While many expected Tito Mboweni to increase VAT, that was not on the table because of its overall impact, says Intellidex’s Peter Attard Montalto on Classic Business

This is a fascinating budget. Finance Minister Tito Mboweni has thrown the kitchen sink at unions and the public sector wage war has started, argues Peter Attard Montalto, head of capital markets research at Intellidex. Featured in Daily Maverick

SA had a budget surplus 12 years ago, but now Tito Mboweni has to raise taxes from an economy in decline

This column was first published in Business Day 

This is the worst of times for the finance minister. But think about the best of times. In 2007, then finance minister Trevor Manuel announced a budget surplus in what was perhaps the most triumphant budget speech since democracy.

“Sound management of public finances and the improved tax compliance culture on which it rests provides us with the resources to invest in our public services, renew our infrastructure, reshape our residential areas, provide water, electricity, housing, sanitation, schooling, health care and access roads to millions who were previously denied these elementary building blocks of modern society” he said then.

We did not know how good we had it. The economy had grown 4.9%; employment had risen 3%; there was a fiscal surplus of 0.7% of GDP. While the global economic environment was positive, there is no doubt that reforms driven by the Mbeki government meant we could take advantage of it.

This week’s budget speech is the toughest since democracy. Tito Mboweni is torn by irreconcilable ends: he must cut back government spending while assuring unions that job and wage cuts are not in the offing; he must convince a sceptical public that the government really is pushing ahead with the structural reforms his department has highlighted, while sidestepping vociferous opposition from some in his own party; he must somehow raise taxes from an economy in decline.

Yet in 2007, the political putsch that ejected president Thabo Mbeki, and ultimately Manuel, was growing. The economic successes had to be undermined through a political strategy. Growth, it was said, was “jobless” even though the unemployment rate had fallen from more than 30% in 2001 to 22% that year. Economic policy was increasing inequality, it was claimed, even though tax revenue had grown 17% in each of the previous three years, financing an unprecedented increase in social spending.

Thinking back is a salient lesson that economic critique is often political, not factual. We can see it now as Jacob Zuma’s desperate effort to avoid the corruption charges he was (and still is) facing and the need to stay out of jail.

The political strategies to undermine President Cyril Ramaphosa and Mboweni include the usual array of economic distortions. It is popular to argue that our problems can be solved by macroeconomic stimulus: shower more money on the economy through low interest rates and greater spending and the economy will magically grow. This argument is an effort in avoiding the more painful work of actual reforms. Pouring water on a bed in which no seeds have been planted will not help.

We first need to fix the bottlenecks and barriers that are frustrating growth. We need to build the infrastructure to support the economy, unlock the private sector now tied up in policy uncertainty over mining, oil and gas development, visas and spectrum, and much else. We need to tackle state inefficiency — shifting operational risk to the private sector where the public service is failing to deliver. (That does not necessarily mean privatisation. The private sector can run state assets.)

This week, Mboweni has no positive news to tell us. Economic growth this year is expected to be 0.6% against a world average of 3.3%. Debt will be about 68% of GDP, likely to rise close to 80% in three years. (In 2007 that figure was 26%.)

We are very likely to lose our last investment-grade rating from Moody’s Investors Service in the wake of the speech. That will increase the cost of raising debt. We are already spending about 4.4% of GDP on servicing debt, and that will grow, sapping resources from growth-enhancing investment and spending on social services.

Wage bill growth

This exceedingly weak environment makes the politics even harder. While Mbeki and Manuel saw the political earth move beneath them in the best of times, Mboweni and Ramaphosa must face it in the worst of times.

There is no way to begin driving the change needed to redirect the economy without winning some political battles. The public service, having abandoned the “sound management of public finances” that Manuel referred to, with 92% of municipalities now unable to receive a clean audit, has enjoyed a wage bill growth of 60% over inflation. The 2.1-million public servants will not willingly accept any reversal in their fortunes. There are, of course, dedicated and hardworking public servants who are trying to fight the scourge, but their task is immense against the venal vested interests that benefit from the status quo.

