They shoot horses, don’t they?

I had an extended metaphor for the title about South Africa being not quite ready for the knacker’s yard, despite the apparently universal hysterical consensus, but by the time I got to the dancing yourself to death bit, it all became a bit tenuous. 

Anyway, I plan to restart the chatty/newsy/regular version of my blog. I worry about the mental health and wounded aesthetic sensibilities of some of my old followers who have had to read the weeklies for themselves over the last few years.

This modest contribution is a bit long and dreary and tries to cover too much ground, but I had to establish a baseline from which I can make short and inciteful comments in the future. The interminable below is the hurdle I had to get over. You are invited to get over it with me.

So here goes:

Baseline

Having to start somewhere, I want to give an SA financial market slant to a glance at:

  • The opening up after Covid, and the hovering possibility of it coming back strong.
  • The Russian invasion of Ukraine.
  • The resultant sanctions.
  • The cumulative supply-side shocks and the spiking of food and fuel prices – and the possibility of actual shortages soon or at some time in the future.
  • China’s zero tolerance of Covid policy and the possibility of a catastrophic collapse of that policy.
  • The deep damage to supply chains and the rise in the price (and availability) of pretty much everything.
  • Deglobalisation – now and later.

Social instability, most obviously expressed as food riots, are robustly correlated in both very long and shorter term big data studies. Wikipedia gives an interesting list from the 1700s till today here of riots related to shortages. Academic and multilateral agency commissioned work pulls out the nuances and demonstrates how variable are the responses in different countries to similar conditions. The IMF produced an interesting, short summary of some of the connections between economics and social unrest and politics. To get a quick feel of the non-linear connections and the surprising insights, I recommend you give it a whirl here.

These are some scattered insights I took away from some of the readings:

  1. The poorer the country, the weaker its democratic institutions, the more likely violence will break out and be widespread in the event of food shortages.
  2. In some countries conditions are so bad that people are purely concerned with survival and have long given up any hope of help from the authorities. Disruptions here are more likely to be in the form of population movements and refugees.
  3. Some countries – Mexico, and even Russia spring to mind – are unlikely to have communal violence expressed at what are essentially popular governments and authorities.
  4. Some countries develop patterns of cleavage around old or repeated grievances, so that anger at food price spikes and shortages might, for example, be taken out on groups that are seen to be to blame or are seen to have exacerbated the situation. South Africa experienced widespread violence against other African migrants in 2008 just as many countries in the world were experiencing ‘food riots’. Operation Dudula’s launch into a much more serious (compared to 2008) environment for food and fuel prices, raises the risks to dizzying heights, but I will try to deal with that in future articles. (Dudula is perplexing and I would guess that while it has found rich and ‘organic’ soil amongst many of the South African poor, I suspect there are hands and fingers in there with a whole complex of political and secret agendas. I don’t know any secret truths about this, but I don’t trust anybody, and I especially don’t trust ‘hidden’ hands’ not to slip and cause things to spin out of control.) South Africa’s proposed legislative response – here and here – tightening the ability of undocumented foreigners to work legally in the country is, in part, a response to the growing rumblings of discontent – and partly the ANC trying to hold onto its declining voter base. It is clear that some among our leaders and political strategists in the state are still furious that Mugabe and Zanu-PF were able to wriggle out of political failure by pushing several hundred thousand hostile (to Zanu-PF) urban dwellers southwards and onto the shadow labour markets and economies and sometimes the welfare system of South Africa. I suspect they (the South African government strategist types) see this as a favourable political moment to attempt to turn Zanu-PF’s victory to defeat.

