks have never been very successful in doing that.

Socially, of course, something else was happening with the not always altruistic rise of the politician to replace the former leadership roles of the Roman Catholic Church and the symbiotic feudal aristocracy whose collective efforts to plot a way forward for civilization making use of these new economic philosophies has not always served us well.

As a result of the efforts of politicians to gain power for themselves by adapting society to exploit the thoughts of these three pioneers, the world ultimately became divided into a nearly century-long contest between capitalism and communism: until the costly race to control space ultimately demonstrated the greater efficiency of capitalism to deliver wealth and personal freedom to every individual. That era was perhaps encapsulated by the observation that socialists built the Berlin Wall to prevent people of the Communist East escaping to a better life in the Capitalist West.

 But in the subsequent attempts to merge the best of the two systems to create a governance style which I have labeled as mankind’s third major social era of ‘democratised capitalism’ – where the politicians have sought to provide safety nets for all citizens in the shape of facilities like free unemployment insurance, quality education, subsidized housing and health care together with the democratic power of one man one vote – politicians have created an unsustainably costly social model as illustrated by the graphic on the right courtesy of The Visual Capitalist. It has stagnated economic growth resulting in debt and tax levels so severe that there is insufficient left over to foster economic growth.

Indeed, the costs have risen so high that wherever taxpayers have pushed back, governments have only been able to maintain cash-starved social services using equally unsustainable levels of debt which have in turn brought the whole world to the brink of economic disaster.

A century ago the tax burden of the average citizen was less than ten percent. But as democracy increasingly became the preferred form of global governance, so taxes began to rise inexorably as illustrated by the graph below. Note, however, that as average tax levels reached between 40 and 50 percent in the 1980s in most leading nations, the graphs began flattening.


That phenomenon was explained by American economist Arthur Laffer in 1974 and it was used as a basis for US tax cuts in the 1980s at the behest of then President Ronald Reagan whose resultant popularity stemmed in large measure from the economic surge which resulted. The ‘Laffer Curve’ graphic above neatly explains the phenomenon as politicians began to learn the lesson that tax increases above the 30 to 40 percent band inevitably result in taxpayers mounting avoidance tactics and less actual income for the fiscus.

Thus, when taxes could no longer meet the insatiable demand of politician’s spending, borrowings began to rise steeply during the 1980s. Thus, pictured next on the right is an International Monetary Fund graph which illustrates how global debt has accordingly soared in the past half-century.

As borrowing levels have risen so has social unhappiness because a direct result has been soaring living costs for ordinary citizens whose household mortgages and hire purchase repayments have in turn increased as a direct consequence of national borrowing rates rising in tandem with lenders becoming increasingly concerned about governments’ ability to ever repay their high levels of debt.

It’s been a deadly cycle of rising debts causing ever-diminishing escape options. If you are heavily in debt, lenders begin to worry that you might never be able to repay what you owe and so the only way you are able to borrow more is to offer to pay ever-increasing rates of interest. But the problem here is that lenders become simultaneously reluctant to lend for lengthy periods.

Shorter borrowing periods mean government aggregate debt – which usually consists of portfolios of long-dated bonds blended with a few short-dated ones – begins to increasingly become dominated by short-dated paper. As the borrowers’ proportion of long-dated debt in his overall portfolio begins to shrink, his average borrowing costs begin rising exponentially every time he is forced to return to the marketplace with his begging bowl proffered in order to roll over maturing debt. So a nation’s debt profile begins to deteriorate which in turn results in the ‘hidden tax’ of interest rates charged to ordinary folk, in respect of items like their household mortgage repayments and hire-purchase costs, rising in tandem.

Thus a vicious cycle is initiated when the public thus loses its discretionary buying power. With less spending money thus available for discretionary items such as clothing and entertainment, private sector sales activity slows disproportionally right down the value chain and soon workers start being retrenched. The country is thus forced into economic recession, tax income dries up and governments’ only means of servicing their debt is by more borrowing. It’s a whirlpool from which the only escape is national austerity or, worse, a government which defaults on its debts…..the equivalent of bankruptcy!

If governments were ordinary people, this cycle would clearly represent nothing short of a rapid road to bankruptcy, but governments don’t usually go bankrupt because their debts are effectively guaranteed by their taxpayers in whose names the debts were raised. I say ‘usually’ because there have been some noteworthy defaults in past history. I will lead you through those experiences in The Investor in June.

