The Massive Challenge of Turning Around South Africa

(Bloomberg Businessweek) -- When President Trump tweeted in August that South Africa was engaged in “the large scale killing” of white farmers to seize their land, the nation’s president, Cyril Ramaphosa, didn’t respond personally. A fabricated accusation from the leader of the free world was the least of his problems. Ramaphosa probably felt his time was better spent doing his job. These days that includes confronting his top deputies, his fractured party, the powerful labor unions he helped found, an unemployment rate of 27 percent, deep-seated corruption, and a clutch of heavily indebted state companies that have been mismanaged for a decade. Oh, and the economy unexpectedly fell into recession in the first half of the year.

The scope of the task is exceeded only by its urgency. After Jacob Zuma’s ruinous, almost nine-year run as president, many inside and outside South Africa regard Ramaphosa as the last best hope to restore the country’s luster. The damage—billions of dollars looted from state coffers—has been on vivid display in judicial hearings set to extend beyond next year’s elections.

No place symbolizes all those flashpoints more than the bunker-style building housing Eskom, the colossal state-power utility. Goldman Sachs Group Inc. says the company, laden with $28 billion in debt and a passel of power plants it doesn’t need and can’t finance, is the biggest systemic risk to the economy. Domestic and foreign capital markets are increasingly disinclined to provide yet more credit—with the exception of China, which has stepped in with $2.5 billion. And the government can’t grant Eskom, or other state companies, unlimited bailouts without undermining its own solvency.

Eskom will present a broad turnaround plan in November, postponed from an earlier target of September. So far, South African officials have been reduced to tinkering around the edges, trying, for example, to nudge local banks to create credit lines for state companies through a special purpose vehicle, according to people familiar with the policy. Simi Siwisa, a sovereign debt adviser at Stratvest, an investment advisory company, says piling on more borrowing may be precisely the wrong way to go at it. “South Africa needs to start looking at various opportunities for dealing with debt pressures,” including restructuring state enterprise debt that, she says, is “the biggest risk to the South African economy.”

Indeed, financial markets want to see South African leadership with the political will to shrink Eskom’s 49,000 staff by a third (employment at Eskom has risen 25 percent since 2010); for the country as a whole, they’d like a clear plan to reduce public debt, which ballooned from 32 percent of gross domestic product to 55 percent during the Zuma years.

Sighs of relief greeted Ramaphosa’s arrival as head of the African National Congress party in December and then as president in February after he and his allies engineered Zuma’s departure. Zuma had entrenched a ruinous brand of personal politics in Africa’s most industrialized nation, coming close to destroying most institutions, the economy, and just about everyone else’s interests to look after his own. “South Africa can be turned around, and Ramaphosa is the man to do it,” says Michael Jordaan, chairman of Bank Zero. “We just need to implement a few tough decisions like acting against corruption to restore confidence.”

Ramaphosa has clear advantages—and surprising disadvantages—in pursuit of those goals. On the positive side, he’d been the late Nelson Mandela’s early choice to succeed him as president until his party colleagues vetoed his candidacy in the 1990s. Today that’s become a plus, making him the logical choice to lead the ANC out of a serious legitimacy crisis. Although he started his political career as a labor organizer and leftist firebrand—much like Mandela—he became a successful businessman largely untainted by the Zuma scandals. His commercial interests and wealth, however, have distanced him from his proletarian sympathies—and are likely to put him at odds with the potent left wing of the ruling party.

Indeed, once in office, Ramaphosa saw his honeymoon end quickly. First, he ended up with a deputy president he didn’t want—David Mabuza, one of the so-called rural barons, ANC bosses who control huge numbers of voters in the countryside—because his running mate, a polished diplomat and ANC aristocrat, lost the race for the spot. To make matters worse, another rural baron and Zuma supporter, Ace Magashule, became the third in command.

The staffing issues compound Ramaphosa’s second obstacle: the ANC itself. The 106-year-old organization often still behaves like the determined, banned guerrillas who were exiled and jailed while taking on the apartheid regime. The ANC has a pragmatic, market-friendly side, but its rhetoric still reflects its liberation movement days. ANC members, for instance, continue to address each other as comrade. At the policy level, members often argue for economic measures that have failed in many countries, including Venezuela. Any attempt by Ramaphosa to articulate market-oriented reforms would be drowned out by politics à la vuvuzela—the hornlike instrument that produced an eardrum-assaulting sound during the 2010 FIFA World Cup in South Africa.

The contending ideologies within the ANC clash in what South Africans call the land debate, the issue that attracted Trump’s attention in his one and only tweet as president about South Africa. No government-sanctioned killings have occurred, and what seizures have taken place have involved compensation. But there is serious discussion about how to redistribute land after what’s widely been seen as a highly unequal pattern of ownership—an issue that pits the rural barons and the left of the ANC against the party’s market-friendly, mostly urban-based faction. In December the National Conference of the ANC decided to call for a constitutional amendment that would back expropriation without compensation.

Ramaphosa has tried to play to both sides of his party. In London in April as part of South Africa’s ambitious plan to raise as much as $100 billion in investment, he tried to soothe fears by promising “well-crafted incentives that will attract people.” But he still had to balance interests from home, saying at a lunch with investors at Bloomberg’s London offices that the land-redistribution drive would go on. He insisted it wouldn’t damage the economy or hurt agricultural production.

