The government will collapse under its debts if there is not a dramatic change of course.

This column was first published in Business Day. 

I wish I knew more history. I’ve studied it formally once after school, when I took a course in precolonial African economic history at the London School of Economics. It exposed the preconceptions an apartheid-era childhood had left me with. I felt as if I had been released from Plato’s cave.

Right now, I wish I knew much more about two other historical topics: epidemics and state financial collapses. Both would clarify the issues South Africans today must grapple with.

Last week I was struck by newspaper clippings from the 1918 Spanish Flu epidemic in the US debating the use of face masks. City health authorities mandated them, then rolled back, then re-mandated them. Citizens argued about the effectiveness, discomfort, and plain selfishness of being a “mask slacker” (a 1918 term that fits rather well today).

There is now no doubt that masks reduce the spread of the disease, but free rider problems mean we’d probably be better off if everyone falsely believed it was about protecting themselves. And officials still prevaricate about mandating their use.

But after last week’s emergency budget by Tito Mboweni, it was financial collapses I wish I knew more about. The finance minister made one thing abundantly clear: the government will collapse under its debts if there is not a dramatic change of course. If that happens, we will lose our sovereignty to our lenders.

There is as much myopic denial about this as there is about using face masks. The interventions are uncomfortable, but they avert disaster.

History gives us plenty of financial crises to look at: Venezuela, Greece, Argentina stand out in the past decade. There is always much in the detail that distinguishes them, but some common themes.

The causes usually involve both external (the 1998 emerging-markets crisis for Argentina, the 2008 global financial crisis for Greece) and internal factors. The internal factors always include budget deficits, years of government expenditure growth running ahead of revenue growth, and, as the financial system collapses, interference in financial markets that backfires as confidence collapses.

But it is the politics around these that are most fascinating. As a financial system implodes, with banking crises leading to freezes on deposits and collapsed currencies, the initial response is panic as social unrest and mass protests ensue.

This often fans populist politics. But, as the realisation evolves that the way out of the mess is to access international funding support, including the conditions it comes with, a sort of technocratic reform process is grudgingly accepted. There is always economic pain taken by ordinary people.

Of course, that sample includes those who failed to avoid crises. We could perhaps learn more from countries that changed course before collapse became inevitable. That is the group we must now hope to be part of.

There are several factors we have in our favour. For one thing, thanks to careful fiscal management after 1994, we do not have a large amount of US dollar-denominated debt. Our debt levels may be at crisis levels, but they are largely rand denominated. Many countries that collapsed did so because currency crises became debt crises because liabilities were in dollars but revenues were in rapidly depreciating local currency.

However, as we are forced to unusual sources of funding in the Covid-19 crisis, there is some risk SA will slacken this discipline. It is important to hedge the currency risks that come from borrowing in dollars as we are doing from several international sources.

We still have a remarkably transparent budget process with far greater oversight than other countries that have collapsed. Our problem is the lack of accountability on spending. The dismally few government institutions that manage to obtain clean audits each year is the clearest indicator of how bad financial management has become at the delivery level.

We still have a strong and resilient financial sector. Banks are well capitalised, with regulators having taken on board the lessons of 2008 and improved oversight and risk management. We have good insurance and savings industries that can maintain client confidence even as the government’s finances waver.

We also have good financial market infrastructure, so global investors can be confident their investments are safe from contagion of national problems. These are important differences from others where crisis has taken hold.

Mboweni says the cabinet has approved a balanced budget for the 2023/2024 fiscal year. That is a dramatic objective that the cabinet will balk at when the implications become clear. It won’t be politically feasible to force through the level of austerity required to meet that target.

Politically, the biggest risk is the increasing isolation of the Treasury from the rest of the government, with declining respect across the government for the central role the Treasury constitutionally must play in protecting national finances.

If the cabinet is merely smiling and nodding in response to Mboweni, with no understanding or intention of delivering the fundamental changes needed, then we really will have a problem. And we will indeed then be writing a history for others to learn from.

Wednesday’s supplementary budget was left naked by the inability of cabinet to agree on a phase 3 recovery plan. All eyes for this are now on the medium-term budget in October – which is too late, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured on Business Tech.

The key issue about Mboweni’s supplementary budget is credibility. Treasury is saying we need to go with the scenario that sees debt stabilised in 2023/24, but it didn’t really demonstrate how that will be done, says Intellidex lead economist Peter Attard Montalto on Classic Business.