Food production and the myriad inputs supplied from around the world is a complex business. Most of us will have heard the many kind of food stuffs and animal feeds produced in Russia, Ukraine and Belarus that have been taken out of the global market and therefore will immediately increase the price through the basics of supply and demand. But those countries are even more dominant as the source of fertilizers – many made from natural gas. Suddenly potash, urea, nitrogen, phosphorous, potassium and ammonium nitrate are tripping off the fingertips of Twitter bores who only a week ago were epidemiologists, and before that climate scientists. Well, I was a garlic farmer for 5 years and I know that a crop I harvested last year would now be in the bag and in the bank, but the crop I had just finished planting now with shortages of fertilisers and weed and pest control chemicals, would yield a 10th (thumb-suck-alert) of what I harvested last year. The food supply has the potential to worsen well into the future as planting is taking place before alterative supply chains and sources of inputs have been explored or logistical systems have been priced and reestablished for dealing with distribution when harvest takes place – although these systems, prices and products are not, ultimately, ‘fixable’ in any time horizon I can think of.

South Africa – the upside down of the commodity price shock

Governments, if they have the cash, can ameliorate some of the most deleterious impacts of the price shocks. In LATAM governments often subsidise food and fuel in situations similar to these. Some governments release strategic reserves of fuel or grains while some administratively control prices of essential or staple foodstuffs. You might remember the usual suspects flogged our entire strategic oil reserves in 2018 ‘because it was getting stale’. While the crooks themselves were nabbed (sort of) and the oil is still sitting there getting more stale than at any time since the Paleozoic, the country lost so much money as part of the general looting that we don’t have as much of the ready to soften the blows the poor are taking and will likely take again and again in the near future.

However, while our government might not have significant strategic reserves that could be released to impact inflation (aside from reducing the fuel levy), as a country we are receiving some modest relief, during these early waves anyway, from some aspects of the unfolding global catastrophe.

South Africa has an abundance of gold, diamonds, Platinum Group Metals, iron ore, coal, including thermal coal, manganese, titanium – and just a whole lot of stuff that Europe and China, especially, used to get a fair slice of from Russia, and these commodities are subject to the same inflationary forces because of supply interruptions as food inputs. So the prices of many items and commodities South Africa exports has gone through the roof, and this provides some kind of balance for the things we import going through the roof (oil and petroleum products being the most obvious.)

So the owners and managers of precious metal mines are making super-profits and government is pulling unexpectedly high revenues through taxation on those super-profits, especially gold and platinum but a whole lot of others bits and pieces we grub out of our lucky ground.

So if you are African and  not from oil exporters Libya, Nigeria, Algeria, Angola, Sudan, Egypt, Congo-Brazzaville, Uganda, Gabon and Chad and you don’t have a developed mining industry in the other areas of global shortfall, the future looks bleak and scary.

If you have a sustainable fiscal framework (which South Africa is still hanging onto for dear life, despite the heroic efforts of some to steal and destroy as much as they could) you will probably ameliorate some of the immediate suffering by spending more money. So we could expect South Africa to up its Social Relief of Distress grant from the woundingly small R350 to something more bearable, like R400 or even R500 per month in the February 2023 budget and possibly (although unlikely) adjust things upwards earlier in the MTPBS in November this year. Government is not bestowing these acts of kindness to just anyone: you have to be proudly South African and pretty much on the brink of starvation, and be able to prove it.

My light banter might suggest I think the government is being as mean-as-cat’s-pee, as my old mum was wont to say. But that would be a mistaken impression. The bigger debt metric story for South Africa is a catastrophe all of its own and Minister Enoch Godongwana has taken up the lonely, unpopular fight to keep us from going down an Argentinian type route into darkness and debt no honest man can pay. So the Minister has indicated he can’t use the windfall to solve all the pressing problems, but he can use some to make life bearable for the benighted poor and unemployed. As long as the lion’s share goes to our national debt and lays the grounds for its gradual decline.

But the upside of price hikes is giving workers grounds to demand their share. Already, the mini supercycle of profits and state revenues arising out of the supply-side shocks is giving unions in the gold and platinum sector itchy feet (can’t really blame them) see here , and public sector unions, already intensely aggrieved by government having broken the third year of a 3 year agreement in 2020 and having now experienced 2 years of a wage freeze,  are entering the current negotiations in full hazmat suits to keep bodily fluids off their skin. (I also don’t know what that comment means, but it sounds gruesome – Ed).