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Artificially Intelligent

By John Mauldin

When new inventions turn into market frenzies, the contrarian part of me wants to be sceptical. But the optimistic part of me wants it to be true, especially when the idea promises to change life for the better. Reality is usually somewhere in between. And that, I suspect, is where the current artificial intelligence frenzy will go.

My observation through many cycles is that these fevers go too high, but they aren’t imaginary. The ideas are often real and so are the potential benefits; they just take longer to develop than most investors can tolerate. AI may prove to be an exception because it is developing so fast—and is already showing tangible, cost-effective applications.

This is not the 1990s sock puppet. AI systems like ChatGPT (released less than two years ago, remember) are doing things most never thought possible. Some of it is questionable quality, some may be socially undesirable or even harmful. But it’s real and improving quickly. AI came up in many SIC sessions because it’s touching almost every corner of the market in some way. I focused on it more specifically with Joe Lonsdale and Ben Hunt. They look at it from different perspectives but had some remarkably clear thinking on this sometimes murky subject. Today I’ll share some of their wisdom with you.

But to put this in context, let’s review a piece my associate Patrick Watson in which we send succinct summaries of interesting research. Here on the right is how Patrick described a pithy essay on AI by technology analyst Benedict Evans:

Now, to the AI conversation at the SIC, reduced to a few pages from 40+:

Statistical Engines

Joe Lonsdale has had the advantage of watching AI develop while also knowing the main players. He co-founded Palantir and now runs 8VC, a large venture capital firm with investments in AI and many related disruptive technologies. No one knows the AI big picture better than Joe. Really. As good as he does? Yes. But not many.

Joe started our SIC conversation by noting how this thing we call “AI” is really a form of statistical analysis. You may remember, way back before COVID, stories about Google’s “DeepMind” system learning to beat top humans in games like chess and Go. It did this by playing billions of games against itself, while noting what worked and what didn’t.

This wasn’t rocket science; it just required giant amounts of processing power that had never been feasible before. But something interesting happened. Here’s Joe from the SIC transcript.

“It turns out there’s these simple constructs of statistical feedback where when you scale them up, it actually seems to approximate different types of intelligence really well. These are called large parameter models, or on [just] words they’re called large language models, and it’s basically like an engine that builds many, many abstract layers to predict the next word, the next token… So that statistical engine is the thing we talk about.

“Now most of the time we’re talking about AI and it’s having a huge impact on the economy, and I think it is important to think of it as a statistical thing, but in some cases it feels like it’s reasoning in a lot of areas. You could train it to think in different ways to perform different tasks and we’re doing a lot with it right now.”

Note those words carefully. AI “feels like it’s reasoning.” Is an AI system reasoning? Or is it just counting words in such vast numbers that it seems to be thinking? That’s not entirely clear, and on some level is an abstract philosophical question. What is “thought,” after all? We don’t have an objective definition. Though, as a human, I like to think there is a difference between a billion neurons firing and 10 billion bits on thousands of Nvidia chips firing.

In any case, Joe’s point here is critical. AI models—at least those we have now—are just statistical engines so powerful they can appear to be something else. (Ben Hunt had more to say on the dangers of that, which we’ll get to in a minute.)

AI is happening fast. I asked what this meant for jobs and the economy. Will we have time to adjust?

“You never want to say this time is different, but it’s going really, really fast. And if you see adoption curves, they’re happening quickly. So yeah, I think the rule holds that when you create more wealth, there’s still many, many things to fix in the world, and so there’s going to be many, many more and better jobs overall with where AI is right now, and it’s going to create a lot more wealth, a lot higher productivity in our economies.

“Our view is you’re going to actually see that show up from the productivity statistics sometime in the second half of this decade. I’m happy to be proven wrong on that, but it seems very likely from the things we’re seeing.

“Is there going to be an adjustment period that’s a little bit difficult because it’s so fast? And there probably is, and this is a really interesting question. I happen to be in DC today as I’m talking to you, John (I think he was trying to explain AI to senators, which may be a bigger problem than creating AI), and I think one of the big things our country’s facing is a rise of populism on both sides and does AI exacerbate that? It very well might at some point in the next five years.

“And that said, it could also create and should create so much wealth and it should make the living standards go up so much that hopefully the productivity thing offsets these problems, but it doesn’t mean it’s not going to be in for a volatile time.”

That last point struck me because the SIC also featured a panel on historical cycles which also point to a “volatile time” just ahead. Whatever disruptions AI brings will likely coincide with the Fourth Turning’s social and political events, creating whole new sets of elites, geopolitical risks, and economic disruption. I suppose AI might help us get through those times more easily. It also has the potential to go badly south.

