Moody’s downgrade of SA is ultimately the result of a lack of progress on turning around growth – that shouldn’t be forgotten as we endure the coronavirus crises, Intellidex’s Peter Attard Montalto told Power FM.
By Mmamoletji Thosago
The coronavirus is carried by people and their movement enables it to spread exponentially – where one infected person potentially can transmit it to, say, two or three people, who in turn each spread it to two or three others. The real danger is that symptoms take anything from two to 14 days to appear (reports on this vary), so people can spread it unwittingly and that is why it is so difficult to curb its spread.
Multiple countries have initiated national lockdowns as a solid strategy, with SA’s lockdown beginning at midnight on Thursday night. Semi-formal and informal trading zones are likely to be the hardest hit economically during the lockdown. We anticipate that the lockdown in SA will have to be extended and the more prolonged it is, the more damage it will do to our already fragile economy. A critical concern is that post-lockdown recovery strategies have not been communicated by government.
Between Covid-19 being declared a national disaster on March 15 and President Cyril Ramaphosa announcing a lockdown starting at midnight on 26 March, I casually observed several densely populated areas, particularly trading zones. This follows my earlier blog when I scoutedthree townships and one Johannesburg downtown market on 15 March.
Midvaal, Meyerton Municipal clinic; theme: last-minute medical check-ups and procedures
Patients are sanitised as they enter the gate and medical staff occasionally wipe door handles. People are seeking medical attention before the lockdown. The majority are from townships around Meyerton.
One pregnant Malawian lady stands outside a door marked “mother and child”. She speaks little English and does not understand any local languages. The medical staff are on a hunt for anyone who is from Malawi to interpret – there are over 120 people including children here, it is not even 8am.
The young man I am sitting next to is from Kwekwe, a small town in the Midlands province of Zimbabwe. He is getting his wisdom tooth extracted prior to the lockdown. The lady on my left is from the neighbouring township and she is also having a wisdom tooth extracted. She tells me she does not want to be stranded during the lockdown.
Wednesday late afternoon
Ekurhuleni, Katlehong; theme: no economic safety net
Rasta’s eatery is usually full around this time as patrons come by to grab an early dinner or late lunch. The eatery sells traditional meals. Today, there are two patrons, in sharp contrast to when I was here on 15 March. Our eyes meet and he immediately puts his hands together and nods, we cannot shake hands. “How are you doing today, ntate Rasta?” – me. He points to his two customers and responds by giving me an update. Business has not done well since lockdown announcement, he tells me. He needs to pay labourers’ wages and feed his family for the next 21 days without the eatery operating. He will be cash strapped.
Johannesburg, Newtown taxi rank hair salon; theme: will there be a safety net for migrants?
KB is from Nigeria; she tells me her contract is on a no-work no-pay basis. With the lockdown occurring tomorrow at midnight, she will use the money she made this week to stock up food. She will be staying with her fellow country men and women and rely on social capital to get by.
The salon owner, also from Nigeria, tells one of her customers that should the lockdown be extended, the South African government might prioritise citizens over migrants.
Wednesday early evening
Pretoria CBD; theme: these vegetables should be sold before lockdown
I usually buy vegetables across from the bus stop, it is convenient for commuters. The difference today is that the street vendors have stocked more vegetables than usual from the Tshwane market. The problem is, if they do not sell by Thursday night, they won’t get another chance to sell the perishables.
Thursday early morning and late afternoon
Pretoria North town; theme: mayhem, earth is closing tomorrow
Retailers are adhering to restricting stores to 100 customers; trolleys and customers are sanitised. Customers are queueing outside, but no one is keeping to the one-metre distancing standard. Shelves are either empty or nearly empty, including those reserved for essential items.
The gas store owner is turning people away because he ran out of gas – but the lady behind the counter gives me a tired smile and advises me to leave my bottle and come back at 16H00. I think she just extended me a favour but my gas cylinder is only 3kg. Gas is an essential and the store has been granted permission to sell during lockdown. Oom, the owner, has not figured out his lockdown trading hours, but he will gauge how the store operates during normal trading hours – clearly his assumption is that customers will not be using public transport. Oom tells me that he can allow only two customers into the store at a time. Failure to comply might result in store closure during lockdown. There is a Coca Cola 2-litre bottle filled with green liquid – he tells me he made some sanitiser spray.
I have not witnessed war, but I have read a couple of books and watched several Leymah Gbowee documentaries/talks; this feels like war, an invisible war. We are fighting a virus in our highly unequal societies. Our small towns, township and downtown economies thrive through semi-formal and informal operations. These operations will be closed during lockdown which will increase economic distress, force company shutdowns, increase labour layoffs, heighten food insecurity, etc. There is a need for interventions for small town, township and downtown-based vendors to get by through the lockdown, irrespective of their nationality.
Rapid intervention suggestions
Self-employed in the informal sector
Rotating savings and credit associations, referred to as stokvels in South Africa, are prevalent across dwellers and vendors in townships, informal settlements and downtown areas. These should have distribution systems adjusted to ease lockdown economic pressure.
Typically, payouts are either on a monthly basis whereby one member receives that month’s savings, or the stokvel funding is distributed during specific holidays to all members. For the lockdown period, distributions should be made as if making use of the holiday payout procedure.
