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  • Charles Snyman

And So This Christmas...

Some economic and political good news at the end of 2018


In the South Africa we live today it is so very easy to become negative and fearful. For our last essay of 2018, we examine several good news items here and abroad.


South Africa exits recession after economy surges


After slipping into a recession at the start of September, South Africa has made a wonderful recovery. StatsSA reports that our GDP has risen by 2.2% in three months, buoyed by the introduction of a national stimulus package and a stream of international investments, things are looking a little more positive for SA.


There’s a long road ahead, and the situation can deteriorate just as fast as it can improve. But the recovery in the agricultural section is vital. Down 29% in Q2, the green shoots of recovery appear to be growing as the industry marked a noticeable turnaround.


Key takeaways of GDP in Q3 of 2018


  • The economy rebounded in Q3 18, increasing by 2.2%q/q saar. A recovery in household spending supported the services sector and an increase in exports the manufacturing sector.

  • Q3 18 GDP growth was 1.1% higher than in the same period in 2017. For the first three quarters of 2018, GDP growth increased by 0.8%. StasSA has left their GDP growth forecast for 2018 unchanged at 0.7%.

Manufacturing production and the services sector gathered some momentum

  • The economy rebounded in Q3 18 by 2.2%q/q saar, after contracting by 0.4% (revised from -0.7%) and contracting 2.2% in the preceding two quarters. On the production side, the services sector accounted for most of the recovery, rising by 4.5%q/q saar, after coming under pressure in H1 18 from weak domestic demand.

  • Sectors such as finance, real estate and business services (+2.3%) and transport, storage and communication (5.7%) registered firmer growth on the back of an increase household consumption spending (+1.0%). The contribution from the manufacturing was positive following two quarters of negative growth (+7.5%). However, mining (-8.8%), electricity, production and water (-0.1%), and construction (-2.7%) subtracted 0.8% from the GDP growth rate. Activity in the construction sector remained weak with non-residential investment and construction works declining. Agricultural production made a positive contribution (+6.5%) after a delay in the effect of the drought in the Western Cape and late harvest of crops had a negative effect on GDP growth in H1 18.

Consumer spending and exports the key drivers of growth but fixed investment remained sluggish

  • On the expenditure side, the main contributors to growth were exports (+24.2%) and household spending (+1.6%). Spending on semi-durables (+6.0%) and non-durable goods (+4.5%) registered the strongest growth whereas layouts on durable goods (-0.9%) and services (-1.2%) contracted. The sub-categories of spending that registered the strongest growth were restaurants and hotels (+10.0%), alcoholic beverages (+7.3%), furnishing (+6.6%), food (+5.3%) and clothing & footwear (5.0%) added 2.0% to the increase whereas communication (-3.1%) and transport

  • (-6.6%) subtracted 1.1% from growth.

  • Fixed investment in residential buildings (+9.3%) and machinery and other equipment (+1.2%) contributed 1.2% to fixed investment but weakness in construction works, transport equipment, non-residential buildings more than countered this.


Source 1

Earnings Season in the USA


The third-quarter earnings season in the USA is just about over and corporate results have not been this strong in eight years. With 97% of the S&P 500 having reported results through the end of last week, the blended earnings growth rate for the S&P 500 is 25.9%, according to data from FactSet.


If this growth rate holds after 100% of reports are in, the third quarter of 2018 will mark the best earnings growth rate for a single quarter since the third quarter of 2010, a period when results were snapping back from the post-crisis collapse in profits.


To say earnings have been anything other than stellar of late is to misrepresent what is happening in corporate America. The stock market, on the other hand, has clearly been expressing concerns about a downturn in the economy. From early October 2018, the Standard & Poor’s 500 Index declined from 2926 to the current (close on 17 December 2018) 2546, a decline of 13%.


The earnings multiple on the S&P 500 this year — which most simply measures the amount investors will pay for $1 of corporate earnings — declined to a roughly five-year low (see the graph below).


The last time the market’s trailing 12-month P/E ratio stood at current levels (around 16.5x the last 12 months of earnings), markets were bracing for midterm elections in 2014, grappling with a major currency adjustment from the world’s second-largest economy (China) in 2015, and concerned about the global economy tipping into recession in early 2016.

During the average recession since World War II, the S&P 500 has seen a median decline of 21%. The 13% drop in stocks seen from early October through to middle December got investors about halfway to a market fully reacting to a recession.


This is despite a very healthy economic and interest rate environment. Investors are currently enjoying a U.S. economy that adds more than 200,000 jobs per month, manufacturing data that continues to point to a solidly expanding U.S. economy, and an apparent de-escalation in trade tensions. In addition, the Federal Reserve showed signs of softening its stance on the pace of interest rate increases in early December. It seems that investors had simply priced in more bad news than was available to harvest from either economic or corporate data. The outlook may have dimmed, but the U.S. economy still looks strong.

(Sources 2 & 3)


The current SA political landscape


A year ago, Cyril Ramaphosa was elected President of the ANC by 52% vs 48%. But he is standing much stronger now. We can argue whether it is 60/40 or 70/30, but it is beyond doubt that he is in a much stronger position this December than last December.


Systematically Stronger


What is also beyond argument, is that erstwhile pillars of the Zuma establishment are falling, almost by the week. Tom Moyane at SARS; Shaun Abrahams at the NPA (with his previous two deputies also on their way out the door even before the new boss has taken over); Siyabonga Gama and four others at Transnet; Zuma acolyte Malusi Gigaba and nine others from cabinet; the entire boards of Eskom, Denel, Transnet and PRASA; and the DG at Public Enterprises. Eskom has laid charges against 11 senior managers who have already left its employment; five senior executives have left Transnet and investigations are continuing; and the CEO at Prasa has been fired. The Transnet board under Popo Molefe and the PRASA board under Khanyisile Kweyama are showing the same grit as Eskom’s in cleaning up. Clearly, they know they have political support.


No fewer than eight senior officers at SAPS were shown the door. The Ramaphosa-appointed task team reviewing the security cluster must still submit its findings, so more casualties can be expected. The power base Zuma built in the security cluster is likely to be dismantled even more in the coming months.


The former Zuma strongman in the Zuma stronghold of North West Province, Supra Mahumapelo, has not only lost his job, his political position and the court cases challenging his removal, but his son has also now lost an education bursary that his father’s buddies (who oversaw Denel) gave him outside the rules. When you fall, you fall far; and so do your families.


Zuma’s son has returned more than once from Dubai to appear in court on charges the NPA previously declined to prosecute. Zuma himself is also appearing in court at regular intervals as his case grinds its way through the tedious court-cases-within-the-main-court-case. The wheels of justice turn slowly, but they turn.


As an aside, this November John Block, the former ANC strongman in the Northern Cape, started the 15-year jail sentence handed to him for corruption back in 2016. Block appealed and petitioned to stay out of jail, but two weeks ago, in he went. Those wheels grind slowly but they grind…


In his home province of KwaZulu-Natal (KZN) Zuma’s personal approval rating is at 59% and Ramaphosa’s is at 63%. The ANC has been losing by-elections to the IFP, including by-elections where Zuma himself campaigned for the ANC. It all makes one wonder to what extent his famed power base in KZN is holding up.


The Real Struggle


Ramaphosa’s real struggle is no longer against Zuma. It is against the corrupt patronage networks that flourished under Zuma, the dismantling of which is obviously very painful to Zuma supporters. Not only painful, but fatal – their oxygen is being cut off.


There is of course a huge push back against this clean-up. One sees it in the attacks on Pravin Gordhan; the desperate court cases to try and reverse clean-up decisions; the dark murmurings of a National General Council where Ramaphosa can be challenged and dethroned; and even in the EFF’s switching from an anti-corruption party to one now defending Tom Moyane!


The EFF itself has become embroiled in the VBS banking saga, linked to contracts from Johannesburg Metro Council, and with Malema living in a luxury house belonging to unsavoury characters, the EFF is quickly shedding its ‘pay-back-the-money’ image for one of ‘our-snouts-are-in-the-trough-too’. This story is not over yet; and one must wonder what it will do to the view held by some that the EFF and ANC will link up in future. Will the ANC really choose to partner with a party like that?


The process of cleaning up is by no means complete. The Nugent Commission on SARS has finished its proceedings and the report will probably be published soon. The Zondo Commission of Inquiry into Allegations of State Capture is proceeding and got a two-year extension to finish its work. It has also already drawn some blood – two people resigned as a result of evidence before Judge Zondo to date. The Mpati Commission into the Public Investment Corporation (PIC) must still get going, but is required to table a final report by 15 April 2019. The head of the PIC, dr Dan Matjila, has recently resigned. Add the review of the security sector (mentioned above), and there is a lot more cleaning up to come.


Open Society Dynamics


Here it is worth stepping back a bit and taking stock. There is more happening here than just Ramaphosa taking action, although the President cannot get too much credit for what is happening. Certainly, hats off to him and determined co-fighters like Pravin Gordhan, Jabu Mabuza, Popo Molefe, Khanyisile Kweyama and others.


