The state needs to urgently push reforms so that the private sector can deliver renewable energy.

This column was first published in Business Day. 

Last week’s monetary policy committee meeting basically announced that there was no free lunch for the government now or during the recovery period to come.

The Reserve Bank committee reinforced the fact there is no substitute for real growth and that simply inflating your way out of crisis driven debt is hardly the first best option. With likely only a 25 basis point or so cut left it therefore becomes all about the ability of the private sector to lift the economy out of this rut.

Why just the private sector? This isn’t to say the state won’t be doing anything, but all the revenue for post-crisis support is going to have to come from somewhere — for likely permanent continuation of supposedly temporary steps up in grant payments and new unemployment benefits — as well as for additional support for state-owned enterprises (SOEs). The state is also likely still to support the economy through making tax holidays permanent and various industrial support.

The scale of rebuilding is now going to be twice as big as before (well, maybe a third as big again thinking about unemployment likely) and the state cannot micromanage the process of recovery. We saw how that went through level 4 of this lockdown after all.

This means an enabling state, with the right recovery narrative. Not the slogans and public relations fluff we have seen around some previous growth strategies or investment conferences, but something that people (investors offshore and onshore) can buy into.

Country-based narratives, however, are going to be a crowded space in the coming year. While normally countries come out and woo investors at random times and uncoordinated — now every country in the world is going to be trying to craft narratives for recovery.

The government has traditionally not understood this issue of competitive policymaking dynamics. You not only have to improve doing business and provide structural reforms at home, but you need to do so faster than your peers. This pressure is going to be more intensive than before and it will be a good time for the government to learn from its past failings in these areas.

The challenge is even greater than usual — all countries will be repatriating manufacturing and supply chains either onshore or closer to within their near regions. What “dream” is SA going to be able to sell?

The other problem will be the need to move at speed. Reforms need to be put in place now (yes right now) to start to open the taps for investment through year-end as the economy opens and into next year.

Waiting for two years, to align with some political cycles, a mass of social compacting, endless delays for something to be gazetted and mixed messaging is not going to cut it. Equally “national lekgotlas” end up going in circles.

To state the risk clearly — the economy can be stuck with permanent loss of output, fiscal space for developmental spending can be permanently reduced and large swathes of temporary unemployment can become permanent.

Let’s find a narrative that takes something that SA has a huge endowment of. Something that addresses deep structural change required in the economy, brings together offshore and onshore capital and supply chains, is jobs intensive can self-sustain a long investment boom over a decade or more, with positive spill overs to the rest of the economy.

What on earth could such a thing be, it sounds too good to be true? Well politically, now, it is. The cobwebs will have to be swept away and with it any ministerial blockages (unless they have a Damascene conversion to survive). The endpoint is uncompactable precisely because of all the points above and its international inevitability.

What is this then?

A full throttle, totally unapologetic green energy liberalisation that lowers energy costs, creates new industries, new SMMEs, supply chains, crowds in foreign capital and will see a boom that will  last over a decade — using SA’s solar and wind resources (and its potential for domestically sourced back up gas).

This is far from a new idea — proof yet again that in SA we just debate over the same finite set of ideas. But so many people have done the maths on its effect (yes and informed government).

There is a lot to do, however, after years of policy neglect, not just in the energy policy space but also as expertise has been paired back in SA with endless delays, as new innovative financing mechanisms for infrastructure in general and just energy transition financing in particular have to be built and plumbed into capital markets then simply given the lead times required for legislative, regulatory, bureaucratic change.

More than that, however, systems of bureaucracy are going to have to change and new institutions built to move infrastructure at scale and speed.

It is time to take ownership and run with it, Mr President. A recovery solution is being offered on a plate.

Attard Montalto is head of Capital Markets Research at Intellidex.

Intellidex conducted a survey of clients of stockbrokers, private banks and wealth managers, representing a large body of investors, on the impact of the Covid-19 lockdown. We asked respondents six questions related to their financial behaviour. The aim of the survey, conducted between 8 and 15 May, is to provide insights to government, policy makers and businesses on how the lockdown is affecting households.

Access the survey results here.

The deepening coronavirus crisis requires innovative interventions to address the funding gaps resulting from requirements to address its devastating economic consequences.

Intellidex’s head of capital markets research, Peter Attard Montalto, and executive chair Stuart Theobald, in collaboration with the Covid-19 Economy Group, propose that government should issue a special sovereign social bond to help fill the funding gap created by the need to address the socioeconomic consequences of the pandemic.

They argue that the South African government could become one of a few sovereigns to issue a social bond to be used to fund the fight against the Covid-19 crisis, setting out details on the model and structure of such a bond in a proposal paper.

This could make a significant contribution to government’s funding gap, with funding raised at a relatively low cost while also diversifying government’s investment base to include ESG funds.