Vendors in stock-buying stokvels should consider using a portion of their savings for this period.
Traders who are non-stokvel members will have to be given safety nets by government (see below).
When offering government support to households and businesses during the shutdown, we should cater to migrants as well. We should always avoid coming across as being xenophobic. This is a chance for South Africans to exercise humility to all migrants, documented or not.
Business closures: labourers’ protection
Some of the businesses in downtown areas, small towns and townships have employees. Owners are responsible for wages and salaries during the lockdown. Some businesses are even tax compliant.
Government should consider foregoing business VAT payments during the shutdown period; these VAT payables should be paid to employees who might lose their jobs during lockdown or employees who are not paid during lockdown (however, payments need not replace UIF claims).
Tax grants can also be offered to SMMEs for a set period. These should be directed to labourers as wages and salaries.
Set an emergency government aid for:
Small town, downtown and township-based registered businesses losing a set percentage of revenue due to the shutdown should be granted permission to apply for employee wages relief.
The same applies for persons who are self-employed but have no labourers.
Overall, a post-lockdown strategy from the government is urgently needed. Failure to secure and implement one might lead to an economic collapse and, in all probability, to social unrest as unemployment surges (which might increase by at least 1.1-million due to Covid-19). We cannot deny that the formal sector, particularly the banking sector, might be the quickest way to revive the economy. However, in so doing, we dare not neglect the semi-formal and informal sectors.
The government will attribute slow growth and recovery to the coronavirus and low global demand.
SA won’t be surprised by the Moody’s Investors Service downgrade — such has been the boredom in having to continually discuss it for three years.
It is tempting maybe to think in this coming week that everything is “fine”, because the impact will get lost in wider coronavirus volatility in markets and was surely priced in anyway.
Yet these views are wrong. The downgrade still has real impacts. There are cliff-edge events that occur with a downgrade — especially in how both the government and companies deal with offshore creditors, the pricing and terms of borrowing in junk. Equally a non-linear event like this can never truly be priced in and there is still an expected R5bn of outflow to occur in two segments — this week, and then at the end of April when SA actually falls out of the World Government Bond Index.
However, all this misses the point — there is blame and it needs to be apportioned.
This may well sound unnecessary in the current times of turbulence and lockdown. Yet if anything it is doubly important for blame to be processed in the proper way so the correct lessons are learnt.
The coronavirus crisis exposes the underlying economic vulnerability. Removing these vulnerabilities and shifting the cost-benefit of doing business in SA in the post-crisis period is going to be crucial. The ideas are not new — indeed they are the same and we end up sounding like stuck records — structural reform, the Tito Paper and so on. It’s all there already. The National Treasury and finance minister Tito Mboweni have worked tirelessly to try to push reform yet been rebuffed.
To shift the risk reward for business to drive the recovery means a fundamental mindset change is required. Some ministers are going to have to be fired for being deliberate blockages to reforms.
The government has a habit of wrapping itself back in on its own spin. Recent utterances from the top down have placed the blame for low growth on the 2009 global financial crisis for instance. We are likely to hear now that low growth and a slow recovery is blamed on the coronavirus and lower global demand.
This misses the whole point. SA has performed so poorly in recent years, and will perform so poorly during the next recovery phase precisely because the government has chosen — yes actively — not to take the necessary reform steps to have a more dynamic and flexible economy that grows faster and creates more jobs instead of being more concerned with vested interests and political balancing.
Moody’s did not downgrade because the economy was left at the end of the Zuma administration in a weak place. It downgraded because it has failed to make enough progress in the two years since when the space was available to turn the trajectory. Interestingly and importantly Moody’s laid out the lack of reform that has occurred but also specifically mentioned energy policy.
Energy policy is where the solutions have been laid out continually and publicly by experts who have been dismissed as technology evangelists. Energy is also where speed has been completely lacking, no real sense of crisis seen as a kicker to action and the risks of corruption being introduced has (rightly) kept civil servants risk averse. The recent scheduling of a new Schedule 2 to the Electricity Regulation Act is not even close to the liberalisation that was promised in the state of nation address and is a distraction.
The risk now is that the government will only be able to think sequentially and the coronavirus outbreak implies all reforms will be pushed back by at least six months. That will raise the risks of a likely second downgrade by Moody’s in the next year, as well as other agencies also cutting sooner.
The strong leadership on the coronavirus by the president provides the perfect platform for pivoting into sweeping reforms. Yet with the coronavirus all social partners are facing in the same direction. That isn’t the case on structural reforms. Hence we remain deeply sceptical that the reform will progress. It would require cutting loose traditional partners and comrades. It would require an end to social compacting — the doom tool that is partly responsible for bringing us to this point.
The alternative has been played out after previous shocks to the economy. A permanent loss of output (maybe about R300bn in 2020 prices will be permanently lost) and a permanent loss of jobs is likely to happen — up to 1-million jobs could be lost. Such shocks would create societal problems.
The Treasury and the SA Reserve Bank are likely to have to take additional, previously unthinkable, steps in the coming weeks to keep the show on the road. An emergency budget, large-scale guaranteeing of new bank lending to stimulate the economy and “real quantitative easing” are all likely to come eventually. But we should not forget that what happens in the short term will largely play out regardless.
