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FM Edition:

If all the best efforts to save SA come to naught, what might the future look like? The Paternoster Group, an independent consultancy offering political economy analysis, has some ideas.

In an Aramageddonesque report, "What if ... SA ‘does a Brazil’?", Richard Calland, Ian Farmer, Lawson Naidoo and Antony Altbeker offer possible scenarios for SA if we face an economic crisis of the Brazilian kind.

Brazil, which as recently as 2013 was predicted by the International Monetary Fund (IMF) to grow at an average of more than 4% a year, has been downgraded to subinvestment grade by all three major ratings agencies over the past year and is experiencing negative economic growth.

Brazil’s crisis combines a dramatic economic slowdown with a loss of fiscal credibility in the face of falling tax revenues, and a crisis in political leadership.

In SA, the authors argue, the situation is not so different: economic growth has stagnated; fiscal conditions have tightened as falling tax revenues meet rigid spending plans; rising debt and debt costs have heightened the possibility of a sovereign credit downgrade; and corruption-related political crises are "gripping the highest offices in government".

While the authors emphasise that it’s rather more likely that SA will not "do a Brazil", they nonetheless provide some possible answers to the question: if SA is downgraded to subinvestment grade in December and its economy shrinks at the rate Brazil’s has, what would happen next?

While the economic consequences of collapsing growth would obviously be dire (think job losses and bankruptcies), the Paternoster Group argue that the political ramifications would potentially be even more serious.

As the unemployed populace become increasingly disillusioned, protests and attacks on public property would be met with police violence; the state would face pressure to bail out failing businesses, including, possibly, "overextended banks and lenders"; and the ability of the ANC-led alliance to resolve the socioeconomic crisis would be increasingly doubted by its own members, leading to further fracturing among an already fragmented ruling elite.

The crisis would force a Jacob-Zuma led government to make difficult choices about where to cut spending, whether to raise taxes, borrow more (at more expensive rates), or even resort to printing money.

"In thinking about how a Zuma government might choose between these options, it’s necessary to think about the costs of each, who bears those costs, and whether costs are to be incurred in the short, medium or long term," the authors write.

Since Zuma is concerned primarily with protecting his own interests, he needs to keep his key supporters happy: namely, political cronies and the rural poor. The trouble with these supporters is that they share a reliance on government spending and would, the authors suggest, pressure their leaders to adopt policies that at least maintained current public-sector spending, even if this were at the expense of higher taxes and more expensive borrowing.

In other words, Zuma’s approach to the crisis would pay no regard to long-term economic implications.

Using titles of various Star Wars films, the authors paint two broad scenarios. The Revenge of the Sith (Star Wars Episode III), imagines Zuma holding on to power and implementing policies that soften the effect of a recession on his favoured groups.

In a second scenario, Zuma attempts to do this but the economic pain felt by everyone else leads to two subscenarios: one where the ANC retains power but replaces Zuma, known as The Phantom Menace (Star Wars Episode I); and another where it loses power to a coalition of rival constituencies, ushering in A New Dawn (the title of the first Star Wars novel).

In Revenge of the Sith, Zuma’s government responds to the recession by raising taxes and allowing the budget deficit to expand. Modest short-term spending cuts are achieved by slowing the rate of increase in social spending and reducing the hiring of civil servants.



Since this strategy won’t do enough to prevent a rapid increase in the cost of debt — nor will it temper rising inflation and interest rates, which in turn will constrain household and business spending — the result will be "a slow burning crisis". Poverty will rise, as much-needed reforms to spur economic growth are not implemented. Zuma would be able to see out his term, manage succession and "reinforce his allies in the security establishment".

The Phantom Menace is not so different from Revenge of the Sith, except that some major trigger event, such as a Marikana-style incident or mass retrenchments, leads to Zuma’s removal by the ANC. The party would replace him with someone who enacts similar policies – promising to save jobs, maintain public spending and perhaps even enact a populist policy here or there (think land reform and wealth taxes) – but who has "less baggage".

In the final scenario, A New Dawn, increasing economic stress on a largely urban, middle-class electorate, who care more about private-sector performance than public-sector spend, prompts support for a new political leadership.

Emboldened by ANC losses in the local government elections, the authors foresee a broad coalition, led by the Gauteng ANC and supported by key members of cabinet, along with the SA Communist Party. Such a coalition, forming a formidable opposition to the ANC in the 2019 elections, would still need to "straddle a tight line" between austerity, tax reforms and protecting the most vulnerable while stimulating economic growth.

Inflexion points, which the authors suggest will provide clues as to the future direction of travel, include Zuma being ousted at the ANC’s upcoming national executive committee (NEC) meeting. In a less encouraging potential development, Zuma, following a sovereign credit downgrade, fires finance minister Pravin Gordhan, leading to staff exits at treasury and the Reserve Bank and further undermining economic stability.

In another inflexion point, a security clampdown (including deploying the army and muzzling the media) is effected as protests against Zuma’s policies escalate. On the other hand, increasingly assertive business leadership, as demonstrated by the CEO Initiative, plays an even bolder role in the event of a "Brazil-type crisis".

As unimaginable as some of these scenarios may seem, a few years ago they appeared similarly outrageous for Brazil.

What it means: There’s a real chance of a deep economic contraction coupled with a political crisis.