The MTBPS clearly shows that there is strong political resistance against leaping to the R150bn of expenditure cuts needed to start to reach a primary balance and stabilise debt to GDP ratios, says Intellidex’s Attard Montalto. Featured in Daily Maverick

The market is marginally disappointed that Eskom’s transmission system operator is not fully spun out and that there were no details on Eskom’s debt, but this should not have been a surprise, says Intellidex’s Peter Attard Montalto. Featured in Fin24

SA is beyond the point at which government can generate revenue through additional taxes, argues Peter Attard Montalto, head of capital markets research at Intellidex. Featured in Business Report

With equity delivering almost no returns over the past five years, the ANC should do more to stimulate the economy

This column was first published in Business Day. 

The equities market has been flat since July 2014 — five years of almost no returns on share investments. It is thus extremely tough for stockbrokers and others to make the case for their clients to trade. They’d rather be in cash, and if they go onto the market it is only to buy passive investment vehicles such as MSCI World tracker funds. SA equities are a hard sell.

But when retail investors are most bearish, it is often the best time to buy. A recent study on US markets in the Financial Analysts’ Journal found that retail investors are a good contra-indicator for future returns. They are overly miserable after negative returns and overly bullish after positive returns.

Comfortingly for professional market analysts, this wasn’t true of them. And it is their views that have greater influence on future performance. But it shows that policymakers can sometimes focus on the wrong thing. It’s not about convincing the masses to believe; it is about making genuine structural reforms that change the economy’s potential to generate wealth.

The problem for SA Inc is that the professionals are not positive either. The series of delays to structural economic reforms that could move the needle on SA Inc is continuing to feed into a loss of interest in SA. It’s hard to attract international attention when you’re contributing only 0.4% to global GDP.

After Cyril Ramaphosa’s election as ANC president in late 2017 there was a spark of interest. But that has since dissipated, despite the efforts of the president’s investment envoys and events such as the investment conference next week.

One key issue to watch will be the minister’s success in his demand that government departments cut 5% from their wage bills, rather than cutting into growth-enhancing investment plans

Many have strongly conveyed to the president that reforms must happen, and fast. Some recent events have begun to suggest something fundamental has changed. One was the most recent ANC national executive committee statement, which struck several positive notes along the lines that the economic shock therapy proposed by finance minister Tito Mboweni in his surprise paper in August might be allowed to be administered. But that momentum hit an immediate speed bump when the mid-month cabinet meeting statement ignored several elephants in the room, particularly the appointment of a CEO for Eskom and a plan to rescue its balance sheet.

It hit another speed bump with the publication of the Integrated Resource Plan days later that included new nuclear generation as well as coal, despite these clearly not being the least-cost option for the country. We are now waiting for a paper to be published with a plan for the future of Eskom that we hope will provide a believable way forward not just for Eskom but for the whole energy sector.

That background may inspire Mboweni to use the medium-term budget policy statement (MTBPS) to build credibility that the government can fix its house. One key issue to watch will be the minister’s success in his demand that government departments cut 5% from their wage bills, rather than cutting into growth-enhancing investment plans.

He’s unlikely to get near that, but even halfway would be a positive indicator that the government is serious about fixing its financial performance. The medium-term budget doesn’t normally play the policy role that the main February budget does, but we are at an unusual inflection point for faith in government finances. There may therefore be some commitment, for example, to move spectrum auctions forward, not least because they can raise some money for the government, and maybe even a nod to the growth-enhancing potential of sorting out mining regulation and visas.

As finance minister, and within the context of the medium-term budget, there is not much more Mboweni can do. It will thus be interesting to watch Ramaphosa’s performance at next week’s investor conference. It is his second conference, and while such narrow attempts to drive investment are unlikely to make much difference, the platform affords Ramaphosa the opportunity to set out his case.

The most recent conference, in October 2018, was overly focused on sentiment and on putting specific investment commitments on the table by big companies. As most were going to be done anyway, it was an exercise in optics with R301bn promised. But the outlook for the economy did not change.

Generate returns

What is needed instead is evidence of genuine structural reform; the kind that will make analysts return to their models, change parameters, and deliver to their clients forecasts of better economic performance.

That doesn’t happen because companies are cajoled into public commitments; it happens because policy opens opportunity in the economy for investors to generate returns. And it is that genuine opportunity for more profitable activity that leads millions, not a few hundred in the Sandton Convention Centre, to take advantage and deliver growth.

If Mboweni can squeeze in a better fundamental outlook for government finances and a few positive policy indicators, and Ramaphosa can follow it up not with impassioned sales pitches and glad-handing but with genuine evidence of structural reform, that five-year equity malaise will end. And with it the lost decade of economic non-performance.

  • Theobald is chairman of Intellidex.

