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: 

The future of the banking industry is going to involve fewer branches, more digital engagement with clients and lower costs as the industry grows more competitive, says Intellidex chairperson Stuart Theobald. Featured in Mail & Guardian

There is no sucker unwise enough to take a minority stake in return for their capital and expertise

This column was first published in Business Day 

I suppose it is progress that the ANC’s national executive committee now accepts the importance of introducing “equity partners” into underperforming state-owned enterprises (SOEs). The problem is that the idea — giving outside investors minority stakes in return for their capital and expertise — isn’t going to fly. There is no sucker unwise enough to take such a deal, especially given the government’s history of abusing minority shareholders.

We proved it first with the introduction of private shareholders at SAA. Back in 1999 Swissair took a 20% stake, but when it became clear that the government wasn’t going to follow through with full privatisation, the Swiss got out.

We proved it again with the much-abused minority shareholders in Airports Company SA (Acsa). That sorry case is now embroiled in litigation as shareholders who bought in good faith in 1999 are still fighting to get the government to buy them out at a reasonable price after a promised JSE listing never happened.

But we also proved the converse with the case of Telkom — it was only once the government relinquished effective control that the company was able to take flight.

SAA and Acsa stand as giant red flags for any investor that would consider taking a minority stake in an SOE. To convince them to do it, government would have to effectively remove all risk. It could do that by giving shareholders the right to sell the interest back without incurring any loss (a put option), or by granting them effective control through a management contract with a giant break fee (which is what SBC Communications had in Telkom until 2004 when it sold out). But these approaches just create inefficiencies without any benefit, apart from easier optics.

Red line

Giving private shareholders genuine control is a red line for many of the governing alliance’s left flank. The main problem seems that SOEs would no longer be tools to deliver the developmental state vision. But the sorry state of our SOEs makes it clear that they cannot be such tools in the first place. The developmental state needs to be fostered by government regulation and investment, not by burning money on large companies in which political contestation undermines their viability.

Scanning the financial results of the SOEs makes clear how hopeless SOEs are for development. SAA lost R5.6bn in 2017, the last year it has managed to produce financial results. SA Express has not been able to produce financial results since 2016, and a horror show is expected.

The SABC lost R621m in its 2018 financial year. Denel lost R1.7bn in its 2019 financial year. PetroSA lost R666m in 2018. The Passenger Rail Agency of SA lost R1.7bn in its 2019 financial year. The SA Post Office lost R1.1bn in 2018. Eskom, the Chernobyl of government finances, lost R20.1bn in 2019.

Add that up and we’re on R31.5bn for the most recent financial years alone (and that kind of bloodbath has been happening annually for several years). The one notable exception is Transnet; it made a R6bn profit in 2019.

Of course, loss-making SOEs pay no tax — they absorb it. The developmental state project would be far more advanced had all those companies been managed on proper commercial principles as they would be in private hands, subject to strict regulation.

Contrast the SOEs to Telkom, which this year generated an after-tax profit of R2.8bn, which the government shares through its 40% stake (plus the government collected R1.1bn in income tax). In 2013, the last year before the government got out of the driving seat of Telkom and left things to the board and management, it lost R11.6bn.

While the state and the Public Investment Corporation (PIC) still hold the majority of the shares between them, the PIC’s interests mostly align with those of private shareholders. The board has managed to secure enough cover for management to pursue proper commercial objectives. The government can now realise value by selling off that stake — the 40% stake is worth R14bn. That value would shoot up as shareholders could discount the risk that the government could introduce non-commercial objectives into the company.

Obviously, there are certain public services that must be delivered by the state, and sometimes state-owned companies are the best mechanism. The SABC is a public broadcasting service that provides an important public good, for example.

But there is absolutely no reason for the state to own SAA, Denel, the Post Office, PetroSA or most of Eskom. The public service requirements from them can be better achieved by using licensing conditions. As far as Eskom goes, its generating assets are obvious candidates for the chopping board. The Renewable Energy Independent Power Producers Programme has proved that if you let the private sector compete to supply the state at the best price, remarkable efficiency and price gains are made.

The last remaining objection to selling the SOEs is employment. Eskom, for example, probably employs 15,000 more people than it needs to. It is clearly the case that Eskom would shed jobs in a financial turnaround. But just think of the destruction to employment that has been caused by Eskom’s dysfunction: the deindustrialisation of the economy on the back of the insecurity of electricity supply and massive price increases has cost us hundreds of thousands of jobs. Bloated, inefficient SOEs are also job killers. It is time to let them go, completely.

  • Theobald is chairman of Intellidex.