Meanwhile, Joe thinks AI will help improve the economy by taking on some boring but necessary drudge work.

“What’s the stuff that can be really improved? What’s the gap in the economy? It’s going after the pre-internet stuff that hasn’t been upgraded, and I define that as a lot of these service parts of the economy. There is the legal part of the economy. There’s a lot of financial services creating estates and trusts and whatever other work people are doing by hand.

“Healthcare billing is a huge area. We just talked about customer support earlier. Healthcare billing, John, just to give you an example. There’s about a quarter trillion dollars a year, by most estimates, spent on healthcare billing in the US economy, $250+ billion. And there’s people sitting in office parks and suburbs and there’s millions of them and there’s tens of thousands of rules per insurance company and thousands of insurance companies. It’s a mess. They call it ‘revenue cycle management’ because you’re cycling back and forth trying to get these things accepted. And it turns out that using AI could make the workflow… so far, we’ve proven it at least twice as efficient, I guess the margins are going to go up three or four times.” (It’s one of his major VC initiatives.)

Any business that can triple its profit margins by implementing AI systems is obviously going to do it as fast as possible. Joe thinks this will be widespread in the service sector, often in repetitive, labour-intensive administrative work.

This raises legitimate questions about unemployment. History shows that higher productivity creates new kinds of jobs, but the transitions can be slow and difficult. We will have to be careful on that front. However, the impact on US workers may be limited by the fact so many of those jobs have already been outsourced overseas. The impact will literally go around the globe.

In 1800, the vast majority of jobs were agriculture related. It was still very high 50‒100 years later when industrialization really began to kick in. But we had four generations to transition farm jobs to factories and other businesses. Even then it was gut-wrenching for many workers.

Now we’re going to do that in 10 years? Or less? Hmmmm…

“I Think the World Moves in S’s”

When we went to audience questions, someone asked Joe about China and AI. Is it possible Chinese engineers could challenge the current US lead? Joe doesn’t think so, but not for technological reasons.

“China, I think, is a much worse environment to operate in. A lot of our Chinese billionaire friends have disappeared, seem to have been killed. Some have fled. Xi Jinping acted very strongly against the tech class and tech leaders. [He] made it very clear to you that friends don’t let friends become Chinese tech billionaires because that’s a very dangerous thing to do.

“And so, what’s interesting is a lot of the top entrepreneurial work, including AI in the US, is led by those of us who’ve already built big companies and then you can do more, and you can put lots of capital to work and you can help others and do it again. It’s just a very positive feedback loop in the US because we’re allowed to keep our wealth. We’re allowed to speak out when we want. At least, that’s the way it’s been in the past.

“And so a lot of people, whether it’s Elon, whether it’s Sam Altman who’s built other companies, whether it’s Mark Zuckerberg, they’re very powerful people pushing hard to build this wave here and to bring in talent and do that. So, the US has a huge advantage.

“In China, almost nobody who’s successful wants to do another one because it’s dangerous and it doesn’t really add to your quality of life. It makes you a much bigger target. So China screwed themselves over. Europe seems to have a pretty bad regulatory environment as well. The US is also just way, way ahead and building very quickly here. So this is a hugely positive thing for the United States.”

Joe agreed China has loads of talented technologists. The skills are there. What’s missing is the entrepreneurial freedom we enjoy here in the US. In the US you can start a successful company, exit, and then use your profits to do it again. That’s difficult in China and becoming more so under Xi Jinping.

We wrapped Joe’s interview with perhaps the most important question. Will AI replace the need for humans? Are we reaching the “singularity” Ray Kurzweil talks about? Where will we be 15 or 20 years from now? Joe’s answer:

“It reminds me of the Dune science fiction as well, where they had to go on a jihad against all the thinking machines because it was too scary. They were going to break things or take over. I think it’s very hard to know what’s going to happen 15 or 20 or 30 years out. This is not a worry for me in the next decade. I think when it does become a worry, we’re going to understand better what the danger is and how to confront it.

“It’s not just about the singular human mind, it’s about it being better than groups of people too and coordinating. So, when is the AI better than everyone at OpenAI itself at designing AI? That’s really a singularity question, right? When is AI itself actually better at furthering its own improvement than the people and how does it accelerate? What does that look like?