The choice really comes about the style of recovery SA wants — at the moment it is still looking like one hand will be tied behind the economy’s back.
• Attard Montalto is head of Capital Markets Research at Intellidex.
The impact of the coronavirus on banks’ balance sheets, as they offer repayment relief, can be managed with the right regulatory frameworks – and banks have to work with regulators to ensure that is done, says Intellidex’s Stuart Theobald on kykNet.
The Reserve Bank buying government bonds for corona relief is a major and necessary crossing of the rubicon, says Intellidex’s Peter Attard Montalto on The Money Show with Bruce Whitfield on 702.
By Peter Attard Montalto
The president’s response to the coronavirus has been solid while the Reserve Bank upgraded its response to bazooka-level; but the economy still faces severe contraction, says Peter Attard Montalto, Intellidex’s head of capital markets research.
The 21-day lockdown to slow the spread of the coronavirus will have a severe economic impact – and there is a strong risk that the lockdown will have to be extended. President Cyril Ramaphosa announced the lockdown and some economic support measures in a well-received, robust and very clear speech on Monday night, which clearly saw him stepping up to the plate on a range of issues, related both to health and the economy.
It was a dramatic move but a strong response, because SA is acting before the first local death from Covid-19 and at a much earlier case load than other countries taking similar measures. This shows resolve certainly, but we should also be cognisant of the much higher underlying risk in South Africa related to health issues, poverty and seasonality.
While a lockdown is enforceable in middle class and affluent areas, the key will be in townships and the informal economy. These large and densely populated areas see poor living conditions that will be hard to patrol and where basic services (such as shops for essentials) can be some distance away. We therefore are sceptical of the effectiveness of such a move in these crucial areas. That is not to say there was any other option – we don’t think there was – either in terms of the epidemiology or the politics; the point is that we should not expect this to stop spreading, merely to slow it down.
Testing will be ramped up during the lockdown to identify and isolate pockets of outbreak more effectively. However, of the 12,800 tests carried out so far, we believe 80% or so have been in the private sector. The public sector, while increasing its rate, is still not near to hitting the required rate of 5,000 tests a day. As this starts to happen, however, we should get a better idea of intra-township spread, which is crucial given that is also where the highest prevalence of underlying respiratory illness is. This will initially cause a marked steepening of the case curve.
The economic impact will be severe, clearly, with all businesses except essential services being forced to close. This includes mines and all industry except those involved in refining, food and medical supplies manufacturing. Banks will still be able run but only with core-function staff.
However, the ability for traders locally to still operate and the JSE to remain open is an important point to recognise.
The severe suppression of economic activity for three weeks would represent a drop of 5.8% from full-year GDP. Consumption of essentials will remain while some output will happen for the manufacturing of essentials. Trade will largely stop but agriculture will not. However, many parts of GDP will be displaced and not lost (for instance with mines, where we have often seen decent recovery curves after loadshedding over a period of three to six months).
Economic stimulus package
Ramaphosa announced a set of economic interventions and the Reserve Bank is contributing with the emergency measure of buying an unspecified amount of government bonds, with varying maturities, to ease the liquidity crunch. It is the first time the Reserve Bank has intervened in the bond market in such a manner.
In a statement the bank also said it would offer repurchase agreements, or repos, for periods of seven days to longer-term maturities of up to 12 months.
After deteriorating liquidity conditions and the bond market becoming effectively dysfunctional this week, the SARB has decisively stepped up to the plate and upgraded its tool kit to a bazooka.
After the repo rate cut last week and then the Reserve Bank’s liquidity measures announced on Friday (which were incentives and optionality-based for banks only), more was clearly needed. Liquidity needed to be forced into the system and the bond-buying programme offers that. It pumps cash directly into the secondary market and adds a backstop bid to the market where there hasn’t been any in recent days.
This is a programme announcement, it gives the SARB the option. We think it will indeed be doing this in the coming days and weeks, but the expansion of the tool kit is the announcement, not a firm commitment it is doing it. This difference is important. The SARB wants to keep this open-ended, unlimited and mysterious. The “fear” factor works to its advantage (the bonds immediately reacted positively) and it reduces the amounts that need buying as a result.
Looking at the economic measures announced by Ramaphosa, it is very hard to describe this as a stimulus. The broad takeaway is, as expected, there is no macro-fiscal stimulus into the economy given the lack of funding space. We also don’t really see this providing meaningful support to prevent a deep fall in GDP in Q2, but more that it creates a lessening of the existential question for SMMEs in particular and an up-ramp for recovery by keeping businesses alive and people employed.
There is actually very limited call on fiscal resources at all at this stage. We look at this below.
The measures were:
A private sector-led Solidarity Fund which is being seeded with R150m of fiscal money (we believe this comes from the contingency reserve) plus R2bn from the Rupert and Oppenheimer families. Estimating the total size of this at the end-point is hard but we could see it reaching 10bn in total if the South African diaspora contribute in a meaningful way. In macro terms this is small.
An informal sector support net, though no details were forthcoming.
Early payment of some social grants.