Some of the clean-up started back in 2017 already. Hlaudi Motsoeneng and his deputy James Aguma left the SABC in mid-2017. The tide also started turning at Eskom in May 2017 when Mark Pamensky resigned, followed by chairman Ben Ngubane and then Brian Molefe with his infamous ‘early retirement’ in November 2017 (later declared invalid by the High Court).


These dislodgements took place as a result of persistent public exposure and reporting. Hats off to the journalists and news media who exposed all this.


Public outrage was fuelled by the publication of the Gupta emails in May 2017. That really broke the dam walls. The emails confirmed what two public reports, the one by the South African Council of Churches and the other by a group of academics from several universities, drew the public’s attention to. They gave a glimpse of the extent of state capture, but the actual forensic evidence was in the emails. Hats off to the South African Council of Churches, independent academics, and the AmaBhungane investigative reporters.


One can also go further back to 2016, when the Public Protector at that time, Thuli Madonsela, published her preliminary report on state capture. Zuma squirmed and twisted and tried to take refuge in the courts, all to no avail. Hats off to the institution of the Public Protector. (It was also the current Public Protector’s finding that sealed Malusi Gigaba’s fate.)


In March 2016, it was the Constitutional Court judgement about the Nkandla matter that proved to be a turning point in Zuma’s relationship with the ANC and the country. Hats off to the courts for that and many other decisions.


This build-up during 2016 and 2017 was capped in October 2017 by the publication of Jacques Pauw’s book ‘The President’s Keepers’. Hitting the shelves – and cyber space – less than two months before the ANC elective conference, one can only wonder about its impact on the election. Certainly, the revulsion against state capture that built up in South Africa’ body politic was palpable, and it certainly helped focus the ANC members on who they were going to elect.


For me, the most intriguing political question of the last 12 months is why ‘DD’ Mabuza swung his support behind Cyril Ramaphosa. He was after all already nominated as deputy president by the Zuma camp, which he would have become if Mrs Dlamini-Zuma had won. So why did ‘DD’ switch sides, literally in the last hours, providing the critical votes that carried Ramaphosa over the line?


Perhaps it was the realisation that the ANC was doomed at the ballot box if it was not seen to be creating a decisive break from the Zuma legacy. Call it self-preservation or opportunism … it was also the ultimate realisation that you can lose power unless you change trajectory.


In short, the clean-up is the result of what one can call open society forces at work in South Africa – exposing, reporting, persisting against all denials and abuse, until the truth is out. It is a great victory for open society dynamics.


New Problems Clamouring for Attention


However, time and tide wait for no man. The sudden deterioration of governance at the SABC, after a very promising start, is a set-back. So is the request for more money from SAA and load-shedding at Eskom. The future shape of the utilities and how their debt should be dealt with will have to be settled. The country simply cannot afford Eskom in its current shape and operational structure, and money for SAA can obviously be better used.


So What?

  • The first ten months of Ramaphosa’s tenure must be counted as hugely successful in consolidating his position in the ANC and in commencing the clean-up of the Zuma networks. Substantial progress was made with those two tasks. Two down.

  • Although nobody is in prison overalls yet, significant numbers of people – from cabinet ministers to state-owned enterprise (SOE) executives to senior police officers – have lost their jobs and are out of the system.

  • More are likely to follow with the commissions of inquiry and review processes currently under way. The clean-up is not finished.

  • The urgent outstanding item on the President’s agenda is structural reform. The term means different things to different people, but currently it is about the SOEs and particularly Eskom. One very important task to go. (Source 4)

SADC Tribunal


In addition, the Constitutional Court has again ruled against former president Jacob Zuma. The court said in a recent judgment (11 December) that his role in thwarting the powers of the SADC Tribunal was unconstitutional, unlawful and irrational. The court upheld South Africa’s commitment to international human rights.


The Constitutional Court issued a scathing judgment against former president Jacob Zuma’s decision to sign a South African Development Community (SADC) decision in 2014 that removed its tribunal’s powers over member states in the wake of Zimbabwe’s land reform dispute.


Several Zimbabwean farmers approached the SADC Tribunal after their land was expropriated during the country’s land reform process under former president Robert Mugabe. The tribunal is effectively a court of last resort and could rule whether a country has acted according to its constitution.


The Zimbabwean government had removed its own courts’ pre-existing jurisdiction over expropriation without compensation disputes, making the tribunal the last option for those aggrieved by the land process.


It is fundamentally about challenging the expropriation of land without compensation and the intended removal of the tribunal’s jurisdiction to determine the validity of that kind of land expropriation that was done in terms of the Constitution of Zimbabwe.