Access the proposal paper here.

Governments are realising that they can leverage growing investor appetite for social bonds that “do good” while delivering an acceptable financial return. This led to Intellidex and the Covid-19 Economists Group developing a social bond to fund the fight against Covid-19. Featured in Daily Maverick.

The issuance of a social bond could make a significant contribution to the government’s funding gap, raising funds at a low cost while diversifying the government’s investment base to include ESG funds, argues Intellidex and the Covid-19 Economists Group. Featured in Business Day.

The SA Reserve Bank is the fastest, easiest way to deploy nuclear-tipped bazookas as the government’s revenue hole gapes open, says head of capital markets research at Intellidex, Peter Attard Montalto. Featured in Reuters Africa.

Intellidex, backed by the Covid-19 Economists Group, is proposing that the South African government consider a ‘social bond’ to raise up to R100bn to compensate for funding gaps that have arisen as SA fights the Covid-19 pandemic. Featured in Polity.

Consultancy firms remain at the side of their clients in the African mining industry despite the coronavirus pandemic. Herbert Smith, Rothschild and Intellidex paint a post-Covid future to their clients. Featured in Africa Intelligence.

Suretyship has been an issue elsewhere and tweaks may be needed to the local loan guarantee scheme.


This column was first published in Business Day

Applications are flowing in for the R200bn Covid-19 bank loan scheme, through which loans to businesses are guaranteed in substantial part by the government. The volume and adjudication of these applications will be crucial in determining the size of the scheme’s economic effect.

Banks have a challenge on their hands in administering it. Their risk is limited — if loans go bad, they absorb 6% of the losses and any losses that can be covered by the margin they earn — about 2% per year and a 0.5% guarantee fee. The rest of the loss is absorbed by the government. This should make banks quite relaxed in taking on exposure. While they won’t make any money out of it directly, the loans are subordinated and thus rank behind their existing exposures to clients. A Covid-19 loan therefore provides a buffer that reduces bank risk in their core books.

The scheme also can do much to soften the economic blow of the crisis, ensuring banks have a bigger economy to service in the long run.

But two factors will be important: how the banks deal with the risk that they err in providing a loan and therefore the guarantee is denied by the government, and whether applicants are willing to bear the additional liability. The latter will be particularly important.

Business owners have two choices: they can borrow money to survive the crisis, keeping their businesses open and staff employed, or they can shut down, save whatever assets they can and look forward to reopening when conditions improve.

The decision between these options will depend on many factors — a sense of loyalty to staff, how much of the business can function now, and how long they expect the crisis to last. But it also depends on their personal situation — how much of their own wealth is tied up in their businesses and what personal obligations, such as family, they have now. Like anyone else, business owners will be reticent about increasing the risks to which they expose their families.

Borrowing always increases risk. The subordinated nature of these Covid-19 loans means they rank alongside equity in a liquidation. The risk facing every other creditor is thus not affected, which is an important feature of the risk-reduction elements of the loans, but the risk to the owner is.

Banks can also require personal surety. Business owners must therefore think about how much they are putting their homes and other personal assets at risk. They also must think about effectively diluting their claim over the assets of the business.

As loans only cover three months of overheads and operating costs, another consideration is whether they will be enough. A loan must get one through the crisis or it is pointless. The last thing you want is to incur a liability that takes you to the brink of the other side of the crisis, but not all the way there.

There were 900,000 businesses that submitted tax returns last year. Not all of these will be operating entities, but about 200,000 will be in a position in which the loans could make an important difference to their chances. But borrowers must believe that too, with enough credence to take on the risk.

The rules also require banks to ensure that borrowers had a sustainable business before the crisis and that it will be sustainable when normality returns. When a bank claims in terms of the guarantee, the Reserve Bank will audit the bank to ensure “sound lending practices were applied”. Banks will be concerned about the risk guarantees being refused if there’s a dispute about whether a business was sound before the loan. That could make them overly risk averse.

Suretyship an issue

More than 50 other countries have implemented guarantee schemes of this sort and many have had to tweak the rules as they went along. Some schemes, such as Switzerland’s small business scheme — which lent up to R9m to small businesses interest free and based only on the business’s declaration that it had been affected — caused greater take-up than expected. But the UK’s scheme, which required personal suretyship when it began (but has since been tweaked), struggled to lend in any volume.

It is important that the Reserve Bank, the Treasury and the banks remain open-minded about changes that may be necessary. Suretyship has been an issue elsewhere. The three-month cost period also may need adjustment as greater clarity is gained about the duration of the crisis.

From an economic point of view, it is important that the market clears at the R200bn volume target. That is how to deliver on the economic stimulus promised by the wider R500bn economic package. We must do what’s necessary to shift the demand and supply dials, adjusting conditions on the scheme, to deliver that outcome.