“And I think a lot of people who are in the field think there’s a good chance it gets there in 15 years, and it’s a possibility. My bias, John, is the world doesn’t go in these singularity exponentials very often. I think the world moves in S’s. I think things change quickly and then they level off for quite a while, and they change quickly, and they level off for quite a while. My guess is that God didn’t build quite as simple of a universe as some of these computer scientists think and that there might be multiple more S’s still to go.

“So I’m not as nervous about it, but I do admit this is a real issue to think about for 20 years ahead.”

I like Joe’s description of progress as an S-curve. The sharp ascents give way to longer periods of relative stability. We’ve seen that in many different technologies and I suspect AI will be similar. We will have time to muddle through the problems.

But that doesn’t mean we won’t have problems.

The Monster with a Mask Ben Hunt is a man of many talents. The last few years (decades?) he’s been studying “narratives,” the ways powerful people with agendas try to influence not just what we think but how we think. The latest generative AI systems are proving quite useful to the narrative-pushers.

Ben says we need to recognize AI for what it is. He began by showing this cartoon.

We see an ugly creature holding a masked human figure and finally a happy, smiling little face. What’s that about? Here’s Ben.

“Generative AI is an alien. It’s not kind of, sort of different. It’s an alien—my view—life form. I don’t know if anyone here remembers, David Bowie gave an interview way, way, way back in, start of the internet. And he was asked, ‘What is the internet?’ and he was like, ‘Well, it’s an alien.’ And he was totally right. And generative AI is that embodiment of the alienness.

“What I mean by being an alien and this bizarro monster that sits behind everything we interact with, with ChatGPT and the like, is that it thinks, it’s understanding information in a totally non-human way. It’s completely unrecognizable to what we think our own brains are doing. Whether that’s what our own brains are doing or not is another story. But it’s totally alien and foreign to how we think.

“The way it’s understandable to us, though, is that there’s a kind of quasi-humanish mask that’s put on top of it. That’s the fine-tuning that’s put on top of the unsupervised learning that’s all happening and is the alienness of generative AI.

“So you’ve got a humanish-looking mask held in front of this alien monster, this alien creature. And then coming out of the mouth of the fine-tuned, humanish mask is the most pleasant-sounding voice in the world. And that’s the reinforcement learning-from-human-feedback piece. That’s the piece that we’re actually interacting with. That’s the piece that’s answering our questions and doing it in the most helpful way possible.

“Because all of this, the masks that are placed onto the unsupervised-learning alien monster, the direct interaction, the voice that we are hearing, it’s designed to please us. If you get nothing else out of this presentation, get that—that generative AI is designed, with the fine-tuning and then the reinforcement from human feedback that’s put on top of it, it’s designed to please. It’s designed to make us happy. And it does.”

Remember Joe’s point about AI being a statistical engine. It learns, statistically, that giving people the answers they want usually elicits positive feedback, and so does more of it. The smiling-face AI keeps us happy with the output the ugly creature produces out of our view. Whether the output is correct is a different matter.

While perhaps useful in certain applications, this characteristic of AI can also go badly wrong. System designers and “trainers” are working on the problem. The systems have to be taught how to evaluate knowledge, knowing what to accept and what to reject. This is hard, not least because the systems train on an internet where false information abounds.

For now, the answer is patience. We all need to treat AI for what it is: a promising new technology that is currently riddled with flaws. It will improve, and far beyond what we can now grasp intellectually. But we have to look beyond the happy face and remember the AI isn’t human. It’s not a real person, no matter how chatty and amiable it seems.

We’ll need new ways to interact with these alien creatures. I am confident we can do it. But meanwhile, check everything the AI says.

At the crossroads of interest rates


Lenders demand compensation for expected inflation through higher interest rates, and borrowers are willing to pay more when higher prices are expected to erode their real borrowing costs. Interest rates, after inflation, therefore reveal the real rewards for saving and the real cost of issuing debt.

Real interest rates in SA have remained elevated, even as inflation has receded. Since 2000 the real income from owning an SA 10-year bond has averaged 3.7% a year, while a US treasury has offered on average less than 1%. The current SA-US 10-year real yield gap is a large six percentage points.

With the advent of inflation-protected government bonds, lenders can now avoid exposure to uncertain inflation. They can buy a bond with a guaranteed real return — that is, they receive an initial yield to be augmented by actual inflation. Since 2010 the SA 10-year inflation linker has offered an average real 2.84% a year, compared with an average 0.32% for the US equivalent.

This real yield gap has widened significantly as SA real yields have risen. The SA inflation-linked 10-year bond currently offers an imposing 5.3% compared with 2.1% for the US treasury inflation-protected securities — a real spread of over three percentage points. Capital is really expensive in SA and discourages capex.

