How Brazil and SA measure up in the corruption stakes

Brazil and SA lend themselves to comparison: both are resource-rich, struggling with inequalities and have a long history of corruption.

There are also some key differences. Brazil jailed corrupt politicians and officials, while no high level officials in SA face jail time for corruption, notwithstanding last week’s arrests of four government officials after an investigation into the R255 million asbestos audit project.

Read: Corruption arrests, land sales raise SA spirits

Former Brazilian president Dilma Rousseff was impeached in 2016 after investigations into state-owned petroleum company Petrobas, of which Rousseff had previously been chair, revealed massive bid rigging to inflate contract prices, with a portion of profits being funnelled back to politicians and state officials.

In 2018, another former Brazilian president, Lula da Silva, was jailed for 12 years for corruption and money laundering. It should be pointed out that both Lula and Rousseff denied the charges against them and claimed irregularities in the way their cases were handled, helped by media bias and opportunism by political opponents.

This begins to look rather like former president Jacob Zuma’s new-found contempt for the Zondo Commission of Inquiry into allegations of state capture, which he appointed and promised to assist.

He now wants Deputy Chief Justice Raymond Zondo to recuse himself for supposed bias after ordering the former president to appear before the commission in November to answer allegations of state capture.

Brazil’s swift and decisive action

Alistair MacDonald, institutional portfolio manager at Franklin Templeton Emerging Markets Equity, told the Morningstar Investment Conference last week that Brazil dealt swiftly and decisively with its corruption scandal, punished those involved, and then embarked on a series of reforms.

It relaxed labour laws, reformed the pension fund system, equalised private and public pensions, imposed more rigorous standards for state-owned company appointments, and introduced changes in its mining code, overseen by an independent regulator.

Perhaps most importantly, it introduced a spending cap bill which limits government spending growth to last year’s inflation rate – which means in effect zero real growth.

SA’s reaction …

Contrast this with SA, where budget deficits are exploding and negotiations to reduce the public sector wage remain unresolved. The state wants to save R233 billion over the next two fiscal years, but this seems unrealistic.

Once Brazil had put its high-profile corruption cases to bed and introduced reforms, its economy took off like a rocket (after slumping badly in 2015).

There should be a positive message in this for SA, but there seems little passion for pursuing high level politicians.

Big fish more likely to walk free

As political analyst Justice Malala told the Morningstar conference, smaller fish are likely to cop the blame for corruption while the bigger ones walk free.

If we were to follow the Brazil model, we would have to deal decisively with corruption at the top level and then embark on reforms needed to address the oncoming train of unemployment and spiralling debt.

MacDonald said there are some signs of prudence in the board appointments at state-owned entities (SOEs), but still little sign of improvement at larger SOEs such as Transnet, Eskom and SAA.

While Brazil decreased the local content requirement for equipment purchases for oil and gas exploration, SA has introduced no such reforms.

SA’s mining regulations still do not address investor concerns over domestic procurement and ownership. Labour laws in SA are seen as inflexible and anti-competitive, and the ruling party has little appetite to face down the trade unions.

Perhaps the most frightening chart presented at the Morningstar conference is that of SA’s debt servicing costs as a percentage of gross tax revenue.

Interest is now absorbing twice the tax revenue of 2010 in percentage terms. This cannot go on.

SA has been shielded from deteriorating terms of trade by high precious metals prices for gold and platinum group metals. Oil exporting countries have been devastated.

Yet SA remains locked in the old economy of commodities and industry. Asian economies are embracing the new economy of cloud technology and ecommerce, which has now surpassed the old economy of mining and industry as a percentage of national income.

That’s true for most Asian countries. It’s not true for SA.

Asia now accounts for nearly 40% of global IT hardware and semiconductor revenue, and about 85% global IT services.

In other words, virtually every other emerging market in the world is showing us a clean pair of heels.