The existing Temporary Employee Relief Scheme will be utilised to extend relief to companies and prevent layoffs (this was already announced on 17 March with no clear additional resources yet).
Sick pay will be paid through the Employee Compensation Fund (existing, so no clear additional resources yet).
Commercial banks are exempted from the Competition Act to enable a unified approach to forbearance – we still believe this is the main route to support into the economy in significant multibillion-rands.
Work to unlock the UIF funds for payment is ongoing. This would not be a new fiscal resource but would involve tapping the 150bn net asset surplus the fund has with easier rules.
The Employment Tax Incentive will be extended to provide 4-million workers with a subsidy of up to R500 a month, where they earn less than R6,500/month, for a maximum of four months. This is a fiscal cost of R8bn, which will have to come from internal rotation under the existing expenditure ceiling.
SARS will accelerate reimbursements and tax credits, changing from twice yearly payments to monthly (this is fiscally neutral but will help liquidity of firms).
Firms with less than R50m turnover will be allowed to defer 20% of PAYE liabilities for four months and an unknown portion of corporate income tax payments for six months. This is expected to target 75,000 SMMEs. This is broadly a transfer of liquidity from this fiscal year to next. We will watch this closely: tax holidays are likely to be an area to be bolstered into tax write-offs as things worsen, we believe.
Government is exploring the reduction of UIF and Skills Development Fund payments by firms. This is likely to be in the order of a few million rand – hard to say at this stage, but it would not affect the core fiscus.
A R500m SMME fund by the small business development department, which had already been announced.
A R3bn IDC fund for industry support (expected to be for larger businesses and is not on the balance sheet for the fiscus).
Tourism department will add R200m to its existing support fund (expected to be within existing budgets).
Overall then, we can find only about R8.125bn in new spending, with possibly a few billion rand more for employment relief yet that is yet to be defined, some deferments through tax holidays and about 13.7bn of other funding. These numbers do not move the dial at the macro level.
Like in other countries, we expect authorities to come back with more iterations week by week as the impact is felt and the political pressure builds. We should therefore expect more to come, just as we expect an off-cycle April meeting of the Reserve Bank’s monetary policy committee.
Vodacom, has agreed to cut its data prices following the Competition Commission’s data services market inquiry. Although the network provider has succumbed to two price cuts, the first on 1 April this year and the second a year later, it is still adamant that greater data cost reductions could be achieved should spectrum auctions be rolled out. We agree. Limited supply is bound to increase tariffs, among other factors. Moreover, we argue that delays in the spectrum rollout are having a major impact on key socioeconomic activities including in relation to digital television – visual communication and information is vital.
The rollout process of the International Mobile Telecommunications, referred to as high-demand spectrum allocation, began in 2006 when the Independent Communications Authority of South Africa (Icasa) sought written comments on procedures and criteria for issuing and granting a radio frequency licence. Minimal milestones have been achieved since then with a substantial one being Icasa’s announcementthat the spectrum licensing process was scheduled for the second quarter (April-June). However, the 13-year delay places South Africans at a disadvantage; we are far behind other countries in rolling out policies aligned to spectrum such as shifting from analogue terrestrial television to digital broadcasting. Namibia and Botswana are already ahead of us on this aspect.
We have particularly noted how foreign equity investors saw the negativity from South African telecoms companies during 2019 as a much broader and deeper sign of the negative shift on the reform trajectory.
As a key bellwether, we have also pointed investors towards the fact that spectrum has been one of the few areas where President Cyril Ramaphosa has deployed (some) political capital in order to move the WOAN and high-demand spectrum processes in parallel. This is an area with many vested interests. Yet as we shall see below there is still a long path ahead.
Icasa announced that spectrum licensing would begin following three months of public submissions closure (closure was on 31st January 2020) and Ramaphosa affirmed the announcement in his state of the nation address (2020 SONA), saying Icasa would conclude licensing by end-2020.
The set licensing date for commencement is not far apart from that of switching from the current analogue television system to digital terrestrial television; the cabinet-approved digital migration date is July 2020; date approval was prior to coronavirus outbreak. Given coronavirus (covid-19) outbreak, we predict a further delay for at least six months.
Although we are undergoing a pandemic, delaying policy reform, including spectrum, is not advisable. More so as employees who are granted leeway to work from home need high speed Wi-Fi, a critical input for rapid information and communication on covid-19.
Spectrum relations to digital TV
The current analogue television system “requires a large amount of bandwidth to transmit picture and sound information” while digital terrestrial television requires less bandwidth and recent generation technology, i.e. 5G, would be more effective than 3G and 4G. Migrating towards digital terrestrial television would increase the demand for spectrum. The global international digital migration deadline set by the International Telecommunications Union (ITU) was in 2015; SA still doesn’t seem to be close to migrating.
Sport broadcasts and licensing
Sport channels planning to restructure and use internet instead
Although SA’s timing might be off given that we missed the 2015 ITU deadline, we can console ourselves by arguing that reducing data prices and implementing digital migration coincidentally is occurring as sport channel airings are shifting from pay TV to over-the-top (OTT) media services – we got lucky. Spanish La Liga launched its OTT selected sports platform in March 2019 and the Union of European Football Associations (UEFA) unveiled its OTT in June 2019. In 2021, UEFA plans to air its Champions League matches via the OTT platform; this could potentially reduce the uptake of pay TV (such as MultiChoice’s DStv).
