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.