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.

This column was first published in Business Day.

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.

This column was first published in Business Day.

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 people are 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 chairperson Stuart Theobald presented recommendations on the design for a bank credit guarantee scheme on Wednesday to a colloquium arranged by the presidency, to support businesses suffering from the covid-19 lockdown. Featured in Business Day

Government denying SAA further funding means that all options to any form of real continuation of the airline are now blocked. The only option now is liquidation, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured in City Press.

Opening-up the economy with certain health protocols is crucial. What we’ve seen in past crises in SA are permanent rises in unemployment and losses in output, which lead to permanent losses in fiscal space as revenue becomes harder to raise, says Peter Attard Montalto on Business Day TV.

The lack of flexibility in the SA economy is a key problem prohibiting the ability of SMMEs to bounce back after the crisis has passed. The longer the lockdown, the less likely it is that weak SMMEs will survive, says Peter Attard Montalto. Featured in Sierra Leone Times.

After the health crisis forces in the government will be pulling in completely different directions.

This column was first published in Business Day.

Has something switched in this crisis?

President Cyril Ramaphosa is rightfully getting a lot of praise for showing strong leadership. But why? What has people so enthusiastic?

We have seen swift action pushed for, advised on and then implemented by health experts. (Scary) evidence was presented which sparked change and the roll out of new systems of control. SA’s social partner framework has given the strong impression of joined up action and cohesion.

What people are really excited about however is a final joined up chain from PR and rhetoric, through evidence-based policy to implementation. This has been the siloed chain of governance for the past two years on economic policy issues. Seeing government in action through the president and the short turn around times of decision making, the fact SA has acted significantly ahead of the curve versus other countries (locking down before the first death) has all shown resolve.

Minds naturally wander then to possibilities of the same resolve being shown with respect to structural reforms. Indeed, some people are getting overexcited that momentum can be continued through from this crisis to deal with economic reforms.

The question arises that with an energy crisis brewing in the past two years, an unemployment and an inequality crisis not to mention the failure of the Tito paper (which let’s not forget shocked the country by being evidence based policy making) — why will anything change after this health crisis?

People are alighting on the president’s supposed instruction to finance minister Tito Mboweni following the S&P’s downgrade that now structural reform will happen! To me this sounds like a very odd time to wake up to the need to embark on reform.

But we need to inspect more why things are suddenly happening now and why this isn’t applicable to structural reforms.

First, the coronavirus crisis plays perfectly into the governing party’s command and control mindset which is fearful of subsidiarity and liberalisation. As such they are all pulling the same direction and in a time of crisis getting a huge amount of support and heavy lifting from organised business.

In particular, the expert evidence-based policy is aligning with securocrat tendencies that want lockdowns and want centralised control by ministerial dictate. True the nature of the lockdown has probably gone beyond the health recommendations, but the direction of travel has been the same.

Structural reform however requires the opposite, liberalisation, less central command and control, less direction by ministers and an inability for central direction — and this is why the energy crisis hasn’t been dealt with decisively.

Indeed, despite the state of the nation address in February, the latest Schedule 2 to the Energy Regulation Act that was gazetted singularly fails to offer the required or promised liberalisation to the sector. More recently we have seen vested interest make a move against the National Energy Regulator of SA with the suspension of its widely respected CEO. Games are ongoing.

The point is that after this health crisis forces will be pulling in completely different directions and the president has not shown he has actually changed how the ANC or political economy or government structures work — they are just aligned currently to his leadership direction.

The state has also not really been tested yet. The issue with so much structural reform in the past two years was that there was a lack of state capacity and what was there was distracted and risk averse with vested interests jockeying.

The number of coronavirus related deaths is currently low and hospital capacity and government response has yet to be put under severe pressure. But this test will come — the government is expecting the most rapid scaling up of the death rate only into mid-year and peaking early in the third quarter. 

Ongoing fights that are largely below the surface will then really come into sharp relief — especially central control over procurement (and associated corruption risk being seen already in some cases) and more decentralised procurement and control efforts.

The same is true for the ability to actually roll out and implement economic crisis responses. The government was quick off the bat to put in place the Unemployment Insurance Fund support and Department of Small Business Development funds among others, but has yet to show success in its ability to pull capacity together and implement and pay out in size to the number of required claimants.

The economy is set to shrink in 2020 by at least 9.7% with the extended lockdown and the shockwaves through over one million jobs lost and several thousand formal sector SMMEs that may not reopen. Yet the real pain will be to casual workers and informal sector SMMEs who cannot access support and with limited fiscal space to offer any broad-brush stroke money drops.

The slow rises in cases now should not lull SA into a false sense of security. This is going to grind on for months to come.

Nor should the (correct) praise for the leadership shown and governing over the head of the ANC to the people be unquestioningly morphed into rose-tinted glasses on post crisis reform. The reform agenda needs to move forward now so the economy can accelerate out after but the limited capacity is fully engaged on the health crisis.

Equally we should be mindful that the securocrats in government have now got a taste of power and ministerial dictate — as have those who like command and control on the economy. The hang over from the crisis risks a sticky slide to more control not less — which we should watch carefully. That would drag post-crisis growth lower than that of before the crisis. This is not a simple one way street towards reform.

