Zuma’s sentence: too small a step

Major issues bearing down on SA’s economy overshadow the recent triumph of the rule of law.

The 29 June Constitutional Court ruling that former president Jacob Zuma must serve 15 months in prison for failing to appear before the Zondo commission is unlikely to provide an impetus for improved investor sentiment.

The judgement represents one small step up a mountain of corruption and malfeasance and is unlikely to change sentiment about investment in a country which has a junk credit rating, mushrooming debt, failing public institutions and no security of supply of basic services such as electricity and water, investment industry sources say.

There are, however, several other reasons why investor sentiment towards South Africa has recently improved. This includes the recovery in the global and local economy and the commodity boom, which resulted in a significant increase in exports and higher company earnings, which are translating into improved trade figures and better tax revenue, which may help the country’s fiscal position. Additionally, the cheap valuations of JSE-listed companies relative to global peers have resulted in positive investor sentiment, and to some extent, increased investment in local companies.

But, given the fact that the judgement only covers Zuma’s contempt of court, and none of the vast array of potential criminal charges which need to be laid against many companies and individuals with regard to years of widescale corruption and theft, the apex court’s judgement is too small a step forward to warrant any change in investor sentiment in itself.

While the judgement may send a message about the strength and independence of our courts, the plethora of examples of government’s weakness and lack of political will to stop corruption, irregular expenditure and the irregular award of business by state entities continue to undermine any uptick in investor sentiment.

Daniel Silke, director at Political Futures Consulting, says the judgement is important for SA’s image that the rule of law is seen to run its proper course and is not threatened in any way, “so the effect of the Zuma issue is not just a domestic political issue – it goes to the issue of confidence in SA in terms of its ability to pursue a constitutional framework and keep the rule of law”.

However, Silke says that SA “starts from a rather low base, unfortunately, and there are such low expectations for issues such as state capture to be resolved and such frustration with processes, making it unclear whether this ruling will make much difference to the outside world”.

Silke says SA desperately needs to restore its good name. It is not just about prosecuting those involved in malfeasance, or whether Zuma goes to jail or whether the Gupta family is caught. “It is really about injecting confidence in SA as being a functional state in terms of the ambit of the Constitution and protecting investor rights,” so this is an important test in that regard.

Sasfin deputy chairman David Shapiro says markets are up because commodity prices are higher and there is no indication that the Zuma decision has swayed sentiment. “Over time, one might see investor reaction to accumulated decisions, should they take place, that might start to swing the pendulum, but we have so many issues to get through before then,” he says, adding that reliable power supply and the roll-out of vaccines were immediate issues.

However, what will make a difference to investor sentiment is if Zuma does not go to jail, Shapiro says, and ratings agencies and investors will react if they see there are different rules for Zuma and other elites to ordinary South Africans. Shapiro points out that while markets have improved, indicating better sentiment, volumes are low and most of the activity is around Naspers* and Prosus. “Markets are very quiet at the moment, and when you track volumes, they are very low, reflecting the lack of interest and scope in our market.”

Protea Capital Management CEO Jean Pierre Verster says: “At this stage, I don’t believe that the Constitutional Court judgement means much for investment. Broadly speaking, investors wouldwant to see that judgements are sound in law and are applied and or executed on by law enforcement agencies.”

Sygnia CEO David Hufton says: “The Constitutional Court holding a former president accountable for his actions or, at this time, inaction, is key to preserving our trust in SA’s democracy”. He says this sends “a loud signal that no one is above the law, which is an important and positive factor that influences decisions made by companies around the world when investing abroad. The alternative would be especially detrimental to our already fragile case for attracting long-term foreign direct investment.”

This investment has been drifting back, for other reasons. As Old Mutual Wealth investment strategists Izak Odendaal and Dave Mohr points out in their recent investment note, the commodity-driven export surge is reflected in near-record exports of R163bn in May, while tax revenue increased 41% in April and May. They said SA assets are also still cheap compared to their global counterparts. This makes them “more optimistic about return prospects from local investments than has been the case for the past few years”.

However, they also pointed to recent news that Rio Tinto suspended operations at its mineral sands business in Richards Bay due to ongoing violence, including the murder of the operation’s general manager, and news that coal miner Exxaro could not ramp up foreign sales volumes, despite higher prices, “because of Transnet’s limited and unreliable rail capacity”.

The Zuma judgement is too small a step, albeit in the right direction. ■

editorial@finweek.co.za* finweek is a publication of Media24, a subsidiary of Naspers.