Intellidex analyst Peter Attard Montalto raises concerns that information around the Eskom emergency financial allocation is “buried in Parliament…and not communicated openly with Eskom creditors”. Featured in Daily Maverick

Maria Ramos’ track record makes her stand out to fill the position as Eskom Chief Reorganisation Officer, says Intellidex chairman Stuart Theobald. Listen to more on The Money Show.

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See the 2018 report here.

By Heidi Dietzsch

In any election year the media are flooded by election poll findings. These polls certainly make for good news stories, but you have to wonder how accurate they are and how much faith we should put in political polls that attempt to predict the outcome of an election.

Peter Attard Montalto, Intellidex’s head of capital markets research, believes that good polls, with a proper understanding of their construction and limitations, are a useful tool for everyone, from voters to analysts and investors. “The outright rejection of polls as somehow invalid given they are not the actual vote, is bizarre and anti-scientism,” says Attard Montalto.

Political polling is a type of public opinion polling and, when done right, is an accurate social science with strict rules regarding sample size, random selection of respondents and margins of error. However, even the best public opinion poll is only a snapshot of public views at the particular moment in time, not an eternal truth. Voter opinions shift dramatically from week to week, even day to day, as political parties battle it out on the campaign field.[1]

Although election polls attract a great deal of attention for their ability to predict the outcome of elections, their most important function is to help journalists and citizens understand the meaning of the campaign and the election. Polls help to explain, among other things, what issues are important, how candidates’ qualities may affect voters’ decisions and how much support there is for particular policy changes.[2]

Attard Montalto reckons that there are two problems with South African election polls. First, polls are often poorly constructed, without appropriate weightings and sample sizes and with many methodological errors. Indeed, some are not even opinion polls in the proper sense, especially those derived from social media or ones that fail to understand the difference between registered and non-registered respondents. The second problem is that the South African media fail to report polls properly, seeing them as forecasts rather than snapshots in time, and not clearly explaining methodological issues.

So, just weeks before the election, what are the South African polls telling us about how South African are feeling?

The Association for Free Research and International Cooperation (Afric) conducted two polls of more than 3,500 South Africans in October 2018 and February 2019. Almost 60% of respondents painted the ANC in a favourable light, citing new initiatives to support businesses, anti-corruption policies, new taxes to improve the economy and other policies targeting social ills such as crime as reasons for their positive attitude towards the ruling party. Fifty-eight percent said they would vote for the ANC, 17% for the EFF and 10% for the DA.[3]

In a separate poll by global market research firm Ipsos, 61% of respondents said they would vote for the ANC. The governing party is followed distantly by the DA (14%), EFF (9%) and IFP (2%). Ipsos conducted face-to-face interviews with 3,571 adults between 23 October and 14 December last year. [4]

The latest poll by the Institute for Race Relations (IRR) suggests that in the national picture, the ANC is sitting on 55%, the DA on 22% and the EFF on 12%. When considering the provincial picture, the results are quite startling. In Gauteng the ANC is well below the 50% mark, hovering on 42%. The DA is on 32% and the EFF is on 18%. The key aspect here may not be so much that the ANC is below 50%, but so far below 50%. It seems quite possible, based on the IRR’s poll, that the ANC could lose the province, which could have complex and important ramifications for the party.

In the Western Cape, the DA would be in power with 50%, while the ANC is on 34%. The EFF is almost nowhere in this province; it is behind the ACDP, UDM and Patricia de Lille’s GOOD Movement.[5]

Attard Montalto believes that Ipsos polls just before an election are generally quite accurate given their large sample sizes and good fieldwork, especially in rural areas and townships. However, their polls have shown methodological problems in earlier campaigns, and last-minute polling is not particularly useful for financial markets specifically. He says the IRR polls are more interesting since they focus on trends and shifts that occur during campaigns. But, he warns, the IRR polls do not have a long enough history to be meaningfully assessed over time.

Despite good intentions and sound methodology, polls often fail dismally to accurately predict outcomes. For instance, what went wrong for pollsters during the 2016 US election and the British Brexit referendum?

One factor could be the gap between rational behaviour and emotional behaviour. How people feel in the privacy of a voting booth might differ from how they will react to a polling question when they feel that a justifiable, sensible and politically correct answer is required.

There is also the phenomenon of the “shy voter”. Through social media, people have learnt that serious repercussions can follow when they express opinions contrary to the mainstream discourse. Therefore, voters may tell pollsters that they are undecided or will vote for the socially acceptable option, while planning to vote for a more controversial candidate on election day.