The Integrated Resource Plan repeats the past mistake of overestimating the level of demand for electricity, says head of capital markets research at Intellidex Peter Attard Montalto. Featured in Money Web

This column was first published in Business Day 

Spending the week in the US — first talking to investors in New York and then at the IMF/World Bank annual meetings — has been enlightening.

The annual circus around Washington throws emerging-market countries in sharp relief with one another for investors and becomes a kind of beauty parade.

The unfortunate timing of the medium-term budget policy statement (MTBPS) and the rest of a busy October kept all senior National Treasury officials and the minister away. Given the blackout around the policy statement and the fact that we are still waiting for many events on Eskom, there was little anyone could do to go into bat for SA. It certainly wasn’t the Reserve Bank’s job to do so on fiscal, though they did on their monetary policy framework.

Still, the comparisons were made between countries, and the longing for a “Brazil moment” — where a particular turning-point reform is undertaken — became apparent. The ability for Brazil to pass its long-awaited and politically challenging pension reform has signalled a key decline in risk for investors. Now investors are on the hunt for who is next and wondering if they will be disappointed if they place chips down on SA.

Portfolio investors are happy to sit with about 4.5% real carry in the long end of the SA yield curve to some degree, given the loosened conditions from developed-market central banks. But still there is a deep dissatisfaction with this simplistic “spreadsheet” investing. People want a positive narrative to latch onto and can see that in quite a number of other emerging markets.

Lack of delivery

There is also boredom with the lack of delivery and spin from the government. Investors are fed up with delays in reform, endlessly pushed-out papers and decisions, and disappointment with fiscal matters and growth.

None of these stances from foreign portfolio investors is overly different from local business sentiment, which is rock bottom. The difference is that local business reacts through a lack of domestic private investment growth. Fixed-income investors, however, don’t stop investing. True, they might not invest as much as they otherwise will, but real interest rates (with inflation low and stable) are just too attractive. Equity investors, by contrast, have been selling and moving out.

Consider too the never-ending benefit of the doubt that Moody’s Investors Service inexplicably gives SA despite the continuing reduction in absolute credit quality.

None of this means the Treasury can’t produce an “okay” policy statement, or that an Eskom white paper can’t be “okay”, or that the “Tito Paper” has managed to change the debate through weight of evidence. What it does mean is that the shift from public relations to policy is broken when it comes to implementation.

Business and foreign investors (portfolio and corporate) will now not budge to a faster investment path without actual implementation. There will be no upfront kicker of animal spirits into private-sector investments.

This doesn’t mean small things such as water-use licences, as interesting and important as that issue is. It means the big stuff that can move the potential growth dial, such as skills visas and Eskom.

Ultimately for portfolio investors the need for lower-risk premia that drives a lower yield curve and in turn lower Reserve Bank rates means stabilising and falling debt to GDP and better fiscal revenue growth from higher potential growth. Zero per capita income growth in the medium run (1.7% real growth) is just not going to cut it.

This is about positive narratives and not about spin, such as cutting home affairs’s visa turnaround time when that is in fact just one step in a long process.

SA needs its Brazilian pension moment, but it is far from clear it is coming. SA policymakers need to realise that, yes, it can mean a downgrade is avoided (at least in the short term), but this really has little effect.

Having a lower, flatter yield curve that saves the government on debt service costs, that could be better spent on health and education, would be a better option. Equally, the removal of risk premia, allowing the central bank to cut rates by 100 basis points over the long term, is another win that would help boost private-sector investment and consumption. These are the wins available that would have a real effect. Yield curves can have real signalling value even to foreign direct investment capital about risk.

This is what I think the Left fundamentally don’t get in the debate over reform. The macro is seen as some magic wand that can be used to conjure growth without doing the hard work on the micro. Instead, the hard work on the micro reforms can create the space to allow the macro to come to the party, and with it higher growth — ultimately driven by companies.

The misconception is that growth is driven by levers at the macro level. No. It is ultimately generated through the micro decisions made by individual companies and investors, and this is where shifting the reward/risk balance of investment decisions makes a difference, and undertaking the challenging implementation (not spin) is the first step to achieving that. To suggest otherwise seems totally counter to how the smallest township to the largest conglomerate actually functions in the economy.

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

It’s clear that business and markets have bought into spin narratives about improvements in Eskom’s operations, says head of capital markets research at Intellidex Peter Attard Montalto. Featured in Business Report

National Treasury has been too risk-averse over the years while it also lacked understanding – until recently – of the depth of the unsustainability of Eskom and SAA, says Intellidex’s Peter Attard Montalto. Featured in Sunday World

Intellidex’s Peter Attard Montalto says markets have overestimated the turnaround in Eskom’s operations. The system continues to run with effectively no safety margin. Featured in Herald live

Despite low demand, Eskom is now loadshedding, which highlights the fact that it has only stabilised operations at a very weak place and not improved them, says head of capital markets research at Intellidex Peter Attard Montalto. Watch the eNCA clip here: