Are we there yet?

The ArcelorMittal /Imperial Crown Trading deal (in all its complexity) is deeply threatening to the future of investment in South Africa.

If I ran a display indicating threat levels to the South African democracy the readings would be higher now than at any time since the successful establishment of majority rule in 1994.

Such a statement is obviously subjective. So here goes:

South Africa’s future depends on sustainable economic growth. This is the minimum condition that must be met if we are to roll back the current levels of unemployment, poverty and inequality.

The minimum condition for economic growth to occur is for domestic and international investors to continue to put their money and creativity to work in the country – preferably on an ever expanding scale.

Investors, domestic or international, are always primarily concerned with the safety of their asset and the predictability of returns.

“Political risk”, for investors is the risk that the actions or inactions of government could affect their ownership of their asset and what they can expect to earn from that asset.

Political risk in South Africa has always been about the macro insecurity caused by the levels of unemployment, poverty and inequality – and, crucially, the racial overlay of the same. Political risk has always been encapsulated in a simple question: can/will this government secure my asset – in a situation where ownership of such assets is so unequally spread?

This isn’t only a question for adrenaline stoned young  bond, equity and currency traders sitting in the global financial capitals with their cold little eyes glued to the screens.

If the answer is: ‘the government cannot secure the asset’, or even worse: ‘the government itself might be the thief in the night’, the people who are in the deepest kind of trouble are not sitting in London and New York.

When governments preside over the kind of slippery asset switching that has characterised the ArcelorMittal/Imperial Crown Trading deal, the people that suffer are the poorest and most vulnerable. The reason for this is not because this particular deal is  important, by itself,  to the future of employment and economic growth in South Africa. What’s important is that all the other money and creativity wandering around global markets looks in on this deal and acts in accordance with what it learns.

And what did this “capital and ingenuity looking for a home” learn from the ArcelorMittal/ Imperial Crown Trading deal about making a home here?

In the short term:

• The issuing of mineral and prospecting rights by the South African government is a process so fraught with danger that it is impossible to trust the authority not to steal,  or be in league with those who wish to steal, your assets;
• The only way to secure your asset – and effectively compete in this market –  is to hire individuals from the powerful political families and factions – at a huge expense – to act as your partner.

The money and ingenuity looking for a long term home – i.e. capital that is prepared to set up bricks and mortar and businesses with global reputations to uphold – is going to be particularly cautious about deals like this one because:

• It exposes Black Economic Empowerment to be nothing more than a mechanism to bribe the political class – rather than what it was promised to be: a mechanism to spread the benefits of capitalism to the previously denied and disadvantaged;
• It acts as a massive drain on the productive employment of capital i.e. it adds so much extra costs to the normal costs of conducting whatever business you are in that the benefits of being in South Africa, as opposed to anywhere else, disappear;
• The kind of “money and ingenuity” that you get when your market presents such long term risks are short term specialists – the ones who make a living out of basket cases and are used to dealing with them – with their bribes and coups and political meddling.

So the ArcelorMittal / Imperial Crown Trading deal – with all of its ins-and-outs – pushes up political risk to levels last seen in the  mid-80’s at the time of PW’s Rubicon Speech.

And that is what I am telling anyone who asks my advice about political risk and investment in South Africa.