Effecting major policy shifts for Eskom will be both a challenging and time-consuming endeavour for government, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured in Fin24

This column was first published in Business Day

Some deep questions are raised by the ANC’s national executive committee statement last week and rotate on the difference between rhetoric and action and the link between the two.

The statement was a rhetoric victory for the reformist forces on the committee with its focus on the microeconomic reforms required, rather than the macroeconomic bulldozering the left would want. True, large parts were already contained in budget speeches but the language around energy was welcome and actually new.

This raised the question — given the huge hold the coal and developmental state lobbies have in parts of the ANC — of whether the committee members knew what they were agreeing to. Or is the statement separate from the discussions and so not reflective? It seems likely that the need to show face to ratings agencies and business allowed all sides to keep disagreements on lockdown.

The messy mix of ideology and vested interests around WOAN that are delaying the huge investment potential by the major telecoms firms is being watched by a broader section of investors and business than just this sector.

Hence, business and ratings agencies will remain sceptical of the post-national executive committee rhetoric until action is seen.

When it comes to action, we need to think about the effect rhetoric has on how implementation occurs.

This can be seen in different ways, with spectrum and renewable independent power producer price purchase agreements contract renegotiation attempts.

With spectrum there is a continual disappointment in the pushing out of likely spectrum auction dates. Yet the rhetoric from the government is totally at odds with this and remains upbeat. There seems to be a desire to promote the idea that a policy path that leads to auctions has been published, yet this is not the case.

A wireless open area network (WOAN) policy framework has been published, but this is open to contestation as well as a lengthy public consultation. Expected dates for spectrum auctions for the large telecoms companies have moved well into the first half of 2021.

The messy mix of ideology and vested interests around WOAN that are delaying the huge investment potential by the major telecoms firms is being watched by a broader section of investors and business than just this sector.

It is an example of where, despite a notional path being laid out, it is unnecessarily long and rhetoric won’t be able to be maintained for such a long period and can actually damage sentiment.

The issue of independent power producer price purchase agreements is more toxic but equally a messy mix.

There are a variety of political considerations. There is a broad political consensus that independent power producers are “screwing” Eskom, which leads to demands for action. Some political actors know the savings will be small but need to save face against vested interests; others want to pummel the independent power producers for ideological reasons.

Eskom has perpetuated the myth, now taken up by the government, that renewable independent power producers made up about 22% of energy costs in SA in the financial year to March yet produced only 4.8% of the electricity.

This is untrue and rests on the odd way Eskom shows its accounts.

It ignores all the rest of Eskom’s costs for debt service, its wage bill and depreciation; these amounted to R30bn, R33bn and R30bn respectively for the last fiscal year. This compares to a cost of R22bn for renewable independent power producers to Eskom. Non-independent power producer primary energy costs (primarily coal) were R77bn in the last fiscal year.

The associated myth is that this independent power producer cost is a drain on Eskom. With the right demand forecasting there is a total pass-through of independent power producer costs to the consumer. Forecast errors may only make a R1bn or R2bn difference which can be recovered the following year from the tariff.

We can see the folly of trying to renegotiate price purchase agreements — it will generate no savings at all for Eskom because it will be passed straight through via a reduction in tariff revenues. Given the small share of total costs within the tariff, it will generate only a cent or two per kilowatt hour savings for the consumer. This is hardly going to rescue the economy as the exercise is positioned. By contrast, cutting Eskom’s wage bill would.

Add to this the faff of renegotiating individual contracts which all sit on different project and funding structures, with the downside of locking in costly independent power producers for longer rather than averaging them out by procuring cheaper new rounds of renewables.

All this leads to a lack of decent benefit/cost trade-off analysis and an attempt to social compact with a group of investors that simply cannot socially compact in any meaningful way. This will be equally as true with disparate coal interests where pricing lowering is also being attempted. As such, the tone of the debate damages sentiment.

All this is happening at the same time as the integrated resource plan is due. This will be a real test of the credibility of a least-cost generation mix promoted in the national executive committee statement. Indeed, assuming the plan is unchanged from the March draft, it will be dead on arrival and require an update straight away.

Last week showed how victories can occur, but maintaining rhetorical momentum is going to be hard without action to back it up or where action is at odds with the rhetoric.

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

Customers put their money where they think it will be safe – hence Intellidex, in its submission to Treasury on economic policy, encourages implementation of the deposit insurance scheme to bolster consumer trust in newer banks. Featured in Business Tech

Is there hope after state capture? Peter Attard Montalto and Patrick Smith in conversation with Mcebisi Jonas, Trade Envoy to the President of South Africa. Register your interest at Invest Africa