That is at the bottom of the pyramid, but at the top Ramaphosa faces threats from Luthuli House and beyond, including the rump of former Zuma supporters whose fear of consequences is every bit as desperate as Zuma’s once was.

Mboweni will deliver some easy wins, but on the hard choices all we will get is frustration. The best Mboweni can realistically offer is the hope that this really is the worst of times, that while the path ahead is arduous, it will not amount to continued decline. That perhaps will be enough to maintain hope that one day 2007 won’t be our best year.

• Theobald is chair of Intellidex.

By Peter Attard Montalto

The 2020 state of the nation address (Sona) on February 13 scores highly for PR/rhetoric (an 8/10), actual policy is “ok” (a 6.5/10, being generous), but signs of any shifts towards actual implementation with specific timelines falls flat (2/10 at best). The Sona was therefore a decent speech and a win in those narrow terms and will generate some buzz. That said, only action will move business sentiment.


This is the last stand. There was little choice for the president but to try and press the accelerator on the PR and rhetoric and in doing so he delivered a speech that generated a certain warm glow. It was in truth far too long at 32 pages and exactly 7,400 words, which meant that, while it tried to drive momentum and the feeling of vision through social compacting, this got lost somewhat in the detail.

Part of the festering problem is that so much has been mentioned before, on energy, on Eskom, on ease of doing business and more. The references to building an “operating environment that is favourable to doing business” [the underlined emphasis was theirs in the e-mailed speech] reinforced a somewhat private sector focused speech. Yet recent action on SOEs like SAA and the inability to seriously move the reform dial has shown that this sentiment only goes so deep and will be met with scepticism by corporate SA. Yet the fact that social compacting was front-and-centre showed that leadership in simple logistical terms will remain a long and drawn out process and speed is still on the back burner.


In order to credibly press the accelerator, President Cyril Rampaphosa clearly had to be specific on policy issues. However, what is interesting is that we believe the process to do this was deeply challenging for the Presidency in several areas – especially regarding energy – and so political capital had to be deployed. The president is therefore – despite all the talk of social compacting – starting to strain at the seams and nail colours to the mast. This is the most positive aspect of Sona that we think will end up being under-appreciated. However, it counts for little without implementation as growth and sentiment won’t shift without movement.  

As for the specifics, there is too much ground to cover here so we highlight only a few key takeaways below:


“With an efficient and capable machinery now in place at the centre of government, we will focus on the most urgent reforms and intervene where necessary to ensure implementation.”

There was no particular detail on exactly why existing blockages to implementation would be dusted aside and a general lack of timelines and delineated responsibilities means that the speech offered little to convince that implementation is forthcoming. The phrase above from the speech does not hold up to inspection. We still believe that a proper system of accountability and deployment of political capital is lacking and hence implementation remains exceptionally challenging.

Concluding thoughts

Sona was a victory on the PR and even policy fronts, though it was not revolutionary. Yet we must consider that so much was repetition on last year, that the baseline was always that reform would progress but too slowly to meaningfully move the potential growth dial. Overall, little has changed since before Sona other than the warm after-glow it might be leaving.

The youth employment initiative announced at last week’s Sona will take 1% or R20bn of the 2021/21 national budget and it’s unclear where that money will come from apart from belt-tightening, says Intellidex’s Peter Attard Montalto. Featured in Daily Maverick

This column was first published in Business Day

What happens when the state of the nation address either falls flat or is implemented?

There are two distinct paths before the country. The choice has become more stark because President Cyril Ramaphosa’s speech was a public relations win and scored quite well on the policy front (despite being rather too long), given the specificity of its promises. It thus raises expectations and sets the bar higher than it might otherwise have been.

Indeed, the impression given by the speech was almost of the administration accelerating forwards, possibly into an implementation wall. Such a crash would have profound economic and political consequences.