Theobald is chair of Intellidex, which services banks among other clients. Intellidex drew up a proposal for a bank guarantee scheme that influenced the design of scheme in operation.

There are different approaches that governments can take in dealing with Covid-19: either trust people and take them into government confidence or be secretive securocrats who don’t even share what epidemiological modelling they are using, said Peter Attard Montalto on 702.

Intellidex hosted the foundationsXchange webinar on Wednesday 12 May. The event was hosted by Dr Zoheb Kahn, philanthropy research manager.

Intellidex works with foundations to help develop strategy and portfolio management. The Covid-19 crisis has created unprecedented challenges for foundations. Intellidex put together the webinar to assist the foundation sector in thinking through the challenges.

The webinar exchanges were fruitful and stand to improve the frontiers of philanthropy. The themes covered were:

Listen to a recording of the webinar above and access the presentation slides here.

Government is drawing up positive lists of ‘what is allowed to occur’ as opposed to negative lists of ‘what should not occur’. This micromanagement is leading to very slow shifts in what is allowed, and when, to correct erroneous regulations, says Peter Attard Montalto. Featured in Business Tech.

Unemployment figures and Eskom results were that sparked calls for an IMF bailout – but there are a lot of mitigating steps that government can still take before that, starting with the budget, argues Peter Attard Montalto on The Money Show with Bruce Whitfield on 702.

This column was first published in Business Day

The government’s dangerously paternalistic streak is showing its worst side during the lockdown and current policymaking.

Disparaging comments recently from trade & industry minister Ebrahim Patel about those modelling the effect of the crisis on the economy were ill judged and clearly showed that the assumptions — and, most importantly, transparency on caveats — of such forecasts had not been studied. The comments were targeted not just at the private sector but also at the National Treasury and SA Reserve Bank-led modelling efforts.

The paternalism is that the private sector should be quiet because the government knows what is best for it. This was the same argument used continually to stimulate faith in state-owned enterprises and investment in the economy during the state capture years against all the evidence. It ignores the fact that there is information asymmetry and the private sector knows far better than the government the complexity of the economy’s operations and how shock propagation works.

Worse, however, the government’s continual appeal to a “V-shaped” recovery when consensus is against this in terms of global trade and tourism — let alone the fact the economy has never acted like this in response to previous shocks — actually damages the government’s credibility.

Such a paternalistic approach also assumes that decisions in the private sector are made on blind trust of what governments are doing and that executives and boards don’t have a duty to map and understand risks in real time themselves.

So-called “thumb-sucking” models are open to be torn apart by clients, investors and executives of those producing them (and indeed the government interacting on the details) and give a guide in a highly uncertain world for the private sector to operate effectively.

Indeed, if banks, for instance, had taken everything on blind trust since the election of President Cyril Ramaphosa, they would likely now sit with inadequate capital, liquidity and unprovisioned impairments in the midst of a proper banking crisis.

The government has continued to refuse to release epidemiological modelling to scrutiny — but also not made clear how different stages of lockdown will be moved between on what health evidence grounds, nor how national- vs metro-level lockdown differentials will work … nor how what economic activity and employment levels were chosen for what industries at what levels.

Why do certain industries have 30%, 50% or 100% employment caps with seemingly little regard to differences between and within sectors? Why can shops not decide what is best to sell to people who have to stay at home in winter?

The strong impression given is that the need for 2-million extra people working in level 4 was decided upon and then the regulations were worked backwards from there, just as the 10% stimulus figures were decided on and worked backwards on — leading still to some gaps in how this will add up with any credibility.

During a policy design process, it should be asked: “Do we have the ability to make positive lists of everything that the economy is allowed to do? Do we understand how complex the economy is?” This introspection was clearly not done.

In a proper risk-adjusted framework where the private sector was trusted to abide by government-imposed health protocols, the complexity of the economy would within itself be able to resolve issues that are “uncountable” for the government.

The reality is that the government has far less data about how the economy operates than the private sector does. Banks have highly detailed real-time data on what is being spent in what way, in what shops, exactly where, by whom in the economy, for instance. Companies are able to survey what is happening upstream and downstream in their supply chains and understand the interlinked nature of the economy. This is not just big companies, but small, medium and micro-sized enterprises and informal township businesses too.

The government seems at once to recognise that its rules aren’t perfect and so it needs to interact with the private sector to better them, but not make the next realisation that it is the philosophical (and ideological) foundation itself that is the problem.

Those with common sense on these issues appear to be in a minority in the government, and the cabinet doesn’t appear to be using health or economic advisory structures in a proactive (rather than reactive) way to inject common sense into the process.