It won’t be until we see a fundamental shift in the political economy and state machinery, an ability to drag the post-crisis divergent forces along the reform path at the critical speed required to achieve lift-off — that we can say that something has really switched during this crisis, and is not just a coincidence that the divergent forces are aligned. SA and business in particular needs to not repeat the same mistake it has made before of misdiagnosing the problem and should see the political economy as a more sticky and unchanging mechanism instead.

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

The lockdown of SA, due to Covid-19, has left many in the informal economy, such as salon owners and run eateries, cash strapped, wrote Mmamoletji Thosago for Intellidex. Featured in Financial Times.

The financial turmoil will feature some elements of the Great Depression, a world war, the dot-com bubble and the 1970s oil crisis.

This column was first published in Business Day

Will this economic crisis be like the global financial crisis? The 1998 emerging-markets crisis? The 1970s oil crisis? World War 2? The Great Depression?

The answer is: some elements of each. The financial system will come under intense strain, as in 2008, with a spike in bad debts. Emerging markets, including SA, will face intense funding and foreign exchange pressure, as in 1998.

The government financing outlook is like it was during the last world war with huge deficits. The demand shock is like that during the Great Depression as everyone stops spending at once. The 1970s oil crisis hints at the impact of the supply shock, though this time driven by broken supply chains rather than oil embargoes.

There is also a lesson from the dot-com bubble: the crisis will change how we use technology permanently, with winners and losers.

Each of these lessons provides clues to what the government’s policy response should be. The World War 2 lesson is to spend like there is no tomorrow. We will either survive this in some semblance of our existing economic and social structure or we won’t. If the latter, then the debt the government builds up won’t matter. The financial crisis lesson is do what it takes to protect the financial system. Inject liquidity into the system and use the buffers that were wisely developed after the financial crisis to ride through this one.

The emerging-markets crisis and the global financial crisis tell us we need international co-ordination, with developed countries using low funding costs to support emerging economies whose funding costs have ballooned. The depression era tells us that once the supply side starts to recover we need major stimulus to boost aggregate demand and get the economy going. And like after the world war, we will need to rebuild with major economic restructuring to grow the economy as fast as possible.

These may be policy moves that should be undertaken, but we live under constraints. Due to the decade of institutional and financial ruin inflicted by the Zuma presidency, SA lacks capacity and financial resources to mount the policy response it should be able to. Debt levels are already at record levels and its bonds are now junk rated. When the Covid-19 lessons are learnt in the wake of this crisis, one should be to not mess around in building reserves for difficult times.

If we were in the state we were in 2007, after several years of 5%-plus economic growth and a budget surplus, our economic response now could have been vigorous and extensive (as it was in response to the global financial crisis). Because of our constraints, it has instead been tepid. In “normal” times we should build capacity into the system, spending on institutional readiness but also making sure we grab every chance to drive economic growth and improve government finances.

We also should do what we can to protect the economy during the crisis, without compromising in the health battle. Oddly, there is much more clarity on what to do when we get through the crisis than what we should be doing now.

More needed

There is big uncertainty about what to do now. We do not really know how the crisis will play out in SA given its inequality and huge differences in resources and population densities on the continuum from suburbs to informal settlements. The playbook for this crisis has been written in Europe and Asia and only now are countries with highly dense, underresourced areas such as India and Brazil grappling with it. We are all having to learn on the job.

The political leadership offered by President Cyril Ramaphosa and health minister Zweli Mkhize has been robust in moving rapidly against the health challenges. We need to match that level of decisive action on the economic front. The economic measures announced so far, including tax holidays and liquidity measures from the Reserve Bank, are important but far more will be needed.

We must make difficult decisions on the details of the lockdown and what to do after it. What parts of the economy can we restart to be able to put food on tables, earn hard currency and deliver tax to the government? What risks are acceptable health-wise in restarting the economy?

We are far from alone in grappling with these questions. As statistics in Italy and Spain start to indicate a reversal in trends, they are wrestling with what to do next. Do you let those who have had the virus and now some level of immunity go back to normal while others are still quarantined? Do you risk importing new vectors of disease by restarting travel? Do you let some businesses reopen in areas that seem to have slower transmission rates but not others?

As we struggle to find answers to these questions, the other side of this crisis will not be a clear finishing line. Instead it will be a slow process of cautious changes. As we go, it is important for all of us to anticipate what economic policy moves will ease the financial consequences on all of us and create the most opportunity for everyone.

• Theobald is chair of Intellidex.

For more i-Blog columns, click here.

SARB’s response to the coronavirus has been “minimal” and “okay for now” but markets and investors are waiting for more action as the crisis deepens, says Peter Attard Montalto in his interview on SABC.

Previous shocks such as the 2008 financial crisis and Nenegate showed that the lack of structural reforms leave long-lasting scars on the economy, Intellidex’s Peter Attard Montalto told Business Day TV

Something has to fundamentally break first for the politics to shift to structural reform and perhaps the deep scars left by coronavirus on the economy and a permanent step up in unemployment will be it, says Peter Attard Montalto. Featured in Financial Mail.