I think it is going to be one of those wage bargaining seasons that I always call “The Winter of our Discontent” and I have not discounted the possibility of the public sector unions striking in support of their no-doubt inflation-plus demand. I also don’t  think the Minister will bend, on the big issues. With unemployment sitting just below 50% for the mass of our people, and the public sector providing good and secure jobs with a built in 1.5% pay progression, any national strike is not going to charm the public. In fact, it might prove to be deeply irritating to the person standing for hours in a queue waiting to get R350 to live on for a month if red-shirted crowds are trundling up and down the street looting the desperate kiosks and traders and overturning rubbish bins.  And anyway if they all went on strike, only in those areas of excellence (that I will explore elsewhere) will anyone notice the denial of service. That’s a silly facetious comment. I’ll definitely have Ed take it out. I think the revenue overruns gives the government a little room to play with, possibility increasing the cash gratuity portion, as long as it doesn’t go into the base and become endlessly multiplied into the future, which is pretty much how we got here in the first place. 

The miners on the other hand, are a different story. At Sibanye-Stillwater, where the workers in NUM and Amcu have been holding out deep into territory where they will never make back the money they have lost, Neal Froneman, the CEO, just walked away with R300.3 million in remuneration (mostly from a never to be repeated share incentive scheme). What can you say? The workers wanted to small share of the super profits, but it looks like their bosses are paid to hold a hard and cold line that they will not cross. Miners who are making super profits are in for labour unrest. It’s a no brainer. Wait for PGMs, it’s going to be even worse. A winter of discontent, indeed.

The infrastructure disaster, has reduced our ability to get our overpriced commodities onto the high seas and into the hands of whoever might want them, including many looking around for supply they used to get from Russia, Ukraine, and Belarus. From electricity to ports to freight to water-reticulation we have shot ourselves in the foot, but even limping and bleeding we are making a killing out of some aspects of the commodity shock – as well as suffering for not having received the double edged blessing of oil – and gas being too new for us to make full use of it. But for us, that is an old story. 

Supply chains and China’s (maybe) catastrophic collapse of Zero-Tolerance

So global supply chains were the things that networked and wrapped the globalising world into a seamless chain of extraction, manufacturing, nimble labour processes, logistical magic including container ships and aircraft, retail and marketing and that iPhone, its inputs of every conceivable material, labour, technology, fuel, transport system, would slide into the sweaty hands of those with the ready to purchase the pretty, clever machine at the end of the line.

Now just add another thousand processes, dependent on there not being a lockdown, dependent on diesel and other fuels not costing the earth, trucks and boats and planes all having their own bits that might be stuck in other supply chain jam-ups and those iPhones themselves having the chips and covers and glass and pixels and all the stuff stuck in other broken supply chains, and the rare earths and platinum casing and … well this could become even more boring than it needs be. Supply chains across the world are paralysed and interrupted by Covid and war and sanctions and their broken interconnectedness means fewer of the end products are reaching those who want to buy them, pushing up prices, always pushing up prices. And with runaway inflation we are starting the long cycle of aggressive rate hikes around the world. No cheap money, less GDP growth.

So here is one of my doomsday fears. China’s bet the farm that they have an infinitely superior form of dealing with Covid than the chaotic irresponsible way that everyone else who isn’t China has handled the crisis. Basically their Zero Tolerance of Covid had been a matter of national pride and supreme success as the rest of the world died and the survivors chaotically wandered around in circles bumping into each other while being decimated by successive waves of disease. And it is unavoidably true that many pumped up official and even patriotic, ordinary citizens, felt proud and superior. Until Omicron came along and seems to have shredded their policy. But up till now they have hung in there, showing their fortitude and their certainty. So 20m people in Shanghai have been locked down as Omicron and starvation do their thing and China has doubled down and doubled again.  Lockdown in Shanghai has increased a range of supply-line disruptions but it has also raised the question: is China just going to spread the lockdown forever, or will it chaotically withdraw from this increasingly dangerous strategy. Or is it such a stable, authoritarian country where people will just do what they are told, and go from ‘zero tolerance’ to ‘living with Covid’ without a catastrophe? I wonder and I worry.

