PETER ATTARD MONTALTO: The same old problems in new wrapping

It is remarkable how a big summit can make politicians think they are all powerful and forget basic rules of how the global economy works.

The most glaring oddity at the Brics summit was a continual, bizarre notion that national politicians “choose” how much and what to trade with each other. This seemed to be repeated by all sides — the Chinese were very happy to promise to buy more SA goods and SA ministers were parading around saying they would decree that more would be exported to China and other Brics nations.

That there is regular trade promotion work between the countries, and prior Brics summits have similarly tried to boost trade, seems forgotten. There seems to be a mindset problem though — that somehow Brics countries will make a conscious policy choice to buy more of a good and SA will decide it must sell it! All this sounds very easy. One wonders why it was never done before?

The reality is that someone must want to produce something — sensing demand and a market — and something must be produced that people want to buy and that they understand there is supply to provide it. That it can be centrally directed is a fallacy. Perhaps with Chinese state-owned companies that are able to receive political instructions to buy SA goods for a short period at inflated prices compared with local alternatives? Yet the financial and wider political pressures on Chinese SOEs are so immense that supporting SA exports cannot be a priority at all. This is before other Brics with freer and less politically directed markets (even Russia) are considered.

The core of the problem is that the Brics countries have generally perfected low-cost production of most consumer items that SA produces and they themselves are trying to further push up the value-add chain. China has been the most successful so far — but SA has very few comparative or competitive advantages vs its Brics peers, and the same is largely true of the new countries. It is not entirely obvious what SA is meant to produce more of.

Of course there are some key metals for the energy transition, manganese , and some agricultural products for which SA has already found a niche with Brics members. However these suffer from the usual problems over Transnet as opposed to somehow being a policy choice politicians can make to improve exports independent of these underlying constraints. China is well aware that SA has avocados and metals.

Promise problem

As the Brics is not a trading bloc and additional collective free-trade agreements between them are lacking, all that is left, given the block is ultimately a political construct, is degree and political willpower to move economic dials.

There is also the foreign direct investment “promise” problem. Since President Cyril Ramaphosa came to power in 2018, China has made huge commitments for investment (of the order of at least $32bn), and yet it is hard to count more than about $6bn-7bn that has actually appeared. After the state visit five years ago the monies promised to rescue Eskom, bar some parts and technical assistance, did not appear.

The Chinese government even said last week that they were sceptical about their ability to deploy support given Eskom’s procurement norms and the general pace of things.

After the previous Chinese state visit there was a fevered debate in just the same way that Eskom would be saved and that growth would be higher. It was during the peak of Ramaphoria and people were generally in the mood for any excuse for growth being higher. It was not to be of course.

The Brics summit therefore perhaps exposes the potential upside from solving the usual problems such as electricity and Transnet but does little in itself to solve those problems. The New Development Bank loan for Transnet itself is unfortunate in that it keeps the utility trying to solve the same problems it cannot solve with its rolling stock rather than focusing on third-party rail access. Money to solve logistics though has never been the problem; the policy foundation and change of mindset has been. That won’t come from Brics but will — indeed it is starting to — come from within.

The Brics countries have so many examples of running efficient ports, building renewables at pace, executing fiscal consolidation and structural reforms, and overcoming corruption. SA would be better learning these than getting large promises of trade and cash that are underdelivered.

Pushed back

Political decree does not work either with the laws of financial system gravity.

It was telling that in the past few months central banks in several Brics countries — including the Reserve Bank — pushed back against the notion of a Brics currency. There is also hefty scepticism about payment systems. Motivations differ between countries. SA looks quite naive vs its fellow members. China views a Brics payment system as a way to increase the reach of the renminbi. The point is not for SA to be able to price exports in rand for Brics buyers but for financing, derivative pricing and underlying mechanics of such a system to have the renminbi as a reference given its scale. Russia and China want a payments system (and a currency) that can sidestep US oversight of global financial flows and remove the threat of extraterritorial sanctions (as well as their own monitoring and power plays that would come with such a system).

The Bank knows however that SA will not suddenly ignore that most of its trade is with the West and that the main foreign financial services participants in the country are from Western (and so USD reserve currency-based) countries. This problem, the politicians say, is solved by more trade between them. Yet this comes from such a low base it would be decades before the surface is scratched.

None of this is to deny that the Brics nations are important as counterparties for SA (though really it is China that can actually move the macroeconomic dial for SA). Nor is it to ignore that the Brics can unblock bilateral issues that might otherwise fester. But we need to be very clear what is viable, what is politics and what not — and ultimately that growth will not be higher because of any of this until SA beds down its own structural issues. And that is something that could do with a bit more political capital being decreed.

• Peter Attard Montalto leads on political economy, markets and the just energy transition at Krutham.

This article first appeared in Business Day.