Why has this high 5.3% real yield not attracted more investor interest and a higher value? It is a rand-denominated bond with no default risk and no inflation risk. The equivalent vanilla bond is subject to this risk and, at worst, to the effective expropriation of wealth tied up in a bond if inflation accelerates.

The current yield on an equivalent vanilla bond is about 12%. Time will tell whether it delivers a real return in excess of the certain 5.2% on offer from the inflation linker.

All of the SA bond yields are connected and elevated by expectations of rand weakness. That reduces the expected dollar returns for any foreign investor. The weaker expected course of the rand is revealed by the positive difference between SA and US interest rates over all durations.

This carry, or equivalently the actual or potential cost of hedging or compensating for exposure to the rand, reduces the actual or expected dollar returns on SA debt held by foreign investors, which are an important source of capital for the SA. It is expected returns in dollars, not rand — even inflation-adjusted rand income — that guides their investment decisions.

Moreover, this carry is consistently wider than the difference in actual and expected SA and US inflation. One might surmise that movements in exchange rates equilibrate differences in inflation between trading partners, to help level the foreign trading field. But this has not at all been the case.

Since 2010 the highly volatile rand-dollar exchange rate has weakened at an annual average rate of a 6.3%. The comparatively stable 10-year carry has averaged 6.53%, while the difference between expected inflation in SA and the US has averaged a consistently lower 4% a year. The difference in realised inflation in SA and the US has averaged a mere 2.9% a year. Persistently lower SA inflation will therefore require not only less inflation but also less expected exchange rate weakness — that is, a narrower carry.

A stronger rand and stronger expectations for the rand can only come with faster real growth. The Reserve Bank has limited influence on growth-enhancing supply-side reforms, including any predictable influence on the exchange rate, with its interest rate settings. It should manage the demand side of the economy so that demand under the influence of real short-term interest rates does not exceed potential local supplies, nor fall short of them, to put avoidable domestic pressure on prices and incomes.

The Bank could now help growth and the foreign exchange value of the rand by reducing the high nominal and real short-term interest rates that have throttled domestic spending.

• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.

Debt and loadshedding

By JP Landman


Steve Jobs famously said that one can only connect the dots backwards. We connect the dots on government’s economic policy since 2018. The dots tell us what has been done, not what will be done nor what has been promised. They help us to distinguish between daily headlines and longer-term trends. (I apologise in advance that this read is longer than usual – there are just too many dots!)

Supportive macro-economic framework

A stable macro-economic framework is one of the five key pillars of growth. (See, for example, the report from the International Growth Commission on which Trevor Manuel also served.) This simply means sustainable fiscal policies (reasonable deficits and debt) and sound monetary policy (curbing inflation).

Monetary policy

An independent reserve bank is crucial for stable, non-political inflation targeting and control. The South African Reserve Bank’s (SARB) independence came under severe attack. At the ANC’s NASREC conference in December 2017, a resolution was adopted to nationalise the SARB. Eighteen months later, in June 2019, then-Secretary General Ace Magashule pushed the envelope and called for ‘quantity (sic) easing’ and a change in the mandate of the SARB. Ex-president Zuma joined the fray and tweeted that a change in mandate was ANC policy and if not implemented, government could be recalled. The Public Protector published a report on changing the mandate of the SARB. Julius Malema and the EFF tried to make political capital about nationalising the Bank. Connect all these dots and they suggest a total onslaught on the SARB.

However, 48 hours after Magashule’s June 2019 statement, the ANC Top 6 issued a statement affirming the mandate of the Bank, confirming the role of the minister of finance in setting inflation targets and stating clearly that nothing would change. Magashule, part of the Top 6, had to swallow his words.

The statement also dealt with the ownership issue, saying: ‘It is our desire for the SARB to be publicly owned. However, we recognise that it will come at a cost, which given our current economic and fiscal situation, is simply not prudent.’ The noise around the SARB died down; even the EFF went quiet and the SARBs independence and stature has since only grown.

Connect all these dots and June 2019 was the month the tide turned on the SARB.

Fiscal policy

The first dot on the fiscal policy page was made in February 2019, before Covid-19, when the president made a commitment in the State of the Nation Address (SONA) ‘… not to spend our way out of our economic troubles’. That was three months before the general election and a spending splurge was predicted by the chattering classes. In the event, spending in that year was only 0,3% above the ceiling set by Treasury.