Ramaphosa didn’t help matters when he made a dramatic announcement on July 31 that he recognized the proposed constitutional change was one that “our people want.” This roiled the markets, and opposition parties said he’d undermined a parliamentary hearing on the subject. Currency markets are clear about what they see as Ramaphosa’s slog ahead: Since he took office, the rand is down 19 percent against the dollar, the fourth worst performance among emerging-market currencies. Ramaphosa sees that as an incentive to push reform. “The position of the rand is a function of the market,” he said in an interview at the Bloomberg Global Business Forum in New York on Sept. 26. “It has to do with what we need to do ourselves to put our economy on a much better footing.”

It’s not just the ANC that Ramaphosa has to contend with. He came to power with the help of what’s called the Tripartite Alliance: the ANC, the South African Communist Party, and the Congress of South African Trade Unions. The latter two are completely opposed to any form of privatization. Fighting capitalism is their stated raison d’être. The union group alone represents about 1.6 million workers who aren’t inclined to support downsizing the state or selling state companies to the private sector. Both alliance partners campaigned vigorously for Ramaphosa to be South Africa’s leader, and they have a clear expectation that their interests will be protected. “The optimistic people are going to be disappointed, because for him to downsize the state and reduce the public-sector wage bill, he is going to fight with key stakeholders, including the unions that backed his leadership campaign,” says Ralph Mathekga, an independent political analyst and author of a new book, Ramaphosa’s Turn: Can Cyril Save South Africa?

The pro-market factions in the ANC and the country see Ramaphosa’s moves as political necessity. They say he has to ride with the unions for now until reformists achieve an overwhelming victory at next year’s polls. Such a popular impetus may be the only way for him to introduce dramatic change, say sources in Ramaphosa’s entourage. A recent poll estimates ANC support at 52 percent, down two points from 2016.

Few have experienced South Africa’s political arithmetic more sharply than Ramaphosa. Since he founded the National Union of Mineworkers and since the dismantling of the apartheid regime, he’s profited from capitalism. After the ANC spurned him as Mandela’s successor, he went into business in 1996 and later founded the investment company Shanduka Group, which accumulated stakes in platinum mines operated by Lonmin Plc, and a coal-mining venture with Glencore Plc. In the early 2000s, Shanduka was one of the beneficiaries of a program to increase black ownership in the private sector. Ramaphosa also held the McDonald’s Corp. franchise in South Africa and was chairman of MTN Group Ltd., Africa’s biggest mobile-phone company, and Bidvest Group Ltd., a holding company with interests including catering and office supplies.

He’s seen his revolutionary credentials questioned. In 2012 police shot and killed 34 striking protesters at Lonmin’s Marikana mine. In an email days before the police action, Ramaphosa called the protests “dastardly criminal” and urged police to take “concomitant action.” A 2015 investigation cleared him of instigating the killings. Critics have also harped on what they say is Ramaphosa’s lavish spending. He has a financial stake in the wildlife industry, and in 2012 he made a 19.5 million rand ($1.4 million) bid for a buffalo. Realizing the optics were awful, he apologized. But he still owns an antelope ranch and another where he breeds expensive, long-horned Ugandan Ankole cattle. He’s also an avid fly fisherman. All that might lead the 34 percent of his countrymen living in poverty to doubt his commitment to reform.

Zizi Kodwa, head of Ramaphosa’s office at the ANC, says Ramaphosa is up to the job. “Over the past 10 years, both domestic and international factors eroded confidence in the South African economy,” he says. “Wide-scale corruption contributed hugely to the low growth in the economy and the lack of confidence. What the president is attempting is a 180-degree turn to undo all the damage and revive key sectors of the economy that have been battered in recent years.”

For now, the fight against corruption remains promising. The Constitutional Court of South Africa in August effectively removed the head of the National Prosecuting Authority, Shaun Abrahams, who’d been accused by opposition figures and advocacy groups of delaying action on prosecuting Zuma and his associates. Ramaphosa thus has an opportunity to appoint someone who’ll pursue the kind of investigations needed to attack corruption. That will appease the markets and many in business, but powerful ANC members face serious allegations of graft, and Ramaphosa will likely make more enemies.

A look at one of Ramaphosa’s heroes may provide clues to how he’ll work through South Africa’s labyrinth. A student of Asia’s economic miracles, the president has often said that China’s Deng Xiaoping is an inspiration. A committed communist, Deng maneuvered through personal humiliation and the perilous politics of Mao Zedong’s Cultural Revolution to create what is now the world’s second-largest economy. Using methods often subtle but sometimes brutal, Deng got his way.

Ramaphosa faces more active opposition than did Deng, who never assumed the top job titles in China even though he was its undisputed ruler. But the South African seems to thrive on the adrenaline that comes with tough times, according to close associates. As it was for Deng, it hasn’t been an easy road. “Cyril has never been chosen in any organization when things were going smoothly,” says James Motlatsi, a retired labor leader who helped Ramaphosa establish the mining union in 1982. “If there is a right time for Cyril, this is the time.”

To contact the editor responsible for this story: Howard Chua-Eoan at hchuaeoan@bloomberg.net, Anne Swardson

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