It has been 6 months since large parts of the world went into some respective form of lockdown. Recent macro-economic indicators show that the impact on economic activity was severe. Most countries, however, seem to be past the worst of the Covid-19 pandemic and, with the backing of significant fiscal stimulus, appear to be making their way back to previous levels of economic output.
The recovery of the global economy to the levels last seen at the start of the year is unlikely to be uniform around the world. Developed countries, in general, are likely to bounce back quicker as they have more fiscal firepower, whereas their emerging counterparts may take longer to recover. There are, however, exceptions as this table from an Economist Intelligence Unit special report displays:
The extent of fiscal policy has unlocked the debate about the potential for inflation (and even hyper-inflation) in years to come. Sharply rising consumer prices has not been an issue for the last decade despite the best efforts of policymakers to increase money supply. Asset price inflation has, however, been rife as equity and bond markets forged ahead – particularly in the United States. The availability of easy money has pushed the valuations of high quality assets (including US Treasuries) and a handful of technology companies into very expensive territory.
The big themes that will hold the attention of global investors in months to come include inflation, the long-term direction of the US Dollar and the potential for outperformance of emerging countries (economies, currencies and markets). Add to this the upcoming presidential election in the United States, Brexit, the ebb and flow of trade wars, and the development of a Coronavirus vaccine and we have the recipe for anything but smooth sailing towards the end of the year. However, investors can rest assured that this will also create opportunities for those who manage to separate fact from fiction.
President Cyril Ramaphosa announced the move to level 2 of the national lockdown which has enabled a large part of the labour force to return to work. This coincided with a slowdown in South Africa’s Covid-19 infection rate and number of daily deaths.
The impact of the lockdown on the local economy was deeply severe. However, not all areas were equally impacted as this study done by Nedbank’s economic team shows:
The perilous state of many of South Africa’s state-owned enterprises was not helped by the economic impact of the lockdown. Despite lower electricity demand from industry, Eskom continues to battle with power generation and in a recent interview Eskom CEO André de Ruyter indicated that load shedding is likely to remain with us for the next 18 months. The upside is that, for the first time, it seems as if Eskom understands the extent of maintenance that needs to be done. They’ve also started to act against their senior and middle managers who have failed in their responsibilities for the upkeep of generation capability. This is certainly a step in the right direction.
Speaking of steps in the right direction; in a recent article the political and trend analyst JP Landman highlighted several developments that can easily be overlooked in the quagmire of negative news that trends on social media. He mentioned the replacement of senior officials that has already taken place and provided examples of misspent money that has since been recovered. The conclusion of the analysis is that getting rid of incapable people, replacing them with better ones, and building up institutions takes time. We elaborate on this topic in this month’s commentary at the end of this publication.
South Africa seems to be faced with so many headwinds across all spheres of life. However, it is often in times like these that the people of this country stand united and surprise with their resilience and stamina.
Another month, another attempt at guessing the impact of this global pandemic and resulting lockdown. Economic data published during the month was weak but global equity markets still pushed ahead as the numbers were not quite as weak as expected.
Global developed market equities (measured by the MSCI World Index) ended the month nearly 7% higher (in USD) but emerging markets lagged their developed counteparts and added only 2.2% in August. Global bonds treaded water (the Bloomberg Barclays Global Aggregate gave up 0.2%) in August but over the last two years have kept up surprisingly well with equities (6.6% per annum versus global equities’ 8.4%). However, this does not mean that global bonds will continue to do well –more than $15 trillion of government debt (making up about 20% of the global bond market) has a negative yield. In other words, these investors are guaranteed to end up with less money than what they lent to the relevant government in the first place.
South African equities ended the month in negative territory (if only just) as the FTSE/JSE All Share Index dropped by 0.3%. Resources and Industrials ended in the green but a drop of 4.2% in Financials dragged the main index into the red.
Property shares continued their downward trend as the index shed 8.6% in August, taking the year to date performance to almost -50%. The weak economic prospects and structural changes in retail and office space in South Africa (and abroad) don’t augur well for this asset class.
Gold continued its rise and added over 13% (in USD) during the month. It’s up almost 30% from a year ago and continues to play its perceived role as a haven during times to turmoil.
We’ve been looking to publish some news on the progress made in South Africa’s fight against corruption. Fortunately, JP Landman, political and trend analyst, has summarised much of what has happened in an article he published a few weeks ago. Some progress has been made, but it’s not been without delays and hurdles. The trend is in the right direction though, and as the saying goes in investments, “the trend is your friend”.
There is palpable anger in the land about corruption. The anger is largely focused on what the ANC is doing and failing to doabout the scourge. If we separate party and state, it is useful to look at the scoreboard of what the state has achieved so far in fighting corruption.
