Aiming for the sky and Ramaphosa's cabinet reshuffle

This week’s edition focuses on the global airline industry, as its operational status serves as a primary indicator of whether the global economy is truly open, or not. On the home front, the major development was President Ramaphosa’s announcement last night of a Cabinet reshuffle. Our analysis is summarised in terms of positives and negatives in our Local News section below. In particular – and because of its impact on business and investor confidence as it pertains to the positioning of our clients’ portfolios – we focus on the new Minister of Finance.

As businesses across the globe start to open, countries such as the US and several in the European Union are seeing economic gains. Perhaps the one industry that is eager to take flight is the airline sector, with plans being made to rejig routes and put more planes in the air.

In the United States, Delta Air Lines is adding flights to secure the business market, while Southwest Airlines and Alaska Air Group want to entice more holiday makers to fly. However, airlines are hamstrung by the fact that not enough people are fully vaccinated!

To date only 1% of the populations of low-income countries have been vaccinated, and 27% of the global population. What’s more, it seems herd immunity is unlikely to materialise, and that the only sustainable solution is to learn to live with the virus, and ensuring we get most individuals vaccinated as quickly as possible. The world is unlikely to “reopen” until we reach higher vaccination rates.

This could have devastating effects on the global airline industry, especially on travel to and from developing countries. The International Air Transport Association this week released its World Air Transport Statistics (Wats) publication with performance figures for 2020, showing the severe effects on global air transport during the first full year of the Covid-19 crisis.

Wats shows that 1.8 billion passengers flew in 2020, a decrease of 60.2% compared with the 4.5 billion in 2019. Industry-wide air travel demand, measured in revenue passenger kilometres (RPK), dropped by 65.9% year-on-year. Air connectivity declined by more than half in 2020 with the number of routes connecting airports falling dramatically at the outset of the crisis, down more than 60% year-on-year in April 2020.

“2020 was a year that we’d all like to forget. But analysing the performance statistics for the year reveals an amazing story of perseverance.”

– Willie Walsh, International Air Transport Association director-general

Global News

US airlines are redrawing their route maps, betting that business travellers who haven’t taken to the sky in the past year will take flight once more; this despite concerns about the highly infectious Delta variant of Covid-19 spreading across that country. Delta Air Lines is adding flights to capture the business market, while Southwest Airlines and Alaska Air Group have sought to keep vacation traffic from falling off a cliff in September, with sales aimed at luring leisure travellers with deeply discounted tickets in autumn.
British Prime Minister Boris Johnson said on Thursday that more countries would be opened up for travel as more Covid-19 vaccines are rolled out globally, after doing away with quarantine for fully-vaccinated travellers from France.
Businesses are sitting on record amounts of unused credit from US banks, which bankers say could help unleash pent-up spending in the coming months. More recently, business clients have ramped up requests for credit lines that can be drawn quickly for spending on inventory, labour or expansions. However, companies aren’t drawing the money into their bank accounts just yet as they haven’t been able to spend the cash they have due to supply chain disruptions.
Bloomberg has taken an in-depth look at China’s recent crackdown on tech shares, which has rocked local and international markets. In a lengthy piece, the wire service looks into the pros and cons of China’s clampdown. It argues that, after spending years emulating Silicon Valley, the world’s second biggest economy is charting its own course. If the crackdown makes it more difficult for China’s largest companies to expand, the beneficiaries could be American tech giants.
This comes as digital payments platform Square, led by Twitter founder Jack Dorsey, is set to buy Australian buy-now, pay-later company Afterpay for $29 billion in its largest ever acquisition. Square said the buy-now, pay-later concept represents a chance to capitalise on a shift away from traditional credit, especially among younger consumers.
Some are warning that it may not end well as Robinhood Markets jumped a whopping 82% on Wednesday after a wave of individual investors piled on the zero-fee trading platform. The stock traded as high as $85 earlier in New York before cutting gains roughly in half as the volatility triggered at least three trading halts.
The United Kingdom will start giving Covid vaccines to 16 and 17 year-olds, in line with many other countries, after a minister confirmed government experts will update their advice “imminently”. This comes just two weeks after the Joint Committee on Vaccination and Immunisation (JCVI) recommended against routine vaccination of children. One of the concerns the scientists raised, linked to the Pfizer jab, was about inflammation around the heart, with the JCVI concluding that the benefits did not outweigh the risk to those who would receive the jabs.