Political polls are part and parcel of election times and these periods will probably be significantly less exciting without them. Polls that don’t apply appropriate methodology should be viewed sceptically, while those that do can certainly be useful.

What’s important, though, is that there is no such thing as a political crystal ball and pollsters are not clairvoyants. There are many variables and every election presents fresh challenges with unique parameters and issues.

One thing is clear – when the pollsters do get it right, they are lauded almost as much as the winning candidate or party. But when they are wrong, their critics have a field day.






A new populist bill places the power to intervene in commercial transactions in a minister’s hands

This column was first published in Business Day

South Africans’ over-indebtedness has long been a political risk for the financial system. Almost 10-million have impaired credit records and millions more struggle to meet repayments. That is a sizable voting constituency.

Cold political logic dictates that politicians can make short-term gains by appeasing that constituency, even at the risk of dire long-term consequences for the financial industry. And that is what is happening.

It started in the run-up to the 2014 national election. Then, it was the credit information amnesty (done via regulations to the National Credit Act) that was rushed through parliament. The amnesty was a watered-down version of what had initially been proposed. The financial sector put up a spirited battle against more dangerous ideas including a debt amnesty, but ended up with regulations compelling credit bureaus to delete certain kinds of adverse credit information, making it easier for many to obtain new credit.

Fast forward to 2019 and the stakes have ratcheted up. The National Credit Amendment Bill, colloquially called the debt forgiveness bill, is currently sitting on the president’s desk awaiting his signature to become law. It gives the National Credit Regulator the power to write off debts of up to R50,000 after suspending the debts for up to two years for those earning less that R7,500 per month. It also gives the minister of trade and industry the power to declare debts “extinguished” as well as to impose caps on interest or fees. This is a clear political device that can be used arbitrarily to write off the debts of whomever takes the minister’s fancy.

This is very likely unconstitutional. Such powers enable the minister to confiscate property, given that any loan is an asset in the hands of a lender. It would therefore fail constitutional muster on at least two grounds: the sheer arbitrariness of it fails the many requirements for due process and restrictions on ministerial discretion, but also the right not to have one’s property arbitrarily removed.

The amendment bill accelerates a trend of political populism in which politicians grant themselves powers to directly intervene in agreements between commercial parties. It follows recent changes to competition legislation that grants the minister of economic development extensive powers to intervene in mergers and acquisitions. One has to remember that such discretion in the hands of ministers must be able to accommodate any future individual in the role. Our recent history provides plenty of examples of how ministerial power can be used in ways at odds with the public interest. Ministerial discretion comes back to bite.

When it comes to populist political moves on debt, the evidence is that they backfire. India provides a clear example. In 2008, shortly before a national election, the government passed legislation writing off about $16bn-$17bn of loans to farmers. While this move obviously reduced indebtedness, subsequent studies have shown that lenders thereafter red-lined all individuals eligible for debt relief, refusing to lend to them.

This was even though India’s scheme saw the government recapitalise affected banks, so the loans were effectively paid off by the government. However, lenders started to anticipate future interference in the lending market, avoiding any loans vulnerable to future write-offs. And they were right to do so. Subsequent Indian governments have followed with further debt relief programmes, usually timed with elections. With Prime Minister Narendra Modi losing support in rural areas, he is now creating a debt write-off scheme that some have estimated would extinguish about $56.5bn of farmers’ debts.

The Indian example shows that once you have admitted in principle that politicians can intervene in credit agreements and direct lenders to write off loans, the genie will never go back into the bottle. It becomes a tool in the political arsenal forever onwards to use in populist flourishes in the run-up to elections.

The industry, of course, rationally responds. It anticipates what moves politicians will make and withdraws lending. The current bill will cost the banking industry but not devastate it. There are 9-million people with loans of under R50,000, some of whom could be considered over-indebted. However, “over-indebted” is not defined in the legislation and it is hard to anticipate who might qualify. Lenders are likely to err on the side of caution and reduce lending to the segment substantially. They will also probably avoid the next tier — up to, say, R100,000 — anticipating that at some time in future the threshold will shift, probably in time for the next general election. Millions of those consumers will be ones who would genuinely benefit from access to funding, though many will also borrow in the belief that their loans could be written off by political fiat.

Certainly, SA does have a consumer debt problem. But what we need are interventions that drive lenders into providing healthy forms of debt, such as asset-based finance that allow poor consumers to build assets, rather than consumer debt. We should also work to deal with inefficiencies in the current debt resolution process, reducing the cost of debt counselling and sequestration. Some lending practices should be banned outright.

But equipping ministers with discretion that can be wielded arbitrarily will simply damage the ability of the lending industry to meet consumer needs. It is a genie that should be kept in the bottle.