The commitment to fiscal discipline was severely tested over the following three years with the Covid-19 pandemic, load shedding, massive Eskom and other SOE bailouts and the destabilising effect of the July 21 unrest.

Given these pressures, what do the dots suggest on that fiscal commitment?

In the 2020/2021 financial year government broke the three-year wage agreement on civil servants’ increases. Consider the politics: Cosatu unions had helped Ramaphosa become president. It’s no small matter to break a negotiated agreement with your supporters. On top of that, in 2021 it was followed by civil service increases considerably below inflation. We will see what happens this year, but for two years increases were held tight.

Another dot is that extra spending due to Covid-19 and emergency relief was substantially (not fully, since debt was taken on as well) financed by cutting other expenditure – the (in)famous re-prioritisation of expenditure. There is not a department or agency that has not seen its budget cut. The economy shrank 6,4% in 2020 when Covid-19 first hit. Government spending to off-set the impact of Covid-19 was about 5,5% of GDP. Well with in the rule of thumb that expansionary spending can be equal to the contraction. That dot confirms no splurging. (Government aimed to spend 10% of GDP, but that did not actually materialise as the bank guarantee scheme did not take off as planned.)

In my view, these decisions were no mean achievement given the context. Of course, the favourable terms of trade from commodities helped the fiscal position. But it came after the tough decisions were taken. No wonder then that Moody’s changed their outlook this April from negative to stable.

All this must be seen against the very different pattern of dots of Zuma’s attacks on Treasury in 2016 and 2017. Remember weekend special Des van Rooyen in 2016, the dismissal of Pravin Gordhan and Mcebisi Jonas in 2017, the overwhelming evidence of state capture…? In South Africa we now take stable macro policy for granted because we have it. But it did not happen by itself.

Structural reform

Beyond macro policy, the single most important pattern of economic policy dots concerns government’s commitment to structural reform.

The first big dot came in August 2019 when Tito Mboweni published the Treasury paper on structural reform. It was met by general howling and condemnation, even from some in business. Six months later, in February 2020, the president quietly declared in SONA that the Treasury paper ‘is now cabinet policy’. By October 2020 there was a dedicated unit in the Presidency working solely on promoting structural reform. The Economic Recovery & Reconstruction Plan largely reflects the Treasury paper – and is now generally accepted government policy. All departments defer to it. Structural reform has become the key economic policy of the Ramaphosa administration.

The biggest reform is playing out in the so-called network industries: spectrum/telecommunications, transport and electricity.  Digital migration and the concomitant spectrum release has been completed after 10 years of delay. (In the first eight years the delay was due to political ineptitude; in the last two years it was due to private sector resistance.) It is now done and dusted. The auction netted R14,4 billion for the Treasury. If that is not a bright dot, I do not know what is.

Dots outside government are investments by Google and a Facebook consortium in undersea cables linking South Africa to the wider world, more than doubling all current capacity. Inside the country, MTN, Vodacom and Remgro subsidiaries are all extending fibre connections beyond the usual areas into poorer communities at affordable prices. R2,5 billion has been put in the budget for the South African Connect project, which aims to bring broadband access to all South Africans, prioritising rural and under-serviced areas.

Next came railways and harbours. Two years ago, the policy on railways and harbours was still one of state-run monopolies. Change started slowly, then accelerated. First, regulating functions in both railways and ports were separated from operations. Next, infrastructure was separated from operations to determine proper charges. That opened the door for private operators to enter railway and port operations. The physical separation took about 18 months. Then, in April 2021, the president announced that a new pier will be built in the Durban harbour by the private sector in a R100 billion project.

Since then, Transnet has issued requests for proposals for a new manganese terminal at Ngqura in partnership with the Coega Development Corporation, as well as one for a liquefied natural gas terminal in Richards Bay. In April 2022, Transnet Freight also opened bids for slots on the container corridor between Durban and City Deep in Gauteng. (There is an entirely predictable tussle on terms and conditions; see the paragraph below ‘Have a heart’.) Work is also being done to upgrade the railway line from Tshwane to Gqeberha to facilitate vehicle exports that currently go by road and through the congested Durban. It is a R7 billion project.

Energy reform

The biggest reform of all is taking place in electricity. Not just the biggest, but also the most important, since load shedding is by far the largest constraint on the economy. Fixing electricity is more important than crime, education, corruption and every other ill inflicted on South African society. In the last two years I have written seven times about the big reforms in electricity and will not repeat it. Here I want to focus on load shedding and overcoming that.