Local News

Following the civil unrest and tighter lockdown restrictions in July, business conditions in the private sector soured dramatically. The economy wide IHS Markit purchasing managers’ index (PMI) fell into negative trend territory for the first time in ten months during July, illustrating the extent of the disruption caused by a renewed level 4 lockdown, together with the violence and looting that flared up in Gauteng and KwaZulu-Natal. It fell to 46.1 points in July from 51 in June.
Joel Netshitenzhe, executive director of the Mapungubwe Institute and a member of the ANC National Executive Committee, has penned an interesting piece for Daily Maverick in which he argues that the instigators of the recent unrest did not necessarily lose control as general mayhem may have been their actual aim. “The fate of the unleashed masses did not matter, as long as the plan to emasculate the state succeeded,” he said.
In breaking political news, President Cyril Ramaphosa made far-reaching changes to his Cabinet, which included replacing finance minister Tito Mboweni with ANC economic head Enoch Godongwana. Our primary consulting political analyst, Professor Ivor Sarakinsky, describes the long overdue Cabinet reshuffle as a barometer of ANC power dynamics:
What do the changes reveal about the protracted internecine factional battles within the ANC? Some commentators have argued that President Ramaphosa’s hand was strengthened after the failed insurrection, and that this created an opportunity for a Radical Economic Transformation (RET) clean-up. Others have asserted that he is more powerful in the NEC than ever before with more members swinging over to him.
The new Cabinet demonstrates very clearly that these views are overly optimistic. The positive appointments are: Mondli Gungubele in the Presidency, Sydney Mufamadi as National Security Advisor to the President, Joe Phaahla as Minister of Health, Khumbudzo Ntshavheni as Minister of Communications, Thandi Modise as Minister of Defence and, very importantly, the abolition of a Minister of Intelligence resulting in the intelligence function now reporting directly to the President. All these changes bring stronger performers into portfolios of significance.
The negatives are: Lindiwe Sisulu as Minister of Tourism, Ayanda Dlodlo as Minister of Public Service, Stella Ndabeni-Abrahams as Minister of Small Business and, most significantly, Enoch Godongwana as Minister of Finance.
While Ramaphosa has tried to bring competent and loyal people to Cabinet, many others retained their Ministerial status despite questionable performance and ethics in public office. This juggling of “dead wood” is about keeping peace in the ANC and not pushing powerful people directly into the RET camp.
The size of Cabinet should have been trimmed down but was not. Also, the number of Deputy Ministers stayed the same. Patronage and power politics triumphed over effectiveness and performance.
Overall, the new Cabinet is an ANC, rather than a Ramaphosa, Cabinet. It appears that Ramaphosa perceives his position as ANC and State President to be vulnerable and this explains his lack of ambition in revitalizing the Executive. There is nothing bold about these changes, that are more about not rocking the boat, and a sign of a leader who has, for some years now, not been able to establish his authority in the party and in government. By keeping too many inherited Cabinet members, there is a false assumption that they will not mobilise against him as the 2022 ANC Electoral Conference looms. If they are against him, they will continue to act in accordance thereof, whether they are in or out of Cabinet.
At an economic policy level, the retirement of Tito Mboweni as Finance Minister was expected, as he had made it clear for some time that he wanted out. While robust and abrasive, he protected National Treasury and created cover for the technocrats left to do the best they could in a faltering economy, exacerbated by the Covid-19 pandemic and attempted insurrection. He held the line on spending and borrowing, understanding very clearly the risks for the country now and into the future.
His replacement, Enoch Godongwana, has experience in Eastern Cape and national politics as an MEC and Deputy Minister, respectively. He comes with some controversy though. Perhaps the announcement of meeting with COSATU and the South African Communist Party prior to the announcement of the new Cabinet, together with the delay in the live briefing, suggests that this was one of the President’s most controversial appointments. The ANC’s allies probably backed him while Ramaphosa had someone else in mind.
Patel and Godongwana, Trade and Industry and Finance respectively, fill the two slots that the President may use for Ministerial appointments from outside Parliament, an indication that both are appointments shaped more by ANC and alliance politics than by the President himself.
The questions for the new Finance Minister are: Can or will he protect his technocrats in managing the country’s finances? Will he act on his earlier statements on prescribed assets as a source of funding for infrastructure? Related to this is the move of Mchunu out of Public Service (Mchunu played a key role in negotiating salary increases down with the public sector unions). Dlodlo has held the post of Public Service Minister before, but shortly, the next round of negotiations over public sector wages for the medium-term budget will begin. Will she be able to keep the lid on the salary bill in the same way that Mchunu did?
Ramaphosa’s briefing indicated a tired President reading from a prepared script. Poker players may see this as his tell – that he did not get everything he wanted in the reshuffle, especially the Finance Minister!