Critical State Institutions
President Ramaphosa, 10 months after coming into power, fired erstwhile South African Revenue Service (SARS) Commissioner Tom Moyane in November 2018. Moyane fought mightily to keep his job, all the way to the Constitutional Court, who sent him away empty-handed. By May 2019 new Commissioner Edward Kieswetter was in office. Four senior SARS executives left in the next three months, bringing the total senior executive departures to seven. Now, a year later, SARS seems on its way back.
At the Public Investment Commission (PIC) no fewer than 17 board members and senior executives left in the nine months between June 2018 and April 2019. The Mpati Commission’s report was released in March. A special team under Judge Yvonne Mokgoro is now assisting the new board in implementing the recommendations of the Mpati Commission and a much stronger organisation is emerging. Some have already received summonses to repay money and I suspect more summonses will be issued.
Eskom retrieved R1 billion from McKinsey and R150 million from Deloitte. (Two Deloitte directors also resigned.) Eskom cancelled a coal contract of R3,7 billion with Tegeta, the erstwhile Gupta company, as well as a R14 billion oil supply agreement. Other contracts are being investigated. On 3 August Eskom and the Special Investigating Unit (SIU) launched proceedings to recover R3,8 billion from 12individuals, including the Guptas, a former minister, former senior executives and former board members. In its investigations at Eskom, the SIU notified the board of wrongdoers -some resigned before disciplinary hearings started. There are consequences, even if we don't see orange overalls yet. (As an aside, 300 managers left Eskom with voluntary severance packages.)
At Transnet, a new board was put in place and 15 senior executives left over a period of 12 months. South China Rail has repaid R618 million; the two Transnet pension funds recovered R1,168 billion from Gupta entities; and assets worth R232 million from a former Gupta associate were frozen.
Not all institutions were cleaned up as successfully. The Passenger Rail Agency of South Africa (Prasa) remains a mess and is now thankfully under administration. Gratifyingly, SARS attached some of former CEO Lucky Montana’s private properties. The Land Bank had to be bailed out with R3,5 billion, but three people have been sent to jail for fraud at the bank -one for 20 years. Mercifully, South African Airways is on its way out (unless a benefactor appears) and SA Express is in liquidation. Denel also saw a clean-up and has a new and very competent board, but it can probably no longer be saved from the ravages of earlier corruption –the military procurement environment has changed too much.
National Prosecuting Authority (NPA)
A most critical institution for corruption is the NPA. A walk along the timeline of what has happened there since Ramaphosa became president is quite revealing. (I apologise for the detail, but it discloses a lot.)
In August 2018 Ramaphosa fired previous National Director Shaun Abrahams. (Like Moyane, Abrahams challenged his dismissal in court, but he too was eventually sent away empty-handed.)
In October 2018 Ramaphosa suspended the two deputy directors, advocates Nomgcobo Jibaand Lawrence Mrwebi. As required by law, he appointed a commission to investigate the suitability of the two to hold office. Following the report, they were fired in April 2019. Like Moyane and Abrahams, Jiba challenged her dismissal in court. She threatened hellfire and brimstone, but eventually simply abandoned her case and went into oblivion. New permanent deputies have been appointed.
In February 2019, while these clean-up processes played out, Shamila Batohi assumed her position, having been recruited from The Hague.
Also in February, Ramaphosa announced in his state of the nation (Sona) speech that a special investigative unit would be created inside the NPA to prosecute state capture cases. The unit would combine prosecutorial and investigative capabilities like the Scorpions used to have. Ramaphosa promised that skills from ‘within government and the private sector' (my emphasis) will be brought in. He also left the door open for ‘a more enduring (anti-corruption) solution’ to be developed.
The unit was gazetted in April, and in May 2019 Hermione Cronjé was duly appointed from outside the NPA to head this new unit.
In September 2019 Ramaphosa returned to the NPA and revoked the appointment of five senior prosecutors who were promoted by Zuma just before he left office. Two accepted the reversal in their fortunes; three threatened to challenge it in court –of which only one has done so far. The director general in the Presidency revealed that Ramaphosa took this decision on the five prosecutors after consulting Wim Trengove SC. Clearly Ramaphosa does not just blunder in.
In October 2019 the Treasury allocated R38 million to get the special unit going; a further R25 million was allocated to appoint private sector practitioners to assist the NPA (there is Ramaphosa’s promise of ‘private sector skills’); and R102 million was allocated to fill vacancies at the NPA.
In February 2020, 800 posts at the NPA were advertised. More positions were advertised in August 2020.
