Issue: June - Aug 2013


Somewhere over the rainbow

The elusive pot of gold is a social compact. In the spirit of Codesa, it must be found for investors’ trust and confidence to be firmly based. The NDP says so, but is anybody listening?

Foreign investors this and foreign investors that. So frequently is SA urged to be sensitive to the sentiment of foreign investors that they might appear to be the be-all and end-all.

Why bother? Isn’t SA a sovereign state, not to be the master of its own destiny?  Aren’t there trillions of rand – in our own pension funds and other collective schemes–suggesting that foreigners can take a hike?

No way, although the bellicosity of Workers’ Day speeches might give that impression. So too might the continued proliferation of strikes, legal and illegal, all disruptive and damaging not only to the economy but also to the interests of these same workers.

The point that perpetually evades their attention, and seems not even to have sunk in amongst their leaders, is that they’re striking against themselves. Their savings are invested in pension funds, which in turn invest in the shares of companies, which means that they’re the beneficial owners of these companies.

As such, through their nominated and mandated representatives, they have every right to be heard in boardrooms rather than on the streets. It applies to public and private-sector workers alike. The performance of their pension funds is inextricably tied to the performance of the companies where they’re invested, and performance of companies is as much reliant on managers and workers as it is on the economy as a whole. To borrow a phrase, an injury to one is an injury to all.


Bonds are debt securities. They’re commonly issued by governments and companies which promise to pay back the lenders their capital with interest (the yield) on maturity. During the life of a bond, its traded by investors who determine the bonds price on the basis of its yield relative to prevailing and anticipated interest rates.

As the yield reduces, the bond’s price increases and vice versa. Assume, for instance, that a pension fund had invested R10m in a 10-year bond. For a move of 20 basis points (0,2%) in the yield, the capital value of the investment would change by about R129 000  (increasing by this amount for a decline in yield and reducing for a rise).

Because of their sensitivity to interest rates, foreign investors have been climbing into SA government bonds that offer much higher yields than obtainable in developed markets.
Yields on 10-year SA government bonds are amongst the highest in the now-favoured category of emerging markets.

What worries finance Minister Pravin Gordhan is a possible change of sentiment, causing sudden outflows that SA cannot control. At present, foreign investors hold more SA government debt than local pension funds.

Such is the “search for yield” that the sovereign downgrades by the three mainstream rating agencies, which followed Marikana, caused only temporary blips to the benchmark SA –year bond (see chart). Even so, as Momentum Asset Management fixed-income head Conrad Wood points out, the numerous factors driving  the market makes it difficult to isolate the direct impact of sovereign downgrades at any one time.

He notes the first downgrade, by S&P, did have a surprise effect. But once the surprise subsided, SA is still comfortable at investment grade and global liquidity remains fairly indiscriminate in search for yield.

“The risk would be for further downgrades that threaten our investment-grade status at a time when, for whatever reason, global risk appetite is waning,” Wood believes. “Given that SA is at historically low levels of yield, this would be a bridge too far”.

This is surely the basis on which a social compact, on which the success of the National Development Plan (NDP) critically depends, must be forged. There’s a mutuality of interest in all but practical expression of this welfare interdependence.

Labour unrest defeats it. For locals, business confidence is bruised; private-sector investment stalls and retrenchments accelerate. For foreigners, a warning bell is sounded by the investment downgrades that followed Marikana; it’s unhelpful to the attraction of foreign capital that, needed for infrastructure financing amongst other things, buoys pension funds’ portfolios.

Roughly10% of the JSE market capitalisation is held by non-residents. Of the bond market, the proportion has reached 38%. Their money is liquid, unreliable and volatile. Yet it’s essential for supporting the rand and financing SA’s widening current-account deficit, occurring when the value of imports exceeds exports.

Foreign inflows -- a function of trust and confidence as well as global interest rates -- can quickly reverse into outflows. Within living memory, it’s happened with painful consequences. The exchange value of the rand goes down; taxes and interest rates go up; growth is choked. Larger loom the social debilitations of poverty, inequality and unemployment that the NDP is intended to counter.

For all that, SA has a window of opportunity. It will last for so long as foreign inflows are strong, as they have been in setting records for the bond market, and as they will remain for so long as overseas investors can earn higher yields in emerging markets than in developed ones.

What nobody can foretell is when “quantitative easing” eventually subsides in the US, Europe and Asia. At some point, it must. Their interest rates then start rising and the competitive edge of emerging markets starts diminishing.

At least until it happens (five years or less?), SA has a window to prepare. Finance minister Pravin Gordhan has warned that SA’s current economic growth is “completely inadequate”. He’s called for a “unique deal” requiring a willingness of government, business and labour to cooperate and compromise.

Reserve Bank governor Gill Marcus has argued for a “structural shift”, along the lines of Germany’s social-market model that enables the workforce “to have greater knowledge of the financial affairs of the company and sector, while management needs to better appreciate the living and working conditions of their employees”. She spoke of “a partnership” between the state, employers and training institutions whereby there’d be “a steady supply of young workers with the knowledge and training to fit into a globally competitive economy”.

Their comments reinforce the need for a social compact, promptly executed. Again and again it’s mentioned in the NDP. In fact, it’s one of the plan’s six “focused, interlinked priorities”. But the draft plan was introduced, to loud acclaim, back in November 2011. All these months later, there’s dismal progress to show.

“A formal social compact may help to strengthen the alignment between growth, development and nation building, generating a virtuous circle”, says the NDP. It speaks of “transparent shareholder compacts, clean lines of accountability and sound financial models to ensure sustainability”. Its inspiration is the Constitution itself.

There are also practical realities, it argues. Development of these compacts has such preconditions as a level of trust, mediation capacity, measures to ensure equitable participation and adequate sanctions. Found instead is a lack of trust between government, business and the labour movement.

Despite various accords having been signed in the post-1994 season of goodwill, most notably to form the National Economic Development & Labour Affairs Council (Nedlac), this institutional mechanism has become paralysed by “the lack of strategic engagement among the social partners”. They prefer to focus on immediate sector interests and generally question each other’s bona fides, the NDP records.

If shock treatment is required to convert these self-defeating bickers into a social compact, then heaven forbid it’s in the form of foreign capital taking flight.

Allan Greenblo
Editorial Director