• Theobald is chair of Intellidex.

By Stuart Theobald

Why invest only for financial gain, when your investment can also have positive social consequences? The idea that our investments can do good in the world, rather than just serve our narrow financial objectives, has excited a new generation of savers. But is impact investing just a fad, or a deeper shift in the mechanics of the investment market? I think it can be the latter, but we must avoid wishful thinking and confront some of the challenges to effective impact investing.

What is impact investing?

There are various definitions. A useful one comes from the Global Impact Investing Network: “The intention to generate social and environmental impact alongside a financial return”. This definition excludes some related ideas such as socially responsible investing (SRI). SRI works by filtering portfolios, either negatively to exclude companies deemed to be harming a particular social objective (for instance, coal mining), or positively by directing investment into companies deemed to have a positive impact on particular social objectives (for instance, renewable energy). Impact investing, in contrast, is focused on investments that are designed to have a particular impact, for example, shares in a company that has set employment creation as a specific goal, or one focused on technology to remove carbon dioxide from the atmosphere. One exciting example of impact investment is the social impact bond. A variety of this has been pioneered in the Western Cape to target early childhood development outcomes, in which NGOs are directed to achieve targets and investors receive a payoff if they succeed. But, as I will discuss, there are many other types of instruments that qualify.

Types of impact investors

All investors have unique objectives. That’s true in impact investing too. The first way to split impact investors is in the balance between financial gain and social impact. The interests of investors can be placed on a continuum – from those who are “financial first” to those who are “impact first”. Different investors sit at different ends of this continuum. At one extreme, investors argue that impact investing is a way to earn superior returns to market returns. They argue that investing which advances the interests of society is more likely to earn high and sustainable profits. I don’t think this is a coherent proposition – conceptually, any company can increase social returns further by directing profits into social outcomes. It is not true that greater social outcomes will lead to greater profitability, at least in general. At another extreme, investors are willing to lose their capital entirely providing certain social objectives are achieved. We can analyse the trade-offs between these two objectives. Social outcomes can be cast in terms of social utility created, whereas financial outcomes can be treated in the usual sense of returns.

Diagram 1

This is illustrated in the graphic above which shows indifference curves for two types of investors. The lines represent points along the balance between social and financial returns that the two different types of investors will accept. Impact first investors are willing to accept a negative financial return if the social return is high. In contrast, financial first investors will accept low social returns in return for high financial returns. This analysis suggests there is an opportunity to meet the objectives of both types of investors, where the two indifference curves cross, which would be an impact investment that balances social and financial returns at just the right level to satisfy both financial first and impact first investors. An investment product that pitches at this point is likely to find the greatest demand in the market.

This makes it seem that there is a magical point at which all impact investors will get what they want. But that is likely to be illusory.

Conflicts of interest

Projects that are designed as impact investment projects often draw funding from multiple types of investors, all of whom could be interested in impact investing. However, differences between these investors can lead to conflicts of interest.

Consider a waterfall of different forms of investment in a potential social impact project (shown in the graphic alongside). This kind of capital structure would work for several types of project such as schools, hospitals or employment-generating factories.

Diagram 2The conflicts arise because all forms of investment involve risk. In impact investing, the risks are to both the financial returns and the social returns. For whatever reason a project may fail to achieve its social objectives, just as it may fail to achieve its financial objectives.

At the different extremes of this cascade you have donors and debt providers. Donors do not expect any financial return, in fact the money they contribute will never be returned. At the other extreme, debt providers are usually using the money of depositors or low risk investors such as pensioners and require fixed returns in the form of interest.

As a project is implemented and intended outcomes are not achieved, the strategy has to be amended. A donor would insist that the social objectives are given priority, whereas a lender would insist that the financial objectives are given priority. Indeed, one can imagine a scenario where in the case of weak financial performance, the donor’s money is being used to pay interest to the lender rather than on social outcomes.

There are some potential institutional structures that can deal with these conflicts. Some include:

Focus: Only use one type of financial instrument, for example, donor grants.

Satellite model: Ring fence donors in one entity responsible for one outcome, with other forms of capital in a separate entity that provides complementary services.

Financing lifecycle: Use donors for the initial phase, for example during setup or to fund research and development. Different funders are introduced at the point of scaling up the project.

In addition to the conflicts between funders, there are potential conflicts between managers and funders. Managers may have different priorities and have an interest in ensuring the financial sustainability of the project. If financial returns are under pressure, they may well prioritise efforts on financial returns rather than social returns.