In July 2020 the regulations on the Zondo Commission were changed to allow the NPA to use evidence from the commission in criminal prosecution as well as to use the services of people currently working for the commission. This was not possible under the commission's previous regulations. One must remember that the Zondo regulations were promulgated by Zuma just before he left office; and it was a balancing act to protect people’s right to remain silent, but still get the stories out. That balancing act now favours the NPA.
In August 2020 the ANC’s National Executive Council (NEC) has resolved that ‘government (must) urgently establish a permanent multi-disciplinary agency to deal with all cases of white-collar crime, organised crime and corruption’. Later, Justice Minister Ronal Mamola confirmed ‘it is clear, the country needs a permanent structure’. This sounds much like Ramaphosa’s Sona speech of February 2019 where he left the door open ‘to develop a more enduring (anti-corruption) solution’. Looks like he knows where he wants to go and is playing the long game.
In the meantime, several investigative agencies have been pulled together in a ‘fusion centre’ to work on Covid-19 corruption, creating precisely the integration of skills and a more enduring capacity President Ramaphosawas looking for.
Sixteen months ago, in this column, I tried to temper expectations for quick prosecutions. I wrote that prosecutions will only happen in 2020. Legal processes take time, simple as that.
How much time was again illustrated by an adjournment of the Zuma case to September to allow for documents to be exchanged between the two sides and for other preliminary matters to be concluded. If these matters are all cleared, a trial date can be set. In the meantime, Zuma has suffered a number of setbacks in various courts. As he is discovering, the wheels of justice turn slowly, but they do turn.
The Hawks are investigating 250 cases of municipal fraud of which 93 are already before the courts. More people will discover that the wheels of justice actually turn, if slowly.
In June 2020, nine suspects were arrested for the VBS Mutual Bank saga. They were granted bail and will appear on 8 October 2020. One of the nine has turned state witness, which should help to secure convictions. The danger of relying on proceedings at commissions, in books and by investigative journalists (undeniably useful as they are), were underlined this week when one of the prime suspects in the VBS case brought a successful application against the report of Advocate Terry Motau on the VBS scandal. The NPA has to build every case, piece by piece, with its own witnesses.
In the meantime, five of the nine VBS accused, including the former chair, chief executive officer, chief financial officer and chief operations officer, were sequestrated and their assets seized to repay moneys to the bank. Two directors were declared delinquent and cannot be company directors again. Consequences are following even without jail sentences.
Special Investigating Unit (SIU) and Special Tribunal
The SIU is a division of the NPA with the mandate to investigate and recover public moneys through civil claims –it is not a prosecutorial body. Where the SIU comes across evidence of criminal wrongdoing, it is referred to the prosecutors at the NPA. (For example, it laid criminal charges against three companies in Gauteng and identified two senior officials as ‘enablers of corruption’ relating to Covid-19.)
Criminal prosecutions can still follow a successful civil claim. Criminal cases require ‘beyond all reasonable doubt’ while civil claims require the less strenuous test of ‘on a balance of probabilities’ (as we are seeing with some of the VBS accused being both sequestrated and now also charged criminally).
To speed up civil litigation by the SIU, President Ramaphosa created a Special Tribunal to adjudicate in the civil proceedings the SIU brings against alleged wrongdoers. It became operational on 1 October 2019 and consists of eight judges under the chairmanship of Judge Thami Makhanya. Currently 22 cases are before the tribunal. They include, among others, luxury car purchases, dodgy scholar transport claims and inflated government contracts.
In two cases the tribunal ruled that the pension of suspects be frozen, giving the SIU the opportunity to seize the money. (Resigning and running with one’s pension has just become more difficult.)
Over the weekend it became known that the Special Tribunal has seized the assets of a suspended Transnet executive, including a luxury home in Dairnfern, 2 farms and … 35 motor cars! Transnet was also prohibited from paying out any pension benefit to the executive.
The SIU has R14,7 billion in cases ready that it wishes to submit to the tribunal.
Asset Forfeiture Unit (AFU)
The AFU is an old division of the NPA and was established in President Mandela’s time. It is an old workhorse that was deliberately restrained in the Zuma era. It now seems to have a new lease of life. In the last reported year it recovered nearly R2 billion from economic crimes against a mere R180 million the previous year. Over the five years to 2019 the AFU has recovered R11,8 billion in 2 707 cases. The AFU focuses on 10 specific crimes, including fraud, cash smuggling, human trafficking, counterfeit fraud and drug-related offences.
An example: in the current Covid-19 corruption saga the AFU seized a bank account two weeks ago with R700 000 siphoned off UIF money meant for underemployed workers.
This article is reproduced with the permission of the author and was first published on 14 August 2020.
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