Delaying policy reform could be fatal as uncertainty and lack of confidence are anathema to investors and business. We cannot afford to cross our fingers and hope for the kind of luck we had with spectrum and falling data prices. This blog has merely highlighted spectrum delays; a topic we’re interested in exploring as a follow-up is that delayed spectrum distribution based on old regulation raises risks of first-mover advantage resulting in oligopolies and high market entry costs.
Delaying reform, including spectrum, would place SA at the risk of nonrecovery post-covid-19. Therefore, government need not slow policy reform further.
This is war. There is a health front, but also an economic front. Saving the economy will require wartime thinking.
Start by considering the radical steps other countries are taking.
The UK government last week announced that all workers whose jobs are made redundant because of the Covid-19 pandemic will be paid 80% of their salaries by the government up to £2,500 a month (R50,000).
Businesses and the self-employed have been given a six-month extension on paying income taxes to January 2021 and three-month VAT holiday. The government and Bank of England have created a loan scheme allowing the central bank to lend directly to large companies that face liquidity strain while bank loans to small companies will be 80% guaranteed by the government.
The government has put up £20bn of grants to cover rent and business rates that companies cannot afford. The Financial Times believes the direct costs will be £43bn assuming only 1-million workers end up on the salary support scheme.
Add in the loss of tax revenue from a recession and the UK budget looks set to require an additional £100bn of funding this year, equivalent to 2% of GDP, because of Covid-19. And that is before any direct bailouts of companies including the possibility of direct investments in airlines and other firms that are facing collapse.
The Bank of England will be effectively printing money to support the loan schemes and other liquidity measures it is taking, after cutting interest rates to 0.1%, the lowest level.
That is what economic warfare against the economic impact of the virus looks like. The UK’s measures are the furthest yet by a developed country, but those by Italy and Spain are similar in scope and ambition, while the US is preparing wide-ranging interventions too.
The resulting budget deficits are likely to be bigger than those experienced during the financial crisis, approaching levels not seen since World War 2.
In SA, however, the response has been tepid.
The Reserve Bank’s 100 basis points interest rate cut last week was substantial, but the press release with it was surprisingly “business as usual”.
There was no “do whatever it takes” rhetoric that authorities elsewhere have offered the market. Oddly, the Bank waited until the next day to announce new liquidity support for the financial markets, an announcement that could have been made together with the rate cut to show it means business.
Over at the government, there have been talks about talks, but no real solutions delivered. The president was due to speak as this column was going to press, after meetings with business, but expectations of sweeping government-led interventions such as tax payment holidays or loan guarantee schemes were low.
Of course, warfare is hard when SA’s arsenal is empty. After years of low growth, government debt levels are already at record highs]. The economy was already in crisis with growing unemployment and companies struggling. SA does not have the luxury of the low interest rates of the US and Europe.
Indeed, the crisis has already forced government bond yields higher and risks are rising that its already higher-than-usual fundraising requirements will not be met by the market.
There are certainly some pots of money that can help. The state’s R5bn contingency reserve will barely scratch the surface, but the R150bn surplus in the Unemployment Insurance Fund is an obvious opportunity to mitigate some of the employment effects. A further R35bn of emergency spending could be accessed if a state of emergency were declared.
The Reserve Bank can use its liquidity windows to further support the financial system. Banks could be supported with a special rate window (repo less 100 basis points, say) specifically for Covid-19 liquidity they could use to provide forbearance to clients in trouble because of the epidemic.
Standard Bank said it would provide a payment holiday for certain categories of clients including students and small business. It is the first bank to do so. However, it is administratively complex for banks to provide relief to clients.
Accounting rules require banks to raise provisions if clients fall behind, but there is some wiggle room for clients who are granted forbearance before they miss any payments (so, actually, getting ahead of client defaults with forbearance is wise).
Otherwise, banks must find a way to get clients into new loan agreements with more relaxed terms, a huge administrative burden. Regulators need to work with banks to temporarily relax accounting rules, so they don’t have to raise provisions for Covid-related forbearance.
Regulations in terms of the National Credit Act may also need to be relaxed so that banks don’t have to apply the usual affordability assessments in rescheduling loans. Getting this right would require co-ordination between the Reserve Bank, the Treasury and the department of trade & industry.
That, however, seems like something a war footing should already have achieved.
While a 100 basis-point interest rate cut is going to provide some support for the economy, that support is really going to be marginal, says Intellidex’s London-based head of capital markets research Peter Attard Montalto. Listen to the interview on CNBC
While SA may end up with an official coronavirus rate which is relatively lower than peer countries, the pandemic may trigger an Eskom “shock” and shrink the economy by 2.4% this year, says Intellidex’s Peter Attard Montalto. Featured in Fin24
SA hasn’t saved for a rainy day nor has it implemented the right structural reforms to accelerate economic growth – and this does mean a Moody’s downgrade, says Intellidex’s head of capital markets research Peter Attard Montalto on 702.
