“There is a huge sense of urgency around Eskom and the need for a second iteration bailout…” says Intellidex analyst Peter Attard Montalto. In today’s Daily Maverick 

While the government allocated Eskom a R69bn cash injection over the next three years in the February budget, another bailout will probably take place in the second half of this year, says Intellidex analyst Peter Attard Montalto in Bloomberg.

Intellidex analyst Peter Attard Montalto says that in the short term the land reform process will face many challenges and entrench uncertainty, keeping any possible positives strictly in the long-term outlook. Featured in Business Tech

“There are a lot of things coming from Ramaphosa, but the implementation is crucial”, says Intellidex head of capital markets Peter Attard Montalto on the Xolani Gwala show.

Dangers of increased lending to entities in terms of creating problems for the economy and the banking system trigger decrease in loans

This column was first published in Business Day

Governments globally lean on the banking system when they need cash. SA is no exception. During the latter half of the Zuma presidency, as the financial position of state-owned enterprises (SOEs) deteriorated, banks sharply increased their lending to them. That creates problems for the economy and the banking system.

My analysis of banks’ statutory returns shows that the amount they lent to SOEs increased sharply from 2013 to 2018, when it reached a record high of R56.4bn, up 2.6 times from R21.6bn five years earlier. While the figures don’t break out just which SOEs received this cash, it is safe to assume that by far the biggest of these borrowers was Eskom.

Several issues arise when the banking system is being tapped in this way. The first is the overall risk of the system. Such lending is often driven more by political considerations than the usual balance of risk and return within an overall balance sheet context. Any bank has to be sensitive to being seen to support the government, especially on socially sensitive issues as serious as keeping the lights on.

The growth in lending increased banks’ exposure to SOEs from about 0.6% of total assets to 1.1%, almost doubling. Such loans can be a mix of short and long term, but as has been made clear by several recent examples (SAA most prominently), banks are often forced to roll over their SOE loans, so even short-term ones on paper are long-term in practice.

By directing their funds to SOEs, banks are often lengthening their balance sheets, meaning they can’t do as much other long-term lending, such as for mortgages.

Our scarce savings should be directed to the most productive uses

And even though much of the more recent bank lending to SOEs has been guaranteed by the state, there is still clearly credit risk. In the effort to save Eskom, the possibility of a restructuring of its borrowing is clear, with banks being forced into some form of rescheduling. So the increased exposure to SOEs really represents an increase in risk to their balance sheets.

The next problem is that it represents poor use of savings. As is often lamented, SA has a very low savings rate, with Statistics SA figures showing it to have been negative (we were spending more than we were saving) for almost all of the last 10 years. Our scarce savings should be directed to the most productive uses.

According to the Treasury, SOEs averaged a return on equity of negative 0.3% in the 2017-18 financial year. While profitability is not all that matters regarding SOEs, the fact that they are making bottom-line losses means that they are poor users of funding.

Bank funds should be directed to productive users of that money, such as profitable businesses who can use it to fund investment and drive economic growth (people often miss that profits are the fundamental source of growth. It is out of profits that investment is made and investment is the only way to increase the potential output of the economy).

So both because it is bad for the risk-return profile of banks’ balance sheets, and because it is bad for economic growth, the major increase in bank lending to SOEs is not a good thing. That seems well appreciated, with banks having cut back a lot so far in 2019, with total exposure down to R51.6bn or 0.91% of assets.

Foreign-owned banks

You might also be wondering which of the banks were most aggressive in the lending. The big four — Absa, Standard Bank, Nedbank and FirstRand — are obviously all there and steadily increased their exposure to SOEs during the period with no clear market share trends between them. Investec did not lend to SOEs during the period.

The most interesting movement was among foreign-owned banks, which collectively had about R7bn lent to SOEs at the peak and the largest exposures relative to their balance sheets. Citi, Deutsche Bank and JP Morgan all had more than R1bn lent to SOEs in 2017, with Deutsche’s R1.7bn the largest proportion of assets at 14.2%.

Of course, for foreign banks the concentration risks are less of an issue given the diversification of their parent balance sheets. But they have also been sharply reducing their exposures, which is down to R3.4bn in latest figures, though Deutsche has maintained its exposure despite scaling back in SA, which is up to 17.6% of its assets. The biggest reduction has been by Citi.

As the Ramaphosa administration works on sorting out the mess left from the Zuma years, banks will have to play their part. Eskom is most urgent and it looks like some plans are solidifying among the different task teams working on the problem, ranging from accessing global climate change funding to rescheduling Eskom’s mammoth R500bn in total debt.

For banks, the task of working out what role to play has to carefully balance political issues with risk management. Supporting the Ramaphosa presidency is close to the hearts of many bankers, but the Zuma years should have left them gun shy about putting more funding into SOEs.

The need to stimulate broader private sector activity is furthermore urgent and would be a better use of bank funds. Working out the perfect role to play will be a challenge for bank leaderships.

