Intellidex estimates that 1.7-million South Africans will lose their livelihoods, and the economy will contract by about 10%. Featured in the UK’s Times.
The Covid-19 crisis is the biggest of our lifetimes. We have been working hard with clients, policy makers and media to interpret the impact and help develop strategic responses – for both investors and corporate clients. Our forecasts have consistently been ahead of the curve as we interpreted the effects and modelled the impact on the economy and the financial system.
On Tuesday 28 April 2020, Intellidex head of capital markets research Peter Attard Montalto and chairman Dr Stuart Theobald facilitated an Intellidex Covid-19 briefing. The webinar was well attended by our clients and others from across the globe. The presentation discussed all the recent announcements and their impact on the economy, banks, markets and politics.
Watch a recording of the full webcast Covid-19 briefing above.
Discussion of the next steps of lockdown has seemingly been divorced from reality.
Some time has supposedly been bought with this first stage of lockdown, but it is hard to say with certainty to what extent given the epidemiological models have not been released.
Herein is our problem: President Cyril Ramaphosa is being praised for leadership but what exactly does that mean if we don’t have the evidence? How can we differentiate a cool-headed decision to do the right thing from the knee-jerk reaction of the securocrats and economic micromanagers who have jumped at the opportunity at the same time?
Separation of these issues is crucial for what happens next to the economy.
We can praise decisiveness on the health front where the government and ideological views were broadly aligned, but what about the lack of decisiveness on the economic response for four weeks? If SA was acting so far ahead of the health curve would it not have made sense to wait two weeks, say, on the health lockdown front to get its ducks in a row on a synchronised economic stimulus? Something like the bank lending guarantee programme could easily have been wheeled out earlier with the right political leadership to make it happen and so it could have cushioned the blow at the appropriate moment.
I do know that mulling this type of question has seemingly been banned. Yet asking such questions is also crucial thinking about the next stages of the path to the peak of the outbreak and then beyond.
Does the state have the dexterous capacity to implement a multistage up and down, micromanaged sectorally and geographically differentiated strategy now?
Probably not but it can certainly given the impression it does, which is dangerous.
Again, like during the first phase, the issue was not (with limited information) “is lockdown right or not?”. It was or should have been “is this conception of lockdown right or not?” No-one is disagreeing that exit strategies are needed; the point is if this complex one is the right choice, and indeed there were quite a number of alternative and easier to implement options on the table in recent weeks.
Equally the question is not “is the stimulus the right thing to do”, but more likely it should be “is this the best way to put a floor under the economy and the right way to accelerate a recovery out of this crisis?”
In these pages two weeks ago, I said that investors would not give any benefit of the doubt on structural reform promises to come. Yet the government announced last Tuesday that structural reforms would be a key part of the third leg of their economic response plan.
An economic and fiscal policy response needs to be based around the fact this trust is missing and that at the fiscal cliff edge credibility is everything.
As such Treasury should be totally open and transparent as possible with investors in its communications — especially on institutional funding institutions (IFI) funding. Being transparent on the fiscal issues up front and showing your readiness for as much (at the moment) no conditionality funding as is available in crucial then to crowd in greater volumes of market issues of bonds and bills.
More deeply, if there isn’t trust the government needs to realise we need to see prior actions to win it back. There is no point in moaning about being viewed a certain way. Seek to address it.
In this regard, and cognisant of the time it takes to turn the structural reform ship and the challenge of capacity, early indicators should be sent on the seriousness which with future reform is going to be taken by the government and the president in particular.
This is not easy but not impossible.
Starting out by declaring that restaurants should only employ South Africans is not a great starting signal to business that is desperate in the post-crisis world for more skilled foreigner immigration.
To make a shift, the government could indicate that the new bank guarantee programme could only be used for non-carbon intensive loans when deployed in the energy sector. Equally the government could undertake an accelerated change to schedule 2 of the Electricity Regulation Act through the powers under the Disasters Emergency Act and rapidly liberalise the self-, embedded- and distributed-generation for companies leading to a huge jobs intensive boom through the recovery phrase.
The government could also commit to finally killing off the dodo that is SAA and ensure that Mango is saved rather than wait out the clock for the inevitable. That would be a strong signal. It could also commit to not bailing out Sasol in its current form as one of the most carbon intensive private sector entities in the world.
At this time, the country will need all the funding it can get and while the fiscus straps itself to the requirement of no-loan conditionality — there is plenty of money starting to wash around globally that can be directed to particular causes with conditionality. Green finance is a messy term but there is plenty of it around and it will be back in vogue more than ever internally after this crisis.
Indeed, combining government and private-sector debt with targeted wrappers towards helping the transition of the coal economy to a green economy can unlock international concessionary finance, which is just what SA needs now.