While the public enterprises department talks about a minority stake in SAA for government, it would want to retain a veto right on key issues which would likely mean no strategic equity partner would agree, cautions Intellidex’s Peter Attard Montalto. Featured on News24. 

The 2020 Financial Mail Ranking the Analysts awards will be hosted online on July 28. The research, conducted by Intellidex, is estimated to cover 90% of the institutional market through confidential questionnaires completed by clients of SA’s institutional stockbrokers. Featured in Financial Mail. 

Quantitative easing is meant to pump money into the system, whereas what the SA Reserve Bank has done doesn’t have that objective. SARB’s objective is to shift rates — what it’s doing is consistent with monetary policy. It’s not about stimulus, says Intellidex’s Stuart Theobald. Featured on

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What matters are the credibility gaps, not the fiscal measures that the Treasury announces.

This column was first published in Business Day. 

We’ve been here so many times before. A crucial budget, big decisions, big announcements expected, reform, consolidation.

The public conversation around a budget event — let us not forget these have been going on twice a year for over 20 years —  always seems to get it wrong.

First, the fiscal path that the Treasury announces is not what matters. It is instead the gap between what is announced and what it is (more) likely to be based on the policy measures announced and expected growth. In other words, budget events fundamentally rotate around the credibility gap that exists around the forecast.

This is more important than ever now as we hurtle towards a “debt crisis” (in the finance minister’s own works). Given the track record of revenue underperformance versus forecast over history, and how the economy generally reacts after past shocks since 1994, it would seem better to err on the side of caution than to try to game a deficit and growth forecast for an easy political ride.

For credibility’s sake, the Treasury has to toe what might well be an impossible line. Having debt stabilise too fast, and the measures required to get that won’t be credible. Having debt stabilise too late would imply a funding programme that wasn’t credible over time. Goldilocks can be found somewhere in the middle.

The former scenario is only possible with a political capital deployment never seen before, the latter possibly only by crowding in credibility enhancements — like international funding institutions’  conditionality funding and using a fiscal rule (which the Treasury seems, despite it offering a degree of free lunch if done right, to be completely allergic to).

Second, the centre of gravity of economic policy power no longer resides within the Treasury. This fact seems to disappoint many investors and is much to the delight of those on the Left, and it is a crucial point. The Treasury’s power waned through the Zuma presidency as such networks were contracted back and institutional capacity both outside and inside the government were destroyed. The centre of gravity left the Treasury and moved towards the presidency, but it never quite arrived.

In the public debate, there is normally an odd mood before a budget event; a feeling that the Treasury will magically have delivered all necessary reform and everything will be fine. This is certainly not to say that the Treasury doesn’t have all the right ideas on structural reform. They do, they are there in the “Tito Paper”. The problem is others have to do the implementing, not the Treasury.

We are seeing this around the “phase 3” reform package at the moment. A huge amount of contestation is ongoing, with little to show for it yet; an entire reinvention of the wheel in government when the correct ideas are already on the table.

There is often a view that Zuma left the government fundamentally weakened and lacking capacity. This is true at a profound level, I believe. However, it also combined with mistakes around capacitation at a higher level under this administration to enable implementation. It is not that nothing is happening (to think this would be a mistake), but that there isn’t enough happening fast enough to reach escape velocity.

So the problem this week will likely be too high a set of expectations around the Treasury delivering structural reforms. The Tito Paper can be reiterated, but we shouldn’t be blind to the fact that long-term potential growth currently looks no higher than zero in per capita terms, and now from a lower base.

The third issue, which is a mix of the two above, is the expectation that if the Treasury says something, it will be true. So, promising fiscal consolidation is not going to happen if you don’t have wider buy-in.

The Treasury finds itself in an unfortunate situation this week. Infighting within cabinet has meant that the government has not been able to outline a more detailed, credible set of recovery reforms and growth-boost proposals ahead of the budget. And the president in parliament last week was rather flat precisely because there isn’t that agreement behind the reforms that he wants to make. He was  stymied by the usual suspects such as energy policy (nuclear) navel-gazing.

The infrastructure forum on Tuesday will be a test, but we’ve been here many times before on infrastructure with nothing to show for it. Will this time be any different? The risk here is if it misses the mark, it will leave a sour taste into the budget.

So we find ourselves at the cliff edge, with most people in government not realising that. Finance minister Mboweni and his staff certainly realise that. As such, this week is far from “normal” and we should gird ourselves against the same mistakes each time we have a budget event.