The problem for the presidency is that nothing that was said in the speech matters except its implementation. Business sentiment is not only weak here but is glued to the floor as a result of ingrained scepticism from past broken promises.

This is not to say that small strategic victories shouldn’t be recognised. One can easily imagine the effort required simply to get the “obvious” statements on the future path of energy policy into the speech, or the ability to mention the Tito Paper at all. These things led to some of the warm fuzzy.

We should also recognise some parts of the speech that may well stretch reality. The number of shovel-ready infrastructure projects, or even just mentioning the public sector wage bill, would be taking a risk if they are shown not to work out.

Yet implementation is going to be hard. It will really test this sentence at the end of the speech which was the key about which the whole thing rotated: “With an efficient and capable machinery now in place at the centre of government, we will focus on the most urgent reforms and intervene where necessary to ensure implementation.”

It is far from clear that this has been true until now. Segmentation between communications, policy and implementation creates problems; so too does a department of planning, monitoring & evaluation that seems to struggle to provide real-time feedback on what is going right or wrong across government. Put simply, information travelling upwards from the bottom to the top, and then accountability from the top back down, is broken.

This is ultimately where the state of the nation address will live or die. The energy policy section of the speech is likely to be the most problematic, both practically and politically.

First, the delays and mistakes made in policy so far have had no consequence management. For instance, the idea that somehow you need to finish round four of the renewable energy independent power producer procurement (REIPPP) before you can start the next round is wrong and should have seen a counter-reaction from high up.

Second, a lack of urgency, because of capacity problems and vested-interest management, should have been stamped on straight away.

Third, speed is needed, and it is not clear from Ramaphosa’s speech that this is understood. In PR terms, you could have had regular public reports back of action taken by the energy war room, yet there has been no sound from them. Equally, the frequent mention of a three-to-12 month period from “notice to proceed” is misleading for the emergency energy procurement round as it may well take six to 12 months to reach this stage through various regulatory approvals.

The presidency will be tested for its capacity to “intervene where necessary to ensure implementation” in the event of further delays or go-slows.

If there are clear signs of the presidency intervening to clear out the political and ideological glue from the department of mineral resources & energy, then business sentiment may well be shocked to the upside if implementation then occurs.

The same applies if momentum around auctioning of the wholesale open access network (known as WOAN) does actually happen. Ramaphosa’s speech referred to this auction happening this year, but this area too is a complex mix of ideology and vested interests.

It is now or never for implementation, especially with the budget coming up next week and the ability to gazette change at any time. Some hard choices over how cadres are deployed in government may well have to be made if there is to be real consequence management for inaction.

The window is closing before the 2022 ANC elective fight gets under way, and it is then that the president’s factional enemies will use the lack of implementation as a weapon.

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

Ramaphosa’s Sona scores a high 8/10 for rhetoric, an ‘okay’ 6.5/10 on policy but falls flat on implementation (2/10 at best), says Intellidex head of capital markets research Peter Attard Montalto. Featured in  Business Tech

The GDPF, IDC and DBSA have finite balance sheets and have to manage their risk. Intellidex’s Stuart Theobald says drawing them in to bail out Eskom is dangerous. Catch the full interview with Stuart Theobald on Classic FM

Intellidex chairperson Stuart Theobald weighs in on Cosatu’s proposal to rescue Eskom. Listen to the full conversation on The Eusebius McKaiser Show on 702

Cosatu’s  Eskom proposal will spark contagion that spreads the financial problems of SOEs into government development financial institutions such as the GDPF, IDC and DBSA, argues Intellidex chairperson Stuart Theobald in his interview on ENCA

This column was first published on Business Day 

Contagion from SA’s state-owned enterprises crisis is heading for its development finance institutions.

It started with a plan tabled by Cosatu two weeks ago that has inexplicably gained some level of support from business to government. It is, however, totally unworkable.