The supply shortage causing load shedding is 4 000 to 6 000 MW. How much of that will be covered by current procurement? Link the dots and note the trend:

  • In April 2018, 27 independent power producer (IPP) contracts from Bid Window 4 that were suspended by Brian Molefe in 2016, were signed. South Africa’s renewable programme could restart. The last 500 MW from that Bid Window is now being connected to the grid. Currently, 93 completed projects have added 6 855 MW to the grid. Imagine load shedding if we did not have that!
  • In August 2020, the emergency or ‘risk mitigation’ programme was launched, 1 200 MW was awarded to the now infamous Karpowership. Thankfully, that deal appears to be stuck, but 800 MW given to other operators are in construction and will be connected to the grid.
  • From October 2020, municipalities were allowed to procure their own power. In June 2021, Johannesburg Metro opened bids for 220 MW from solar and gas. In February 2022, Cape Town opened a bid for 300 MW. Eight other municipalities are working on it but have not opened bids yet.
  • In April 2021, Bid Window 5 for 2 600 MW renewable power was opened and the 25 successful bidders were announced in October 2021. Financial closure is at the end of April 2022. The 2 600 MW can be connected to the grid by 2023/2024.
  • In June 2021, the president lifted the threshold below which a license is not needed from 1 MW to 100 MW. Several private companies have signed agreements to procure power from renewable producers. Examples include Amazon in Cape Town (who gets 10 MW solar power from the Northern Cape), SAB (who signed an agreement with a black women empowerment group for electricity from gas generated from the biomass of a dairy farm), and BMW (who already gets a small quantity of power from a biomass plant). 58 projects are currently being pursued by 12 companies for 4 500 MW. The big ones are the mining companies. Anglo signed an agreement to switch to 100% renewable power by 2030; Sasol is pursuing 900 MW. Eskom has made land available for renewable operators to put up plants below 100 MW on Eskom land. This list goes on, but this paragraph illustrates the galvanising effect of the president’s 100 MW announcement. This is where the real action and innovation in power generation is. Eventually, most dots will be here.
  • During the weekend of 23 April 2022, news broke that the unit in the Presidency dedicated to help implementing structural reform has succeeded in getting some restraints removed that hinder below 100 MW projects. This is new territory for everybody, and as the various players move along, more reforms will follow.
  • In April 2022, Bid Window 6 was opened for another 2 600 MW renewable power. The closing date for bids is 11 August 2022. This can be connected to the grid by 2025.
  • Note that all the money for this new power generation comes from the private sector.

The dots above add up to more than 11 500 MW that will be connected to the grid by 2025. It excludes the 1 200 MW from Karpowership. Compare that to the 4 000 to 6 000 MW deficit. As sure as I am writing this, more Bid Windows will open this year and next. I am only listing the dots that are already on the page. Of course, 1 MW of renewable power is not the same as 1 MW of base load, but still, the gap is being narrowed considerably. Load shedding will not be a permanent feature of our future. Mistakes have been made and delays occurred, but the trend is absolutely clear.

A key element of economic recovery is more infrastructure. Readers will know I have been cautious on this issue, simply because so many ducks have to be put in a row. It now looks as if I may have to shift my stance – the ducks are lining up.

The first is the budget. Infrastructure spending by government entities increased by a healthy 22% in 2021/2022, enough to overtake the numbers recorded in the two years before Covid-19. Investment spend is set to increase a further 15% over the next three years. Transport and logistics (roads, railways, and small harbours) get the biggest chunk, and water and sanitation the second biggest. (By the way, a very competent and experienced civil servant, Sean Phillips, was appointed Director-General of the Department of Water and Sanitation in December.) The third biggest chunk goes to energy to expand power-generation capacity. Noticeable big projects include Phase 2 of the Lesotho Highlands Water Project to supply Gauteng (R32 billion) and the project on renewable energy and water saving in government buildings (R55 billion). The latter will be done by the private sector with its capital on a build, operate and transfer basis.

The second is an innovation, the Infrastructure Fund, which blends public and private money to facilitate infrastructure investment. After a three-year struggle it at last became operational in 2021. This year Treasury put R4,2 billion into the Fund, with another R13,3 billion to follow over the next two years. Over 10 years, Treasury will contribute R100 billion. (One wonders if some of the money from the spectrum auction will go there…?)

