STUART THEOBALD: Learning the lessons from Trussonomics and Nenegate

You can hate “the market” all you want, but it is the best mechanism humanity has invented to calculate the probabilities of future outcomes. The problem with any economic policy choice is that we cannot know for certain what the outcomes will be. But when Liz Truss and Kwazi Kwarteng imposed an extreme version of supply side economics on the UK economy, the market’s verdict was swift and brutal, ultimately ending the brief careers of the prime minister and chancellor of the exchequer.

The market reaction reminded me of the SA experience in 2015, when finance minister Nhlanhla Nene was summarily fired as finance minister and replaced by little-known ANC backbencher Des van Rooyen. It was quickly interpreted as an attack by the Zuma presidency on the National Treasury and the markets were brutal in response. In the days that followed, the rand tanked more than 10% and the value of government bonds plummeted. Clearly, investors, who manage the savings of locals and foreigners, took Nenegate as a sign that the government was less committed, and soon to be less able, to pay its debts.

In the SA case it took three days for the decision to be reversed, with Van Rooyen replaced by Pravin Gordhan after Zuma faced unprecedented internal and external pressure. In Britain’s case, the chancellor “resigned” 21 days after he announced a radical budget with sweeping unfunded tax cuts. Prime minister Truss announced her intention to exit a week later. In the first three days after the budget, the pound fell almost 8% against the dollar. The price of government bonds fell more than 8% at the same time, an unprecedented level of volatility for a G7 economy.

That fall had dramatic consequences for pension funds, which were using derivatives to manage their risk and were suddenly hit with calls from their brokers to inject cash to cover the margin they must post for their exposures. That forced them to sell to realise cash, which risked triggering a downward spiral. The Bank of England, which not even a week earlier had announced it was going to start selling bonds in a step to unwind years of quantitative easing, stepped in to buy long-dated bonds to “restore order”, ultimately buying £65bn worth.

There are, of course, notable differences in the SA and UK examples. Nenegate did not lead to the end of Zuma’s presidency as it has to Truss’s prime ministership, though I would argue it fatally weakened him and contributed to his eventual fall.

The Van Rooyen appointment was intended to break Treasury’s grip on public spending, particularly to force through the controversial nuclear power deal that it had been resisting. But it was also clear that fiscal controls would be jettisoned too, removing any restraints on the state capture machine’s ability to feed voraciously off the state-owned enterprises and public procurement.

It is tempting to say the UK was different because it was driven by ideology rather than corruption. But I wonder just how material this difference is. The UK budget slashed taxes on the rich, removing the top 45% tax bracket and a planned increase in corporation tax. This was undoubtedly in line with the wishes of those who backed the Truss/Kwarteng ticket. The motivations of the budget might have been ideological, the “Trussonomics” that aimed to minimise the state, slash taxes, cut employment protections and the welfare state. But the immediate beneficiaries were well positioned to extract maximum advantage. The links between the Conservative Party and assorted hedge funds is astounding — indeed, Kwarteng’s first event after the budget was to attend a party of assembled hedge fund managers who were major donors.

In some ways the claim of ideological rather than venal motives is not much different to SA in 2015. Those baying at the gates of SA’s Treasury had purported ideological motives, calling for “radical economic transformation” and denouncing “white monopoly capital” and “neoliberalism”. It was perhaps the opposite of Trussonomics, but no less of a purported belief system to justify radical change to the nation’s finances.

The UK’s turn to ideology over pragmatism was clear in the decision by Kwarteng to not run his budget by the office for budget responsibility, which customarily prepares forecasts as part of the budget development process. This rejection of pragmatism has been a hallmark of the UK since the Brexit campaign and Michael Gove’s famous declaration that Britain had had “enough of experts” when asked whether any economist thought Brexit a good idea.

Tight grip

The turbulence within the ANC is coloured by ideological claims to the party’s historic calling as a revolutionary tool to improve the lives of the people. But this is thin veneer for the venal motivations underneath, particularly the effort to stop the return of accountability and the resurrection of the criminal justice system.

The UK’s Conservative Party is at least as divided now as the ANC, though I would grant that far fewer are motivated by a desire to stay out of jail. But venality has had as tight and strangling a grip on the party.

We will know the next UK prime minister this week, who will have to regain the trust of the financial markets that the country will not veer lightly towards untested radical policy changes again. As SA learnt after Nenegate, that takes time. It took many months before bond yields and the exchange rate recovered, though the background weak economic conditions contributed. The UK’s repair work must occur in a similarly difficult context, with generational inflation highs and weak confidence. Only serious pragmatism will work.

• Theobald is head of capital markets research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.