The government will always get there eventually. Step by step under pressure, as the economic carnage of policy choices made are seen — not just on business survival and unemployment, but the humanitarian outcomes on the ground. This delayed response will have profound political consequences in the long run, but equally the common sense to see those political consequences seems to be missing at present.

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

Intellidex chairperson Stuart Theobald says banks are under extreme pressure and it is not a stretch to expect a return to the levels of provisions we saw during the financial crisis (4% of their books increasing to 6%). There will be a fall in new business on the non-interest revenue side. Featured in Moneyweb.

Those keen to shower praise on Ramaphosa’s leadership given his response to Covid-19 have now strapped him to the mast if or when lockdown goes badly wrong, says Intelldiex’s Peter Attard Montalto. Featured in Business Tech.

This column was first published in Business Day.

My life is divided between the UK and SA. So I’ve seen the Covid-19 responses in both countries, and the comparisons are revealing.

The UK made some awful policy missteps in dealing with the epidemic. It started out aiming to deliver herd immunity, the idea that once 60% of the population have had Covid-19 there is enough immunity to stop it spreading.

When a team of epidemiologists at Imperial College London then showed up to 30% of hospital admissions would require intensive care, totally swamping the National Health Service, there was an abrupt turnaround and a lockdown was introduced. Though by then the infection trajectory had been put on a higher plane.

There have been several other stumbles including testing only those admitted to hospital, failing to mobilise procurement of personal protection equipment, and failing to ramp up testing capacity. These blunders no doubt contributed to the UK’s daily death rate becoming the highest in Europe, with almost 1,000 people dying per day in hospitals (not counting those dying in care homes and elsewhere).

Compared to that, SA has been a model of clear, well-considered interventions. The lockdown decision was quickly taken at a relatively early stage of the epidemic. Testing capacity and rate has been impressive, despite the relatively poorly funded health system. President Cyril Ramaphosa earned wide praise, from opposition politicians through to the director-general of the World Health Organisation.

But where SA falls in comparison is the economic response. The UK announced a dramatic £350bn (16% of GDP) intervention to support the economy three days before a general lockdown. This ranged from covering 80% of the salaries of all workers who were furloughed to a funding scheme through which the largest businesses could borrow directly from the Bank of England.

In addition, many specific features of the lockdown in the UK allow far more economic activity than in SA: e-commerce was not only allowed, but many retailers could also set up new online sales and distribution. There has not even been a ban on flights (though there is almost nowhere to go).

While pubs, restaurants, entertainment venues and education facilities have been closed, other businesses can continue operating provided they do so safely, and if workers cannot work from home.

Individual workers such as gardeners and window cleaners can operate provided they work alone. This means lockdown in the UK has considerably less economic impact — you can still buy and sell whatever you want online and if you absolutely must go into work, you can. And it is you who makes that decision; in a country that rejects ID cards as unacceptable government overreach, the idea of permits to work hasn’t even been suggested.

In contrast, SA waited four weeks after the initial lockdown before a material economic intervention was announced. Four weeks of lost time during which business owners would have closed instead of holding out hope. The details of the lockdown, and the phased relaxation, appear not to have been thoroughly assessed for their economic impact. There is no effort to help the economy adapt, such as allowing e-commerce. Companies that could operate perfectly safely, such as highly automated manufacturing or logistics centres were forced to close, with no possible health reason.

The UK’s office for budget responsibility, which reviews government fiscal policy, has estimated that the second quarter will see a 35% decline in GDP, with a 12.8% decline for the year. The estimates for SA are not as bad, with the official Reserve Bank estimate at -6.1%, though others, including my firm Intellidex, are forecasting a worse outcome at -10.6%. But if you compare the two countries’ economic responses, it would be understandable for SA to face a far worse economic collapse than the UK.

Yet it seems some don’t want to hear that. I was astounded at comments by trade & industry minister Ebrahim Patel in the Sunday Times decrying forecasts of the cost to the economy as a “thumb suck”, and that the government had not calculated the cost.

The only UK comparison I can think of is when economists’ forecasts were dismissed by justice secretary Michael Gove before Brexit with the words “people in this country have had enough of experts”. On what basis is Patel making decisions about policy? Does he really have no estimates of what the cost of his and cabinet colleagues’ policies are? Who is doing the technical modelling to forecast the economic impacts?

I fear the answer is: no-one. Which might explain why SA’s economic policy intervention was so late, and the details of the lockdown phases are so unresponsive to economic impact. How has this happened?

While the president was assembling a crack team of health experts, did he not also assemble a crack team of economists? Where are the excellent technical teams from National Treasury? How is it possible they are not in the room to give Patel and the rest of the cabinet and Command Council detailed analysis of economic impact?

This genuinely fills me with fear for the future of the SA economy, one far more economically precarious than the UK’s. In SA, poor economic policy translates rapidly into poverty and hunger.