By Mmamoletji Thosago
There is an urgent need to slow the spread of the coronavirus (Covid-19) in SA, irrespective of location. Urban areas likely to be hardest hit. Townships and informal settlements accommodate the majority of those urbanising from rural areas as well as migrants from other developing countries. The coronavirus thrives in crowded zones.
On Sunday afternoon I scouted three townships and one Johannesburg downtown market to casually assess preparedness.
Johannesburg downtown market; mood: ready
The Kwa Mai Mai market seems prepared for a Covid-19 outbreak. This is predominantly a medicine market after all – traditional medicine. There are also food stalls, traditional healers, traditional clothing venders, informal car washers, a tavern and primary boarding school. I noticed that all food stalls have water basins and soap. Across the street there is a running tap – works well for car washers but anyone can make use of it, so I washed my hands using a car washers’ green dishwashing liquid, which is used as a car soap.
Ekurhuleni; mood: business as usual, no urgency
Sadly, I do not find any Covid-19 preparations in Katlehong and Thokoza township markets in Ekurhuleni, despite these markets being adjacent to several health clinics. Economic survivalist mode has taken the upper hand here. The food vendors have wet hand cloths but that is inadequate for the virus outbreak. From casually conversing with Bo mma (female food street vendors), I’m informed that business has always functioned this way and they can only stretch a rand so far.
Across the road one guy is sharpening his skinning knife between two pavement bricks. No, he does not rinse it. He skins iskopo (cow head, a food delicacy for men – cultural symbolism is that men are heads of the homestead), with that same unwashed knife. There is no running tap close by to wash it.
I need to use the bathroom and go down the road to the nearest petrol filling station. Bathroom usage is charged at R2; the door has a slot just for R2 coins. I feel cheated: there’s no toilet paper, the toilet does not flush properly and the soap dispenser is empty. If you do not walk around with toilet paper and a hand sanitiser in your bag, you are in trouble.
Vilakazi Street, Soweto; mood: not losing the market to Covid-19
Vilakazi Street attracts tourists interested in township apartheid history. Its restaurants and that helicopter/wax statue place are fully prepared. There are water, sanitation and hygiene (WASH) items including hand sanitisers and wet wipes. These restaurants are owned and managed by locals and they are aware of and practising ways to reduce the virus’ spread. I will be having dinner here, there is a reasonable African cuisine buffet special plus I can use a contactless payment method when settling the bill. Most importantly, I can wash my hands.
Rapid awareness coupled with concrete intervention is needed to curb transmission as much as possible. Critical experience from China is that during the initial outbreak in Wuhan, the response was not rapid and the virus spread swiftly. Across the rest of China, rapid response was applied and transmission cases dropped. Based on my Sunday afternoon observations I suggest the following rapid interventions:
Rapid intervention suggestions
Governments need to have a unified message across all spheres and platforms. This should curb the emergence of misinformation and fake news.
Awareness posters should be displayed at taxi ranks, bus stations, train stations, open markets, street poles and places of gathering such as community halls, churches, schools, etc.
Municipalities with public Wi-Fi hubs, such as Tshwane (Tshwifi), should forward awareness video clips to municipal account holders’ cellphone numbers.
Water and sanitation (WASH)
Water and soap are not readily available in the informal sector, including at food vendors. Some areas are underserviced, particularly informal settlements.
Government should make use of community care givers to distribute hand sanitisers door-to-door including to informal traders. Some would be from the Isibindi programme, whose child and youth care givers are already trained to deal with households infected and affected by HIV/Aids.
Build trust and assurance with communities
Train and educate community leaders. They are often asked for advice.
Inform communities about the symptoms and the importance of self-isolation and teach them about the procedures to get screened and treated if symptoms develop.
Ensure communities that updates on family members in quarantine will be maintained.
Respect community cultures while also limiting spread – lessons from the Ebola outbreak revealed that handling the deceased during burial rituals without protective gear increased spread. Ensure that the deceased are buried in a safe yet culturally dignified manner.
Establish mapping tools for monitoring purposes. For instance, exchange information with pharmacies on sales to track spreads, especially for newly infected locations.
Zone hotspots: clearly mark red and green zones to ensure rapid response in critical zones.
The R5bn fiscal contingency reserve and R35bn s16 PFMA emergency expenditure limit should be used for rapid investment into healthcare and for necessary equipment purchases such as ventilators – especially into township and informal settlement areas that will be most affected.
School principals and teachers and school governing bodies should be trained and informed about Covid-19.
Posters on symptoms, preventive measures and nearest screening locations should be on classroom walls and handed to children to pass on to their parents/guardians.
To avoid delayed and disrupted curricula due to the closure of schools:
Online curricula platforms should be updated and circulated
Lessons should be conducted via radio and TV channels or online
Businesses should support working from home for workers wherever possible or provide alternative means of clean transport to avoid use of crowded public transport (not everyone would have been screened and tested prior to commuting). Working from home support may include supporting the upgrade of home Wi-Fi. Telecoms companies should explore offering large-scale roll out of dongles to support this at cost price on temporary contracts.
Office entry points should have a sanitiser bottle within reach.
The World Health Organisation mentioned that contaminated cash might be a common carrier. Banking platforms mimicking mobile money need to rethink the platform and come up with inventive ways to allow a receiver to transact without needing to withdraw cash – Zimbabwe’s EcoCash is an inspiration.