Seven projects adding up to R21 billion have been approved by the Fund, which will contribute R2,6 billion of the money, with the balance coming from the private sector and development institutions. It shows the leveraging impact the Fund can have. The seven projects include social housing and student housing projects and two water projects (the Olifantspoort & Ebenezer Water Supply Scheme and the Mokolo-Crocodile River Water Scheme, both in Limpopo). 

A third duck getting into the row is the deliberate effort to build skills. Last year government admitted that it simply does not have the capacity to run infrastructure programmes. A dedicated unit, Infrastructure SA, was established to build a pipeline of projects – in the process building skills and capacity. National Treasury, through its technical advice service, is helping to build skills at both the Infrastructure Fund and at Infrastructure SA.

Infrastructure SA’s work also involves unblocking policy and regulatory obstacles to infrastructure development. An example is getting land re-zoned by a municipality to build a school. Currently, it takes an inordinate amount of time. (The same problem exists in getting land rezoned for renewable energy projects.)

Connect the dots of political will, more money and building capacity, and infrastructure spending is likely to increase considerably.

Growth dividend

Treasury modelling suggests that these structural reforms should add about 1,7% to GDP growth. If we take our current growth ceiling as about 1,5% it means that growth can go to 3,2%, which is double our population growth.

Have a heart

Allowing the private sector into the network industries and financing infrastructure is new territory for South Africa. We grew up with state monopolies in the network industries. The tradition is more than 100 years old. Converting to private sector participation requires new rules and practices. Developing them will necessarily take time. Who takes the risk? Who does the maintenance? What is a reasonable return? Over what period? These are the details that need to be thrashed out. Naturally it involves a process of negotiation and arm twisting between old monopolies and new private sector players.

On toll roads we have developed successful partnership models. It happened through an intensive process of having all the parties in the same room, the engineers, bankers, operators, builders, lawyers, and policy makers. The same will now be happening in energy, railways and harbours. It is not necessary to go hysterical when the process plays out and it seems like the parties are far apart.

The trend is clear: the genie is not going back into the bottle of state monopolies. We will learn how to have a ‘mixed economy’ in the network industries.

Employment stimulus

A separate page in the economic report book concerns short-term relief measures on unemployment.

In October 2020, the president set the goal of 800 000 public employment jobs. This must not be confused with civil service jobs. They are temporary jobs paying a stipend of R 3 500 per month. To date, 850 000 people have been employed in this programme, of which more than 500 000 have been employed in education as teachers’ assistants, cleaners and janitors in schools. More than 80% are young people and 60% are female. The number is set to rise to one million this year. There is enough money in the budget to sustain the programme for three years. Will it solve the country’s unemployment problem? No. Will it contribute to alleviating poverty and put some food on the poorest tables in South Africa? Yes.

The programme is now being expanded beyond government by using the capacity of NGOs and community organisations who work in areas like urban agriculture, early childhood development, public art and gender-based violence. It is expected that 50 000 jobs will be created that way.

Other dots are:

  • the expansion of the employment subsidy, making it easier for smaller businesses to employ young people;
  • the platform for young work seekers, which now has more than 2,3 million young South Africans registered, of whom 600 000 have been placed in jobs;
  • the revitalised National Youth Service, which will recruit its first cohort of 50 000 young people this year;
  • 10 000 unemployed TVET graduates who will be placed in workplaces, starting this month; and
  • Home Affairs having hired 10 000 youngsters to digitise records.

These dots will not resolve South Africa’s unemployment problem of nearly 12 million unemployed people. To lower unemployment substantially we need to increase the size of our economy. That is where the structural reform measures come in. But these employment measures provide young people with the work experience they need to take their first step into the labour market. They also bring much-needed relief while unemployment is rife.

So what?

  • It was a former editor of The Economist, Bill Emmot, who said ‘… like all instant analysts, the journalist is constantly at the risk of over-interpreting the short term and under-rating the longer-term trends. What is needed is a longer view.’ The dots help us to see the longer-term trends.
  • More space is being made for the private sector in energy, railways, ports and infrastructure funding. The monopoly model that South Africa has grown up with for over 100 years is changing fundamentally.
  • This is an important new trajectory for more investment and higher productivity.
  • For six years South Africa has suffered from declining per capita incomes. It turned around in 2021 (thanks to the low base Covid-19 created). More investment and higher productivity can lift growth by 1,7%, enough to put South Africa back on the path of rising per capita incomes. It is a tipping point.
  • At the second investment conference in 2019 the president said: ‘The man who moves a mountain begins by carrying away small stones.’ That summarises his style. Over the last two years the stones have systematically become bigger. The mountain will move.

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