It proposes to shift R250bn-worth of Eskom’s R450bn of debt into a special purpose vehicle funded by the Development Bank of Southern Africa (DBSA), the Industrial Development Corporation (IDC) and the Government Employees Pension Fund (GEPF).

But no-one seems to have considered that this is mathematically impossible.

Let’s think for a moment about what the balance sheets of the DBSA, IDC and GEPF can accommodate.

The DBSA, which has a mandate to fund development infrastructure, has a balance sheet of R89.5bn in assets. Like any bank, it has risk management policies that include the concentration risk it can take to any one entity.

According to its most recent annual report, it has a limit of R500m of exposure to a single government entity. Its board recently allowed an exception to that to lend R3.5bn to SAA with a sovereign guarantee, a move that has already weakened the overall risk position of the bank.

While the DBSA is not subject to the Banks Act, the concentration risk guidelines set by Basel 3 would be a line it can’t cross without risking a run on its own funding. Basel 3 limits the maximum exposure a bank can take to 25% of its capital, which works out to R9.2bn for the DBSA. Given that the DBSA already holds Eskom debt, some of this exposure is already deployed.

Moving on, the IDC has a mandate of funding industrial development. It has total assets of R144.6bn. Its own risk framework specifies, in line with Basel 3, that it can take no exposure to a single industry of more than 25% of its capital. That works out to R24bn.

But given that the IDC has been a major funder of power projects, it is already heavily exposed to energy generation, so less than half this limit is likely to be available for further exposure to Eskom.

The GEPF seems to have serious firepower with over R2-trillion in assets. But it also has to apply prudent risk management.

According to its latest annual report, at end-March 2019, it already holds R84.5bn worth of Eskom bonds, which represents half of the public sector debt it holds, and 15% of the entire debt asset allocation of its portfolio. This is already a substantial concentration. The GEPF cannot absorb more exposure without stepping far from acceptable investment risk management practice.

The GEPF is a defined benefit pension fund. This means that its members are not exposed to the financial performance of its investments. The government guarantees the fund. So any shortfall it faces must be covered by the national budget and therefore, the taxpayers. While Cosatu has suggested that using the GEPF represents the workers coming to the party, it is nothing of the sort.

It merely transfers additional risk onto the government balance sheet. One suggestion has been to convert the R84.5bn of debt the GEPF holds into equity. But the resulting equity would have to be valued at zero, representing a claim on a company that has been losing billions, so the government would face an immediate contingent liability of an equivalent amount to make good GEPF’s funded status.

But even if the GEPF doubled its Eskom debt exposure, taking it into unacceptable risk territory, the three institutions between them would not be able to absorb even R100bn of Eskom debt. That is not even half what Cosatu imagines.

It is astounding that the plan has gone as far as it has, despite this obvious maths.

Cosatu has also suggested that prescribed assets could be used to compel the private sector to take on exposure. Prescription is required when the normal risk and return features of an asset do not justify investment by institutional investors.

While the GEPF is a defined benefit scheme, many of those that would face prescription are not, so workers would be facing a loss in the value of their pensions. Prescription is a stealth tax on savers.

The question is whether it is optimal to use such a stealth tax, or alternative taxes including VAT and income tax instead. Given the damage prescription will have to normal financial market incentives and to the savings of pension members, alternatives should be considered.

Cosatu should be concerned about the existential threat to the state’s solvency. The one sure way that pension members will lose is if the government tips into bankruptcy. There would be a dramatic curtailment of worker’s benefits.

Cosatu has clear motive to bring ideas to the table, but they need to focus on what matters: government solvency. A good suggestion would be, for example, to accept a wage freeze in the public sector for three years. That is the kind of move that would contribute to avoiding total calamity and eventual collapse into the arms of the IMF.

So what should be done about Eskom’s finances? The one option the government seems to be ignoring is to reschedule the Eskom debt. That means forcing Eskom’s debt holders into more favourable terms. It could do that by switching Eskom bonds into sovereign bonds with different terms, removing debt from the Eskom balance sheet onto the national balance sheet.