Organised labour represents labourers with financial precarity who are likely to continue working as their jobs are a necessity not only for themselves but most likely for other family members – multigenerational financial support (referred to as black tax in SA).
Organised labour should cooperate with businesses in ensuring that workers are screened, and transport systems are clean and safe.
Quarantined labourers need to be protected and be entitled to their sick leave with pay.
The government has not set aside enough funds for a rainy day, and coronavirus now adds severe external shocks
This is why you run a conservative fiscal policy with only moderate debt to GDP. This is why you undertake structural reform swiftly when you have the chance and have a dynamic economy with healthy companies that can adapt to shocks and bounce back quickly.
For years there has been a halfhearted discussion about the fact that the fiscus needed to be consolidated for a rainy day. Looking through all the concerns about misallocated expenditure and revenue buoyancy problems, at a more fundamental level the fiscus has not been where it needs to be for an emerging market that is susceptible to global shocks against the background of exceptionally weak (and weakening) domestic fundamentals.
Coronavirus now adds severe external shocks into the SA economy while the risks from domestic transmission are growing.
All economies are undergoing these shocks but the issue — the truly fundamental problem that Pretoria often does not grasp — is that the real test is how fast you bounce back. The lack of structural reform, the energy policy mess and the ongoing tightening of financial conditions as bank impairments were rising will set SA on the back foot in absolute terms and also with respect to peers when the time comes for the recovery.
SA has no simple avenues for stimulus without risking a sudden shock in this febrile global environment to funding which would result in emergency austerity spending cuts. There is a small amount of R5bn in the contingency reserve for the fiscal year from April, and the Treasury could use section 16 of the Public Finance Management Act (PFMA) to use about R35bn of emergency spending. However, the inefficiencies of spending would mean using this for general economic stimulus would be highly ineffective and it would be punished by markets. Using it for emergency health expenditure to combat coronavirus would be a much better use of the money.
Political choices over business support will be thrown into stark relief as well. SAA will be severely hampered by coronavirus, especially if the government announces various travel bans to slow the spread of the virus. This will necessitate even larger bailouts from the Development Bank of Southern Africa (DBSA) and others to keep the airline’s operations alive. Yet such money would be far better being used from development finance institutions to support jobs in otherwise sustainable businesses in the economy rather than propping up something that was insolvent anyway.
SA is about a month behind Europe in the timeline of the progression of the coronavirus, giving some opportunity to delay progression (flatten the curve as it is called) but also get in place support mechanisms for business, especially small, medium and micro businesses and tourism, which are likely to be particularly hard hit. Given the lack of fiscal space built up in recent years, however, most of this support is likely to be bank forbearance.
The larger worry is that the economy’s underlying structural weaknesses will mean it will fail to bounce back quickly.
As we saw after the global financial crisis, deep job cuts in periods of crisis have long-lasting effects. This process of job losses had already started to accelerate in the past six months anyway but will now be compounded.
We must also keep an eye on the reform process and how this stalls during the coming months as coronavirus spreads.
Part of this stalling will be inevitable as the government is distracted by the health care emergency and its resulting economic fallout. Yet Pretoria also likes deflection excuses for the lack of reform and low growth. Recently the president blamed the global financial crisis over a decade ago for low growth now — ignoring the fact that other countries had easily outperformed SA thanks to more dynamic economies since that period.
Energy policy should be particularly watched if a depression in demand reduces load-shedding in the months ahead and with it any last remnants of urgency to solve the underlying crisis, which will still be there waiting.
The government needs to avoid a “year off” reform just because of coronavirus. Indeed, reform efforts should be sped up to help the economy accelerate out of the coming slump.
What could be better than a mass of energy and infrastructure investment ready to jump-start the economy afterwards? Yet the government still lacks the capacity and desire to be able to take such a view.
A blame game is likely to start alongside the calls for stimulus. The refrain that this was an unknowable black swan event will become common. Yet no-one can say they weren’t warned about the need to undertake fiscal consolidation and structural reform to be ready for the rainy day that has now arrived.
• Attard Montalto is head of capital markets research at Intellidex.
Global airlines are coming under extreme stress due to coronavirus. This is likely to have a significant impact on #SAA’s existing and even profitable routes, accelerating the need for additional cash from the government, says Intellidex’s Peter Attard Montalto. Featured in Fin24
While the question of ownership in the banking industry captures headlines, another question to ask is whether those patterns of ownership transform the economy, says Stuart Theobald. Featured in Daily Maverick
Blacks now represent the majority on banks’ boards, with black members climbing from 43% in 2017 to 51% in 2018, Intellidex’s report on transformation in the banking sector found. Featured in Business Day
Intellidex’s second annual report into transformation in the banking sector, commissioned by the Banking Association South Africa, covers 2016-2018 – the latest figures available. It is an in-depth report that delves into all aspects of transformation, from black ownership and management levels to financial inclusion and black agricultural financing.