It should be clear from these considerations that one of the important issues in impact investing is measuring the social returns. Financial returns are comparatively easy to determine and there is a well-established institutional structure, from auditors to financial markets, to monitor financial performance. It is much less clear how social returns should be determined. This is a lively area of debate in academic and practice circles and there are many ideas on how social returns can be measured. In some cases, very simple measures are effective – for example, specific health indicators can be used in the case of early childhood development. But many projects have less tangible and difficult to measure outcomes. They also have to be guarded against manipulation to ensure that any measures are appropriate and independent. Projects must ensure that they signal their social returns to stakeholders. Investors must monitor and evaluate impact. These create a residual loss to both social and financial returns as monitoring costs have to be incurred. Effective evaluation and monitoring is essential for impact investing to be a credible alternative. I think it is also important that investors themselves have access to information to assess effectiveness directly – the disciplinary effect of investors seeking to maximise social impact is important to drive innovation.

Who should be impact investing?

Any investor might be interested, though currently regulation would be an obstacle in some cases, such as pension funds, when it comes to more innovative structures. One clear investor type that would suit an impact strategy is foundations. These usually have an endowment, such as a portfolio of assets, that generates returns which are then used to fund philanthropic activity. There are several examples in South Africa of family foundations (like the DG Murray Trust), black empowerment foundations (like the FirstRand Empowerment Foundation) and renewable energy project-funded community foundations. While these can have restrictions on what they can do with their portfolios, for instance, requirements to remain invested in legacy instruments, there are opportunities to use their portfolios to add to the impact that grant making supports. For instance, a foundation can invest in education-focused impact investing as part of its asset portfolio, in addition to making grants that support educational outcomes. To my mind, foundation portfolios should all be considering how impact investments can be included within an overall investment policy, which can additionally include socially responsible investing screens.

But it should not stop there. Some asset managers (for example, Ashburton) offer impact investing funds that any member of the public can invest in. In due course, policy changes may allow for more institutional money, such as pension funds and insurance companies, to be directed into impact investing funds. Already some of this money can find its way into impact instruments that are structured appropriately.

Role in South Africa

In South Africa there is a growing political debate about access to private capital to achieve certain public ends. One example is the issue of prescribed assets, which the ANC has announced in its election manifesto that it intends to investigate. Under a prescribed assets regime, institutional investors are forced to invest in certain designated instruments, usually a variety of government bond. This approach is rare internationally, with the Apartheid state among the only in history to use it. My view is that prescribed assets is a very harmful policy as it distorts markets and blunts the disciplinary effect that investors should be able to have through their choice of investments. Imagine how much worse the state capture era might have been if investors had been compelled to invest in SOE bonds…

Impact investment, in contrast, could play a more positive role. Such investments can include those pursuing defined public benefit objectives such as education or healthcare. As a matter of public policy, we are comfortable allowing tax deductions for donations to organisations that support public benefit activities, so the idea of defining such objectives is well established. We are also comfortable with the fact that individual choice dictates which particular organisations end up being supported. Public policy could encourage impact investment by allowing institutional funds to direct a tranche to it, as they currently do with hedge funds. It could also be earmarked for favourable tax treatment, for example by allowing impact funds to be included in tax free savings accounts for individuals.

Impact investing is not a panacea – to really address unemployment and inequality we need broad economic development far beyond what impact investing can achieve. But it can make a difference on the margin and with certain problems that are hard to solve through traditional investment or public spending. For those reasons, it should be encouraged.

“SA does have a consumer debt problem. But what we need are interventions that drive lenders into providing healthy forms of debt,” says Intellidex chairman Stuart Theobald. Read more in his Business Day column.

If the market spent half as much time fretting about education or health policy settings as it does for monetary policy settings, SA could well be in quite a different place, says Intellidex head of capital markets Peter Attard Montalto. Read more in his Business Day column.

Decreasing interest rates will not necessarily put SA in a better situation

This column was first published in Business Day

In some ways I preferred the period of 2005-2008, when Cosatu would march to the Reserve Bank and make demands to the governor. They were simpler times, with simpler demands.

The debate is growing again about the Bank “mistakes” and “outrage” being expressed at a lack of cuts. This of course is occurring within a larger dual-track debate over the role of the Bank — with some looking to weaken the institution for state capture purposes while others are simply concerned with stuck old records about neoliberalism.

A sensible debate can certainly be had with people who want an alternative vision for the Reserve Bank. But those who want to weaken it for rent-extraction purposes and remove the blockage during the state capture years need to be called out aggressively.