What other task ahead for SA is so jobs intensive, so easily fundable and solves an energy crisis and boosts growth with cheaper energy?
The problem, of course, is ideology, and this is exactly why these early reform signals are needed right now to show that ideology will be cut through. The upside can be realised. The benefit of the doubt can be given. Nominal growth can result and with it SA will not be dragged down by the fiscal burden it is rightly deploying right now.
With the fiscus and SA Reserve Bank both opening the taps, the seeds of an almighty bun fight over the future of the economy are being sown. The president needs to get ahead of this in making clear his own vision and bringing investors and business along with him.
• Attard Montalto is head of Capital Markets Research at Intellidex.
Banks are missing an opportunity to help people build financial resilience.
By Dr Graunt Kruger
The immediate impact of the coronavirus pandemic was counted in the number of infections and deaths. Soon, jobs began to disappear, industries came to grinding halt, and economies slowed down. Some 26 million people in the United States have filed for unemployment aid in the last five weeks, the worst string of layoffs on record. Banks around the world have announced a range of measures to help consumers and small businesses in the short term, including payment holidays on loans, rebates on insurance premiums, and other remedies to dull the immediate financial pain of the pandemic. In South Africa, as in many countries around the world, the crisis has also exposed a longstanding problem: abysmal consumer savings.
According to the World Bank, South Africa’s savings rate is 15% of its GDP—10% below the world average. China, by comparison, saves at 47%, India at 31%, and Russia at 30%.
Over the years, studies have shown that people don’t save for a number of reasons. In the context of South Africa, they include high unemployment; overindebtedness; financial strain in the form of high inflation and increased cost of living; economic uncertainty, which erodes confidence among savers; doubt that sound planning will ultimately yield positive results; the rise of consumerism; ineffective savings products; and lack of awareness about the importance of saving.
Interventions within the banking industry’s reach, such as financial education, have been ongoing under the auspices of the financial sector charter. The evidence of their efficacy is mixed and inconclusive, both when researchers run controlled experiments and even more so when looking at the ever-rising levels of household debt and decreasing levels of savings.
But behavioural economics—the study of how people make financial decisions—presents a different way to understand the barriers to savings. Fintech startups have used insights from this field to create solutions that enable consumers to easily build up personal savings.
Case in point, South African startups Fomo and AddaBit have adopted a social savings model whereby savers mobilise their social networks to contribute to a specific goal, such as school fees. Other companies, such as Acorn use automated savings. This model is built on IFTTT (if this, then that) rules. Consumers set rules for deposits into their savings accounts. These can either be by action (every time I buy a cup of coffee, then add R5 to my savings account), or every time my salary is paid, put a specific amount into my savings account. Acorn has helped 4.5 million American consumers save $1.2 billion by basically moving spare change between accounts.
Another example is prize-linked savings. The retail giant Walmart responded to a challenge issued by the US Federal Reserve to help Americans overcome the $400 problem, as research had shown that nearly 50% of Americans do not have $400 in savings for an emergency. Walmart partnered with financial wellness nonprofit Commonwealth to add a savings account to the Walmart store debit card. Each dollar saved in a cardholder’s account earns an entry into monthly draws for one of 499 prizes of $25, or one $1,000 grand prize. Walmart customers have put away $600 million over five years.
FNB tried prize-linked savings and was taken to court by the National Lotto and forced to abandon the project. While a similar scenario happened in the US, Walmart and Commonwealth continue to lobby state regulators to allow low-income consumers to participate in this savings program. South African regulators might be willing to make similar concessions to help the country solve its appalling savings rate.
As for these other savings innovations, one might theorize why banks haven’t embedded them into their mainstream product offering. Perhaps they’re waiting for the fintech startups to prove their models. Similarly, I would be hard pressed to answer why banks are not eager to increase their savings deposits by all means necessary, since savings are the cheapest form of funding available to them. These massive institutions can get stuck in their ways. Business practices that have been built over decades are hard to break. But banks have adapted and adopted the ongoing wave of digital transformation. Savings product designs should benefit from that momentum.
As the South African government scrambles for funds to distribute to the neediest, everyone can do their part by slowly building their own savings. Banks can help by embracing innovations that facilitate consumer deposits. Doing so will strengthen the country’s economic recovery in the short term, bolster economic growth in the long term, and minimize the need for drastic government intervention when the country finds itself in the midst of another crisis.
Our business researches and analyses the financial system and capital markets and from our US and bases we saw where SA could possibly be due to covid-19 and how the lockdown would translate into economic effects, said Intellidex chair Stuart Theobald in an interview on 702.
Intellidex chair Stuart Theobald, Cannon Asset Managers CEO Adrian Saville and Stanlib chief economist Kevin Lings talk to Business Day TV about economic recovery steps. Watch the full conversation below.