The increase in banks’ overdraft interest rate reflects their increasing risk aversion, says Intellidex’s head of capital markets research, Peter Attard Montalto. Featured in IOL
Remember when we cared about company strategy and the quality of management? Last week I stumbled across several decade-old notes I had written analysing JSE-listed shares. I was struck about how things have changed. Then I thought it was important to understand those things as part of forecasting future returns.
It seems like another era. Now the thing that most affects their prospects is politics.
Take the annual financial results that were out last week from Nedbank and Standard Bank. Both reported a big jump in bad debt provisions as clients’ ability to pay has diminished on growing unemployment and corporate distress.
It is also more difficult to find lending opportunities with asset growth constrained. Standard Bank reported headline earnings growth of just 1%, while Nedbank reported a 7.3% decline. In real terms, the profitability of both shrank. The market was expecting better and both share prices were down on the results. This week we will be getting figures from FirstRand and Absa, which are likely to confirm the tough environment.
It has been bleak to be a bank in an economy that is grinding down. But there was a moment of cheer for bank shares on the day of the budget speech two weeks ago. Then, bank and retail shares had a positive bounce of 3%-4% (before coronavirus fears quickly swamped that in a global market rout). That was because finance minister Tito Mboweni spoke a strong game of delivering better economic prospects through reforms and tackling the government’s unsustainable debt position.
A ratings downgrade, which would be sharply negative for banks as it would increase their cost of funding, seemed to be delayed and maybe even avoided. And if the reforms Mboweni spoke of are implemented, there might even be a positive effect on economic growth.
Now, as I think through the prospects of JSE-listed companies — whether banks, retailers, telcos and IT businesses, property companies, manufacturers and even miners — every one depends on the government to deliver an environment that might enable growth.
Apart from the macro environment, each also has specific exposures to policy decisions: will Icasa (the Independent Communications Authority of SA) actually deliver on spectrum auctions with anything like the urgency that is being asked? Will the deadlocked Mining Charter reach some conclusion that will bring some comfort and certainty back into the mining sector? Will the government actually deliver a restructured energy supply sector that can reliably and, perhaps, more cheaply, deliver electricity? And, can progress be made on sentiment drivers such as property rights and the criminal justice system?
These uncertainties can be managed. Companies can install generators and batteries or their own production to manage power disruption. Miners can flog their SA assets and deploy capital elsewhere. We can make do with expensive broadband, shifting business strategies to cope. This is what it means to be in defensive mode. But all of that means we end up with flat growth. There is no wind in anyone’s sails.
Banks will continue to focus on reducing costs, cutting branches and headcount while trying to manage distressed borrowers. Other companies will cut back on investment and try to maintain profitability. No-one is positioned to grow. That is reflected in the performance of the exchange: the Top-40 index is now at the same level it was in 2014.
Things would easily be worse if conditions in the rest of the world were different. The monetary stimulus pumped into economies from the US to Japan has been critical to emerging markets as global investors have directed flows towards them in search of yield. SA has been lucky this global wall of money has been available to us during this hour of need. But at some point, foreign markets will change course and the wall of money will leave.
Too few in the political sphere seem to realise how important these policy issues are for the health of the SA economy. It is almost as if listed companies are the problem, not the solution, at least judging by the comments of those who think one can pull investment out of them without consequence.
The Government Employees Pension Fund, a large portion of which is invested on the JSE where it earns a return commensurate to the risks, can be used, according to some, to bail out bankrupt state-owned companies, especially Eskom. Apparently, they believe, this would be better than the money “doing nothing” on the JSE.
But that is politics, not economics. Unfortunately, politics is what share prices now depend on.
• Theobald is chair of Intellidex
The Southern African Venture Capital and Private Equity Association (SAVCA) impact study has been published. This is the third iteration of the report, with the previous two versions published in 2013 and 2009. This year, SAVCA commissioned Intellidex to undertake the research. Based on an in-depth study of 75 portfolio (investee) companies, the study showcases the significant role that both venture capital (VC) and private equity (PE) play in bolstering economic activity, transformation and job creation.
The private equity industry has grown substantially since the early 2000s, with the value of PE deals ramping up nearly fivefold since the first study was done in 2009 to reach R35.4bn in 2018. By comparison, the value of venture capital transactions totalled R5.3bn from 755 deals between 2009 and 2018, with an average of 129 deals a year observed since 2014. In addition to a high-level overview of these industries, the report features numerous quantitative measures in PE and VC activity, including details around financial and business performance, the impact of investment on BEE and the measurable effect of investment on innovation. To provide added context to these components, numerous case studies featuring nine of the portfolio companies that were surveyed are included.
The findings of the study emphasise the crucial role that PE and VC play in facilitating the successful growth of businesses, not only through the provision of capital but also through offering operational support and establishing strong relationships with the investees. In the end, these partnerships promote improved outcomes in various components of the business, including more robust innovation capacity, superior financial performance, better governance, improved transformation outcomes and job creation.
At a time when the South African economy is generally struggling to stay afloat, it is encouraging to see that the South African VC and PE industries are flourishing – both in terms of their ability to generate financial returns and through having a real economic impact. Such a potent mix of both financial returns and economic impact can make significant inroads into solving many of South Africa’s social and developmental problems, with private capital the key catalyst.
Intellidex is a leading research and consulting firm that specialises in capital markets and financial services in Africa.
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