• Theobald is chairman of Intellidex.

Head of capital markets research at Intellidex Peter Attard Montalto joins CNBC Africa’s Karabo Letlhatlha to discuss South Africa’s increased unemployment rate.

Among the pre-election polls, the Intellidex poll emerged as being the most accurate. The poll was a representation on the thoughts of economists, investors and other players in the market. Featured in Business Tech

What the national executive committee does next is all that really matters

This column was first published in Business Day

There is a lot of having-cake-and-eating-it going on in the SA commentariat and market commentary. It is quite nauseating. A positive story is always required even when the facts are tenuous.

First, 60% for the ANC was required for reform, now actually having less is better. The reality is that the election results matter little for what comes next.

The real question now at the heart of what comes next is this — what does the neo-patrimonial majority within the ANC’s national executive committee do? This is all that matters.

Currently this disparate grouping is split, but with a sufficient number supporting President Cyril Ramaphosa to bring him to power at Nasrec and then bring him to the presidency.

They will stick with him, and their numbers will grow if he can deliver an electoral narrative in the next five years through the 2010 local election to the 2024 national elections that keep the ANC in power and rent extraction running.

However, equally as the taps get turned off and the clean-up progresses they will be forced away and will support alternatives into the 2022 next ANC elective conference.

These two-way forces will dictate what comes next politically but also on policy. The ANC decided at Nasrec (just) that politically it needed new appeal through a shift in personality offering. A slow but steady clean-up, that maybe is selective, combined with the advantages of incumbency will likely mean Ramaphosa survives until 2022.

However, Nasrec did not change direction in terms of policy to ensure its electoral success through either its policy offer or implementations subsequently.

Indeed, these elections were incredibly dull for the lack of policy contestation. Sure, there were stand-and-deliver speeches on policy but it never felt like there was a true battle of ideas and head-to-head comparison of alternative visions. Instead it was a clash of party machines and emotions.

Nasrec shifted policy towards populism (and rent extraction) with the Reserve Bank nationalisation, prescribed assets and land (as conceived through the need for a constitutional amendment as opposed to fundamental institutional change).

Policy has the added complication that it is complicated, hard to implement and requires the deployment of political capital — a mastery of the functioning of the state.

The interplay between policy and the functioning of the state has been a central theme of my past 12 columns here since I joined Intellidex. It is incredibly important for investors and the economy.

We know that Ramaphosa can give amazing state of the nation speeches and can crowd-source ideas for policy. Implementation, however, has shown, at best, no urgency until a crisis —  like Eskom — becomes apparent. Unemployment and inequality clearly do not count as crises.

The issue is that a fundamental system for the deployment of political capital to move the levers of state efficiently and sweep out vested policy interests was certainly not evident in the past year. Presidents cannot do implementation; they must provide the leadership that puts systems in place that allow others around them to deploy their political capital on their behalf and drive implementation and change.

This means capable proactive ministers and advisers. Hence the first test will be how the presidency is shifted after the elections and the choices for cabinet (and indeed things such as committee chairs in parliament given that is an increasing route for policy formation). If this is not gotten right then what follows stands a much lower probability of success.

The ANC’s parliamentary list unfortunately did not contain a strong list of policy wonks (those generating policy for change) nor managers or implementers to get things done. One can probably count on one hand those that tick both these boxes.

The problematic nature of trying to have debates over credible, sensible succession options for various ministerial posts such as finance and public enterprise in the long term speaks to this capacity constraint.

The complex interwoven web of the ANC’s factions, but also the political and ideological forces within Ramaphosa’s own faction, are a key constraint on policy and potential growth rising. However more so is a generalised mindset of state-is-best and a distrust of business and the private sector.

This mindset has been evident through the campaign, most alarmingly around renewable energy (sceptical of the private sectors involvement) and coal (supportive of the status quo against the international direction).

A mindset change will have to come from the top, clearing away the factional and ideological web that is wrapped up in collectivism and that will be the core test change.

Collectivism can be used by Ramaphosa’s political and policy opponents to wrap him in knots. A lesson is needed from Jacob Zuma. He wrapped his opponents in the ANC’s collectivism, tying them down and allowing him to do what he wanted to construct state capture. He turned collectivism back in on itself and was the way he welded power and survived so long in the face of the obvious.

Ramaphosa needs to be the other side of the same coin. Turn ANC collectivism inside out to in effect be a loyal cadre of the party deployed to keep a seat warm in the presidency, but actually being a powerful deployer of effective political capital to drive implementation and change in the state into potential growth-boosting policy.

Now if that actually happens, that would be exciting.

• Attard Montalto is head of capital markets research at Intellidex.

Projections at this stage by Intellidex analyst Peter Attard Montalto have the ANC nationally at 57.5%, the DA at 20.44% and the EFF at 9.27%. Read more in today’s Daily Maverick.

Intellidex’s head of capital markets, Peter Attard Montalto, joined Business Day TV from London to share his views on the national election.