The tribunal ruled Zimbabwe had violated the SADC treaty and ruled in favour of the farmers, ordering the country to comply with the decision that said they should get their land back. The country refused.


Zuma and other SADC leaders then systematically stripped the tribunal of its powers to avoid a repeat of the embarrassment and thwart being held accountable by an outside institution. A SADC summit resolved to suspend the operations of the tribunal by not replacing members whose terms had expired or were expiring, meaning it couldn’t quorate. SADC leaders also signed a moratorium on referring individual cases to the tribunal.


Both moves have had the effect of “rendering it effectively as good as dissolved”, said the Constitutional Court judgment.


The effect, said judge Mogoeng, “of this provision is to strip the tribunal of its jurisdiction over individual disputes, including a challenge to what they regard as violations of the treaty in relation to human rights, democracy and the rule of law”.


The court said Zimbabwe had designed the plan and Zuma was a willing ally. SADC failed to follow the correct procedure in suspending the tribunal’s operations; Zuma never presented the protocol to Parliament to be ratified and he ignored South Africa’s obligations to international law. The president signed a protocol that unabashedly sought to put us (south Africans) and the people of SADC in a position that is worse than before.


He was announcing to SADC and the world at large that a critical aspect of what defines our constitutional democracy will no longer be respected, protected, promoted or fulfilled.


The applicants in the case, including the Law Society of South Africa, four individuals and two companies, were represented by Lawyers for Human Rights (LHR). The Southern African Litigation Centre and Centre for Applied Legal Studies joined as amici curiae.


Fundamentally, this case concerns the right of access to justice and specifically access to courts at a regional level. The issue for determination before the court was whether the president acted constitutionally, irrationally and unlawfully in participating in the decision to essentially suspend the SADC Tribunal. The outcome confirms that where executive power is exercised — on the international stage or otherwise — such power must be in line with the principles of the Constitution.

(Source 5)


And some more good news


Jacob Zuma will have to pay for his own defence costs. This comes after the Gauteng High Court in Pretoria ruled on Thursday (13 December) that the former president is responsible for his own legal fees. "It is declared that the state is not liable for legal cost incurred by Zuma," said Judge Aubrey Ledwaba in handing down judgment.


The Democratic Alliance (DA) filed papers late in March, asking the court to set aside a 2006 agreement relating to legal costs Zuma incurred for his criminal prosecution, which the Presidency signed. This was after President Cyril Ramaphosa revealed that the agreement, signed by Zuma under former president Thabo Mbeki, formed the basis of the decision to continue paying Zuma's legal fees in the so-called spy tapes case.


Both the DA and the Economic Freedom Fighters (EFF) lodged applications in the High Court, asking it to set aside the decisions the state attorney made in Zuma's bid to have his legal costs funded by the state.


The political winds of change swirling within the ANC reach gale-force ahead of the 2019 elections


In the space of a 24-hour period on Tuesday, the ANC in Limpopo announced that its mayors implicated in the VBS scandal must resign, the national ANC’s spokesperson Pule Mabe went on special leave after being accused of sexual harassment, and the National Working Committee told Qedani Mahlangu to resign. Each of these instances has different dynamics. But they all have one thing in common: there is an election in 2019.


The Esidimeni scandal will not go away for the Gauteng ANC. The reason is simple. The person who is generally perceived as shoving mentally-ill people into unlicensed NGOs was the Health MEC at the time, Qedani Mahlangu. Yet she was re-elected to the party’s provincial executive committee.


Then the provincial integrity commission said she, and former Chief Whip Brian Hlongwa, should resign from the PEC. The PEC refused to accept the recommendation of its own Integrity Commission, saying it wanted to wait to see what the national ANC would say. Finally, mercifully, this week the ANC’s national working committee wrote to Mahlangu to say she should resign.


At no point in any of this did anyone in the Gauteng ANC admit that Mahlangu’s behaviour was morally wrong. It appeared that to them, the people who died didn’t matter. This leads to another, possibly unfair, question: How many people would have to die because of the actions of a Gauteng ANC leader before the provincial party took action?


The NWC clearly felt it had no choice. All the polls suggest that Gauteng will be on a knife-edge in 2019, where the ANC is under pressure from both the DA and the EFF. Those parties are going to make Esidimeni as big an issue as possible. Literally with slogans that may read “A vote for the ANC is a vote for death”. And while the party can argue that that kind of messaging would be unfair, their behaviour around Mahlangu will make it difficult to claim that on this issue, morality matters at all.


