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The ANC policy conference turned out to be something of a damp squib - no significant policy decisions we taken, nor was there a strong commitment to taking bold decisions and re-energising the economy. There were a few important policy pronouncements around the rejection of the youth wage subsidy, state involvement in the economy and land redistribution. The need for broader state involvement in the economy was ratified but with little to back it up on the mining or economic policy side. We should also remember that nothing is set in strong until the elective conference in Mangaung in December. While the local take on the outcome was very mixed, our impression (based on conversations with those attending the conference) was that actually a stalemate outcome is in itself important.
A whirlwind of factors came together to give the somewhat muddled outcome. The succession battle brewing under the surface was likely one of the key driving forces, with Kgalema Motlanthe's scepticism about the premise of the second transition countering Jacob Zuma's need to show renewed leadership with a fresh push on policy, and both taking their factions with them. As such no particular policy path could be clearly dominant and there was no clear shift in policy. As expected, a number of more ‘left of field' policy discussions did occur but were rapidly discarded (like the SARB mandate change). Where there were policy changes they were generally already well known, within the government's existing thinking or lacking in detail. However, Mr Motlanthe's only victory (and perhaps Tokyo Sexwale's too) can only really be said to be the lack of full endorsement for the ‘second transition' ideal. Mr Motlanthe did not ‘win' any argument about which direction policy should go in as he did not offer any alternative to the conference. This may well be a sign of his ‘risk-averse', conciliatory style. However, if there was a time to show real leadership it is now.
Overall however save for some ‘violent scuffles' towards the end of the of the conference reported in local papers (not uncommon it must be said at these events) there was relatively little open briefing for and against either side as the ANC moves into its ‘smoky back room' phase of succession battling. This contrasts strongly with the last conference five years ago when the anti-Mbeki faction clearly had the upper hand. The seemingly strong position of the alliance partners (COSATU and the SACP) at the conference was another issue, in particular around the youth wage subsidy where, even though it is government policy, the conference still declared itself against it - a sign that the government members of the ANC and its leadership were unable to show leadership on this issue. Finally, the lack of concrete policy conclusion documents and instead the reliance on often conflicting accounts of what was agreed suggests that the factionalism continues.
Overall the ANC collectively still does not appear to be in the right place to take the politically very difficult steps to ensure a boost to potential growth, even if some in government are. The message even from Pravin Gordhan was about how to maintain the current rates of (to us sub-potential) growth let alone boosting that underlying potential. While this certainly showed realism (regarding both the ANC's politics and the international situation) it still is somewhat depressing.
The lack of progress last week suggests that the policy direction will now become caught up in the succession debate and eventual battle for the leadership in Mangaung at the elective conference in December, which is not positive for investors. The potential for a larger risk event at that time therefore increases. Equity investors are likely to remain negative/underweight South Africa as a result of the clarity from the policy conference, and hence the current situation of net foreigner equity inflows will likely continue. On the bond front the continuing uncertainty reinforces the need for a moderately steep curve but, with WGBI inclusion and bond investors' more short-term focus on South Africa risks, that means inflows can continue and politics will likely only be a loose theme overlaying the market with the ‘quasi-safe haven' tag still in place.
There are a few specific policy areas to comment on:
Mining: The issue of mining occupied some significant part of the discussions but the recommendations of the SIMS report earlier in the year were not adopted by the conference and there was no agreement over the mining super-tax in particular. Nationalisation appears to have been rejected, though there are some conflicting accounts as to exactly what was agreed. The greater use of the state-owned mining company was backed, but this does not seem to go beyond what the Department for Mineral Resources is already advocating - the greater utilisation of the state's existing mining assets. We expect mining to again be at the top of the agenda in December and nothing is settled till then.
Broader nationalisation: While broader state involvement in the economy was agreed upon, the exact nature of this was vague except in three areas. There was no meaningful discussion of nationalisation in the banking sector, and instead the greater use of a state-owned bank (ie Post Bank) was decided upon but again that is broadly already government policy. The setting up of a state-owned pharmaceutical company rather than nationalisation of existing companies came as something of a new area to us and raises legal issues of the breaking of international patents for the production of generics. There was also a surprising amount of discussion around the full nationalisation of Telkom - the government and the public pensions fund together hold a majority of the stock. The sensitivity of this, however, seems to have removed it from any final declaration of policy outcomes and, given the recent rejection of an offer for a stake in the company by a South Korean company, we think the government may be considering increasing its stake. However, this would make no sense to use. Through legal, regulatory and shareholder influence the government already effectively controls Telkom and can use it in whatever developmental state means it deems fit without the expense of buying up the company.
Proscribed assets: The conference did not consider the notion of proscribed asset allocations into infrastructure and other developmental state debt. We still believe a policy broadly along these lines could eventually be proposed, and think it is likely to resurface in December. We continue to believe that a properly constructed, loose framework to direct assets into such projects where there is no compulsion and asset managers have the ability to reject financially unsound or politically connect projects should be welcomed.
Youth Wage subsidy: The unions won the day with a rejection of the youth wage subsidy at the conference - worries over intergenerational equity prevailed with concern at the targeting only of the young. While this is indeed not optimal, such a policy is in our view the least bad one that could be conceived of when considering long-run potential growth (it is better to give the young unemployed the prospect of a long-term career rather than the middle-aged). In its place a more general job-seekers allowance was agreed upon which should support those of all ages looking for work or retraining. Two other interesting policies did come from the conference on this front. The first is that all university graduates should spend a year working in the public sector as an intern. While not intrinsically a bad thing, this move strikes us as counter to the need to turn university graduates into the entrepreneurs and industrialists that the country so sorely needs, rather than more civil servants. The other was a recommendation to get school-leavers to spend a year in the military. While this could indeed teach people many valuable skills, the risks are again that (when combined with the previous policy) too many people are kept away from the productive labour force for too long - conscripting the unemployed into the military by contrast could well be a better option.
Land redistribution: Here there was firm agreement to reject the current ‘willing buyer-willing seller' model in favour of forced land redistribution in the cases where land had originally been taken illegally (a highly thorny and divisive issue in most cases) and through a closer alignment of the policy to the constitution which says that land can be transferred with the payment of fair value. Government policy was broadly moving in this direction anyway so it comes as little surprise, and the prospect of a complex legal review of a shift in policy suggests it will be quite some time before this actually occurs. We still also believe that the government will stress productive use and will be unwilling to redistribute major productive land assets without agreements for sale and lease back for instance.
Constitution: Broader changes to the constitution did not seem to materialise, especially to the judiciary, but we suspect this will again surface at the time of Mangaung.
Written by Peter Attard Montalto, Nomura Emerging Markets Research