Simultaneously, it could seriously embrace green financing facilities from around the world that would provide it with discounted funding while following through on the Eskom restructuring it has promised.

At least such an approach would avoid adding the development finance institutions to the list of financial disaster areas in the public sector.

  • Theobald is chairperson at Intellidex
The scale of unemployment and inequality in SA is such that you cannot “start somewhere” with large set-piece investments and hope things percolate downwards.

This column was first published on Business Day 

SA has its own odd version of the “economic calculation problem”.

The problem reflects that the lack of a price mechanism balancing supply and demand cannot be replaced by a full knowledge of the economy in a socialist system and trying to count and record demand and supply through other means.

While some on the Left in Pretoria might well study the original problem, the SA version was recently displayed at the UK-Africa investment summit and last November at the annual SA investment conference.

The pitch was off but there was a strange belief evident in the countability of individual investments: if you just have more individual commitments from individual companies with rand amounts attached, and more hands on which to count them, you will be fine. In this conception, because a certain company is investing in this industry and another in another industry it’s a sign of life in each industry. Never mind if a handful of other investors have turned down opportunities or become frustrated and put plans on ice.

The countability of investments is a bad thing. Investment should be occurring from uncontrolled optimism about the economic prospects of the country, facilitated and channelled by a capable state providing an appropriate foundation.

The scale of unemployment and inequality in SA is such that you cannot “start somewhere” with large set-piece investments and hope things percolate downwards. What is needed instead is bottom-up foundation of uncontrolled investment.  Investment in small, medium and micro enterprises (SMEs), which is exceedingly hard to count, should be the goal, and with it higher jobs intensity.

It is ultimately a government mindset thing, and partly why there is so much business frustration with the government and so a gluing to the floor of business sentiment.

Sentiment is so low because the private sector doesn’t understand how the government’s counting of investments and attempt to “count” what is going on where fits with their much more profound need to reduce uncertainty and shift the benefit and cost dial of investing.

The lack of X factor at the UK-Africa investment summit (and seen too in Davos) was telling. There was no “Have you seen the Kenyans?” in hushed whispers of excitement about SA — despite some interesting companies present at the exhibition in the summit. Speaking to people around the edges of the summit — private and public sector investors, international and regional development banks — it was evident there was a lack of interest in SA.

Delving further into why showed not necessarily a hugely negative view on SA but a weariness of endless foot-shooting and missed opportunities. This was particularly the case for investors with huge amounts of capital waiting in the wings to invest in new rounds of renewables procurement who are agog at the fact there is an energy crisis yet a world-class procurement system is laying idle.

Among manufacturers and retailers and those in-between, there was a sense here that though SA has decent infrastructure and a sound financial system, it lacks a meaningful pitch for its cost-effective integration into the African Continental Free-Trade Area (AfCFTA), while other countries in the West and the East are pitching integrating regional supply chains that can be linked up across Africa with AfCFTA — giving a sense of scale.

Lost decade

This was compounded by the official pitch coming from the department of international relations & co-operation: “We want your investment but if you don’t invest, we will do it on our own” — to paraphrase minister Naledi Pandor at one event — was a bizarre off-the-cuff remark when you have such low savings, and a skills and employment problem. No, you can’t do it on your own — you need money from abroad and the skills and technology that comes with it.

Similarly, the lines that SA is “fixing” the lost decade is not as exciting a pitch as other countries simply asking investors what sort of environment they need, and reforming.

The final line of the pitch, however, has been repeated continually in recent years: “We are an exciting country that is full of potential as we overcome the legacy of apartheid.” No, you cannot use this 25 years after the event when so many other countries on the continent have far more recent traumas they are overcoming far faster (think Rwanda). The “charity case” line does not work with investors and looks bizarre.

Investors respond to countries with an X factor pitch that shows action, reform and shifting the cost-benefit dial. It’s not difficult. Get it right and you won’t be able to count the pledges.

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