The NWC clearly felt it had no choice. All the polls suggest that Gauteng will be on a knife-edge in 2019, where the ANC is under pressure from both the DA and the EFF. Those parties are going to make Esidimeni as big an issue as possible. Literally with slogans that may read “A vote for the ANC is a vote for death”. And while the party can argue that that kind of messaging would be unfair, their behaviour around Mahlangu will make it difficult to claim that on this issue, morality matters at all.


The situation around the Limpopo ANC is slightly more complex. The provincial party instructed seven mayors who placed money in VBS, in defiance of Treasury regulations, to resign. That money was looted, and there is now much evidence before the public that suggests political pressure was involved (to make the investments) at various stages.


On Wednesday morning, Limpopo ANC leader and provincial Premier Stanley Mathabatha gave the Gauteng ANC a masterclass on SAfm in how to handle these situations. He said that they had been asked to resign because the situation simply could not be ignored. When asked why he had waited for so long to act, he pointed out that his province had requested this. When pushed on what it meant for the Limpopo ANC to have so many top officials implicated (its deputy leader is Florence Radzilani, who’s resigned despite still proclaiming her innocence, provincial secretary Danny Msiza is expected to resign after being named as the kingpin in the scam), he simply said: “When something this wrong happens, there is no way that one can differ with one who comes with that kind of criticism. You know, this has to do with the kind of people who were deployed in those particular positions.”


That may well be the kind of honest criticism that gives some voters hope that the ANC can, to use its own language, “self-correct”.


But it also shows that there can be freedom to act in certain ways when the balance of forces is flowing a certain way. Mathabatha clearly feels he can do this without worrying about consequences. It may also be that he expects more evidence to emerge about VBS, and that these people will be weakened further. Also, he himself, as far as is known, is not implicated, and so does not have to worry about anything coming back to bite him.


The situation in Gauteng may be more complicated, which could explain the lack of firm action from the province against Mahlangu.


In the longer run, it may be that the decision by Mabe to take special leave, and for the ANC to act so quickly in instituting a hearing into his conduct, is the most important indicator of changing political balances this week. Mabe has been accused of sexual harassment by his personal assistant. Luthuli House moved relatively swiftly. Hours after the story was broken by EWN, it confirmed that a complaint had been laid. By the next morning Mabe was on leave, and then a procedure was outlined. By Wednesday afternoon, the SABC was reporting that 10 women would testify during the hearing.


The context to this is some interesting politics around the ANC’s spokespersons. Mabe is national spokesperson and was appointed by the national executive committee. Under the ANC’s constitution, the secretary-general, Ace Magashule, is his boss. Zizi Kodwa, former ANC spokesperson and now an NEC member, has been appointed to the head of the ANC’s presidency. He publicly voted for President Cyril Ramaphosa at Nasrec. He has been regularly attending the Zondo Commission and defending the ANC to the media. Kodwa has also been regularly available for interviews, in a way that is surely with Mabe’s consent.


The point here is that it gives credence to those who believe there are still two camps within the ANC, each with their own spokesperson. In politics, communication is power, and the party could give messages that differ in nuance on certain issues. Now, Kodwa is likely to be heard more often, while Mabe’s future as an ANC official could be in doubt. Either way, in the slowly changing balance of power in the ANC, this could suggest that Ramaphosa’s side has gained a slight edge in the battle for control of the party’s communications.


There was a time when the post-December period could be quiet politically, relatively speaking. However, since the ANC’s Polokwane Conference in 2007, December has often proved to be busier than other months. This may be because of more intense political contestation in all sorts of ways. This December is unlikely to be different. The ANC’s January 8 Statement kick-starts the year, followed by the election. All of that is another indication of how high the stakes are now in our politics. It may only be after the election that a new kind of political equilibrium will be reached.

(Source 6)


So, Quo Vadis Equity Markets?


We know this is a very long note and maybe a tedious read on top of that. But the point is that there seems to be a lot of very positive action in the ANC. All very good of course. In addition, the economy seems to be growing.


On top of that, our equity markets are cheap (as per our previous Some Notes). The fact that the US markets seem relatively inexpensive, may just be the kicker that we need!


Say a prayer for 2019 please.


Source 1. StasSA: Third Quarter 2018 SA GDP Statistics. Summary by Investec. Tertia Jacobs Source 2: Myles Udland. Yahoo Finance. Earnings Season in the USA. 10 December 2018. Source 3: FAL Research Source 4: JP Landman. Two done, one to go. 13 December 2018 Source 5: Money Web. SADC Tribunal. Stephen Grootes. 13 December 2018 Source 6: The political winds of change swirling within the ANC reach gale-force ahead of the 2019 elections. Stephen Grootes. 13 December 2018

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