Right now at least some of the world thinks it is a disaster and South Africa, which relies so much on Chinese resource demand, would be a serious casualty if China failed to grow at close to expected rates (5.5%) because they doubled down on a failing Covid strategy. This will give you some idea of how we have kept our head above water in these times and suggest how a serious underperformance in Chinese growth would hurt us.

Everyone and their dog is reducing growth forecasts for Europe and the US which takes care of most of our trading partners. The dreaded recession word is being heard quite widely as is stagflation. 

Globalisation

It will probably be news to no-one that the unravelling of global supply chains, war (have no fear, I will deal with SAs approach to the invasion of Ukraine, just not right here and now) and deepening conflict between powerful nations rolls back the relentless march of globalisation. In short that means less integration of production and supply processes across geographies and national borders. There is lots to say about this, and many who will ascribe relatively prosperity to the growing integration of the world economy. Well, it might not be news to you that as many ascribe the loss of  sovereignty of nations in general, but smaller and weaker ones in particular, to multinational companies and the super-rich. There is much here to debate and discuss, but let me just leave this here: trade unions, national governments, and country-based enterprises wishing to be protected from global supply chains, are not all going to be weeping about a rollback of globalisation. In fact it re-raises the possibility of governments protecting domestic industries, of trade unions getting back some of their influence over companies and labour processes that will for now be more confined to sovereign states and domestic law.

South African Politics, in a sesame seed shell

I think CR has the December conference in the bag and while SA remains on the radar screen of many of the big EM bond funds I don’t think the world will be hanging on the edge of their seats waiting for this conference results like they were in 2017. I will be discussing this on and off all year so I won’t try and do it justice here.

The RETs are now facing an interpretation of the ‘step aside’ law that says you can’t stand for positions in the ANC if you have been charged with a serious offense in a court of law. That’s puts most of them out of the running. I am of the view that the faction around Ramaphosa will hold the line on this position even if the opposition is likely to be intense – the alternative is that public anger at ANC corruption will confirm a below 50% vote in the national elections of 2024 – which is a better than even possibility anyway. There is lots to discuss about the other top six positions in December 2022. Will Paul Mashatile spin his Treasurer General and acting Secretary General and clever tactical sense into a Deputy President position and therefore, most likely, into a presidency in 2029? Could Ronald Lamola take it and make the CR crew grin from ear to ear. Do we care this far out?

I am positive about the various attempts led by Operation Vulindlela to open key government owned infrastructure to private operators, builders, maintainers. This applies to ports, rail, freight, power, spectrum auction, digital migration … and, even though it is mixing oranges with apples, finding a way to reduce the skills mismatch between our economic needs and our education system or skilled immigration laws. We have a long way to go, and this is mostly what I will be discussing from now on. CR and his cronies staying in power, even in an alliance government after 2024, is crucial. 

For now I am worried that no matter what we do, we are more than ever tossed on the waves of a series of global storms – it is only after the roiling waters calm or recede that we might make our own way. Till then we are flung hither and thither and the best we can do is bail.

9 thoughts on “They shoot horses, don’t they?

  1. Thank-you Nic. While we can kind-of generally see what’s going on, it’s always good to hear an experienced opinion on the issues. But it must be like being a war reporter in the thick of battle – uncomfortable!

    (Note for Ed. Not sure if this all made sense? “There is lots to say about this, and many who will ascribe relatively prosperity to the growing integration of the world economy.” – Feel free to delete this bit when read)

  2. Hi Nick,

    I value your insights. I would be prepared to subscribe to a weekly or monthly column from you if you do want to go this route.

    Regards

    Doug

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