The stimulus measures that SA has announced to soften the blow of #covid19inSA on the economy are not a tenth of what is required to make an impact, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured in City Press.
While the proposal on the potential sale of a R100bn social impact bond wasn’t solicited by the government, Intellidex made a submission and it is being considered, says Stuart Theobald. Featured in Bloomberg.
It is harder to ignore than the economic crisis that is causing it.
Perhaps one reason the government has been so slow in developing a decisive economic programme to mitigate the fallout from the Covid-19 crisis is that we don’t have the data. And without the data, it is easier not to panic.
But let’s try to think through the numbers, starting with what we can learn from the rest of the world. The US knows that 22-million peopleare now out of work, taking its unemployment rate to 17% from next to nothing. It is easier to let go of employees in the US than here, but even in the UK, where companies can get 80% of their salary bills paid by the government, they are expecting the unemployment rate will double to 10%.
Locally, of 11-million formal sector employees, how many will have been retrenched already? Of the 3-million informal sector workers, how many have been cut off from their subsistence activities? Of the 1.3-million workers in private households, how many have been let go? If we imagine a rate between the US and the UK, about 10% seems reasonable. That’s 1.6-million people added to the list of unemployed in SA. Because our unemployment rate is so high already, this would “only” increase it from 29% to 36%.
There are 2-million registered companies in SA, but only 900,000 submit tax returns, which indicates those that are active. What proportion of these are going to survive several months of almost zero income? Are we going to see a 35% contraction in GDP this quarter, as in the UK?
I think it could be worse. Our lockdown has been far more draconian in forbidding online sales and exports of most goods, which the UK has allowed to continue, from an already higher base. Could SA be down 40% this quarter? This stress is also not evenly distributed. Clearly, hospitality and tourism are severely affected and other sectors, such as business services, less so.
Companies were battling after two quarters of negative growth, so cash buffers will already be stretched. But the uneven distribution means some will be experiencing a death blow and others merely a slap in the face. Those we can expect to be in mortal peril include the trade, catering and accommodation category, which makes up 14% of GDP. All told, is it unreasonable to expect that we lose 15% of active companies which are forced into liquidation?
There are clear anecdotes of what this means on the ground. Reports last week were disturbing: residents of Diepsloot shouting to army patrols that they are hungry and desperate for food; police firing rubber bullets on hundreds who had gathered in Alexandra to receive food parcels that never arrived; the SA Social Security Agency (Sassa) receiving 9,000 calls per hour applying for food parcels.
In the absence of data, it is perhaps these anecdotes that will grab the attention of political decisionmakers. A social disaster is brewing that is harder to ignore than the economic disaster that is causing it.
The odd thing is that the health threat of Covid-19 has been dealt with robustly, yet the economic threat has not been. Clear political leadership from President Cyril Ramaphosa got the nation to accept the need for a lockdown, yet his leadership has not so far extended to addressing the economic consequences of it.
Closing companies reduces the capacity of the economy, baking in a permanent loss of economic potential. Unemployment feeds itself as those without work lose skills and therefore become less employable. The crisis will lead to a long-run smaller economy that employs fewer people. When the time comes for recovery, it will be that much harder.
Just how much smaller the economy becomes depends on the actions taken now to defend it. So far, these have been paltry. The R40bn set aside by the Unemployment Insurance Fund (UIF) for the Temporary Employer/Employee Relief Scheme (Ters) is a red-tape nightmare for companies to use and takes a long time for the cash to arrive. For those companies at the margin and face with laying off their staff, any delay tips their hand towards closing. Small amounts have been set aside for a sectors such as tourism, but these have been too little and too complex to access.
To protect jobs and companies we need rapid and substantial interventions. Employers should be able to cover a proportion of their payrolls for workers who cannot work directly through the SA Revenue Service (Sars) without any need for an application, provided they keep them in their jobs. Companies should be able to access low-cost loans to keep themselves from bankruptcy in a simple and quick way, ideally using the banking system.
The informal sector is perhaps the toughest. Arguably, the social security system is the best mechanism we have to deploy support. These are obviously expensive interventions for an already cash-strapped government to make, so it will also need an emergency budget and overhaul of spending priorities with innovative ways of borrowing. This is the sort of economic intervention we need to match what has been done on the health front. That is what strong political leadership would look like.
Theobald is chair at Intellidex.
Intellidex’s Understanding Empowerment Endowments report is cited in a Daily Maverick article exploring some of the successes of BEE. Intellidex’s research found that 25 BBBEE trusts formed by large companies for charitable purposes had committed R4.5bn to fund projects.
Intellidex is a leading research and consulting firm that specialises in capital markets and financial services in Africa.