Setting aside the issues of constitutional mandate, nationalisation and overall politicisation, the broad argument for an alternative Bank modus operandi within the existing monetary policy committee (MPC) mandate is that lower rates would support growth without much impact on inflation.

This is broadly the view in the market among foreign but particularly local investors, and the so-called Sandton Consensus of interest market makers. We need to stress-test the current monetary policy setting in several ways to see if it really is deficient.

First, what successes is monetary policy currently having?

Inflation expectations that used to be so volatile above target have, since 2014, become less volatile and slowly converging towards 4.5%. This is a key success of monetary policy as broadly conceived, which is a mixture of the interest rate set and the communications around it.

The “steady as she goes” thoughtfulness of the MPC, the strong string of common rhetoric between MPC meetings and indeed between governor Lesetja Kganyago and former governor Gill Marcus has sunk in to economic agents.

Lower inflation expectations reduce uncertainty for retailers who can then run tighter margins to the benefit of consumers. Meanwhile inflation pass-through from a range of factors has been at historic lows. This includes from the exchange rate into core inflation, from the VAT and other tax hikes, from oil price rises via petrol into wider prices. It is still too early to tell the impact of minimum wage hikes into wider prices but beyond the service sector pass-through here may be somewhat muted as well.

This is a significant success for the Bank and increases the welfare of consumers. While wider structurally lower growth may be partly an aid, previous bouts of low growth over history have not impacted pass-through to such a strong degree.

There are arguably two routes that price formation can take during heightened policy uncertainty such as under the Zuma years: either become more volatile as uncertainty rises if monetary policy is not credible, or become less volatile with lower pass-through as credible monetary policy.

The Bank has also helped itself (and currency volatility) by having a firmer, clearer line on currency intervention. The Bank has been increasingly clear since 2008 on its policy that it will only intervene where a breakdown of the orderly functioning of the balance of payments is occurring and not regarding levels of the currency. Once this had eventually sunk in, arguably currency markets become more efficient without the dead-weight loss of excessive speculation of Bank intervention. This in turn likely helped indirectly to anchor inflation further.

We need to also consider what good a rate cut would do and balance the costs and benefits. In isolation, it could be argued that a cut in rates would have no impact on inflation and help growth given pass-through is low.

However, a cut in rates in an environment of increasing political pressure on the institution would have a serious credibility impact and risk losing that low pass-through over time — it would also act as a ratchet effect with pressure for one cut followed by another.

It is also doubtful that small cuts would have any significant impact on current growth here. While the argument that short-term rates do not affect long-term potential, growth has become embedded and the Bank has largely won the argument with consistent communications on this issue, the short-run argument is less well rehearsed.

There is very little evidence that low growth has anything to do with monetary policy. The World Bank and World Economic Forum as well as various consultancy surveys point to a vast array of other issues, including the lack of structural reforms, political and policy uncertainty, labour market problems and lack of electricity, as all far higher on the list of concerns.

Banks have broadly saturated the economy with as much credit as they can, given the current structural problems in the economy, and would not adjust supply simply because of rate cuts — customer credit quality would not change.

Demand for credit would increase slightly after a rate cut but arguably, especially investment decisions, are being made on much larger structural issues rather than a 25-basis-point difference in the cost of credit.

In areas such as renewables technology, cost compression is driving much more than cost of credit changes, with a lack of political leadership the blockage on that front.

The current policy setting is based off a long-term view of inflation anchoring. Yet the current stance that says policy is broadly fine here and no future large moves are expected (subject to watching the data) while policy is slightly loose gets a lot of flak despite broadly making sense. This will be the key communications battleground for the Bank at next week’s monetary policy review.

The criticism is that current real policy rates are far too high at around 2.45%. Yet such a view is bizarrely short-termist, looking only at current interest rates and current inflation rates, which monetary policy cannot affect. If one looks at inflation about 18 months out, then real rates are actually 1.65%.

Markets then criticise the Bank for not cutting rates when the long end of their inflation forecast is at the centre of target of 4.5%. Yet it is only there before the Bank artificially massages it there with a hike.

The fact that the MPC is not hiking as the model says shows that they think the long-term risks of inflation being just a little bit higher are acceptable and so while aiming strongly for the centre of target are not overzealous.

The Bank’s ultimate problem is the fact it is so forward-looking versus a market that is so “now now” (or even backward-looking at data). Mix this in with a little risk aversion and the lack of much point in moving rates in either direction and so the current monetary policy stance seems entirely appropriate.

If the market spent half as much time fretting about education or health policy settings as it does for monetary policy settings, SA could well be in quite a different place, with a greater impact on growth.

• Attard Montalto is head of Capital Markets Research at Intellidex.