• Attard Montalto is head of capital markets research at Intellidex.

One requirement to reform the bank guarantee loan scheme to improve take up is to remove restrictions of what borrowers can do with the money. At the moment they can only use the loan to cover their overhead costs, which is an unnecessary restriction, argues Intellidex’s chairperson Stuart Theobald on CNBC Africa. 

Moneyweb reports that National Treasury and the SARB are reviewing the R200bn bank loan guarantee scheme. BASA has pointed to several issues in the scheme that Intellidex also covered in its paper on proposed amendments.

The R200bn guaranteed loan scheme is a crucial centrepiece of “phase two” of the economic response to the Covid-19 crisis, but take-up has been low. Because of this, we looked at what wasn’t working and why, and have proposed reforms to the scheme to make it more effective.

Access the reform paper here.

It is not meant to be business as usual and one reason why the bank guarantee loan scheme does not seem to be working as intended is because banks often require personal guarantees for the loans, as is standard in South Africa, says Intellidex’s Stuart Theobald. Featured in Reuters.

SA’s fiscus can’t carry the cost and corruption risk of a 2,500MW nuclear project and the timing of issuing the RFI document is not right, as the country’s energy needs have changed given the Covid-19 pandemic, argues Peter Attard Montalto. Featured in News24.

The bank guarantee loan scheme has onerous conditions and risks for entrepreneurs as it requires personal suretyship to back their loans. These will have to be removed to encourage greater uptake, says Stuart Theobald, chairperson at Intellidex. Featured in Moneyweb. 

There are important moral and practical concerns that should guide the discussion on whether to disrupt multigenerational transfers of wealth.

This column was first published in Business Day

Last week Pierre de Vos, a law professor at the University of Cape Town, published a blog raising the possibility of a 100% inheritance tax. The response, on Twitter anyway, was outrage.

His concern is the role of inheritance in driving intergenerational inequality that contributes to the stark racial inequality that has been highlighted by the Black Lives Matter movement worldwide. There is obvious resonance in SA.

Well, the professor poked a hornets’ nest. The torrent of abuse on Twitter was something to behold, including from occasionally sensible professionals. There were some voices of reason, particularly a rejoinder from Deon Gouws, chief investment officer of Credo Group, who pointed to the practical difficulties of the proposal, but the emotional outpourings dominated reasonable discussion.

To be clear, there is no proposal on the table for such a tax. The last time estate duties were properly considered was by the Davis tax committee in 2016. It recommended that the amount you can inherit tax-free should be increased from R3.5m to R15m. But it also advised the implementation of a higher 25% duty on estates in excess of R30m (20% below), and that the “abatement” for inheritance by spouses should be abolished. The committee was concerned with the unfairness of estate duties applied to married spouses compared to unmarried couples. The National Treasury accepted these recommendations only in part — the duty on estates over R30m was increased to 25%, but the tax-free amount stayed at R3.5m and a transfer to a spouse at death remains tax free.

The way estate duty is done in practice reflects awkward moral and practical compromises.

De Vos’s fundamental point is surely clear to anyone. There is something unfair about disparities in wealth that reflect only who your parents were. Given our history of racism and its effects on wealth accumulation, that base unfairness is compounded by the fact that it perpetuates racial inequality of the past.

Philosophers throughout history have worried about this. In Plato’s ideal republic, children would not even be raised by their parents (indeed, they wouldn’t even know who they were), to prevent the unfairness that results from relative qualities of parenting, never mind inheritance.

The abolishment of inheritance was part of Marxist thinking too, though it followed as a natural consequence of the abolishment of private property. Marx thought trying to abolish inheritance tax itself would be a “foolish” distraction.

Many on the Right also thought inheritance is unfair. Ayn Rand, for instance, abhorred unearned wealth and thought family had no claim on your assets. The transfer of wealth across generations is feudalism rather than capitalism. Of course, thinkers on the Right don’t think estates should be taxed but do agree there should be no special claims or rights given to children who should work for their own wealth.

Moral views opposed to this abound. There is a basic property rights defence. Your wealth is, at least to some extent, the result of hard work and choices to save rather than spend. You are free to spend what is yours as you wish, and that should include giving it to your children. In contrast to Plato, we see the preferential relationship between parents and their children as the one exception to the Kantian maxim to act as you would want others to act towards you. Most of us see a parent’s desire to give their children the best lives possible as an admirable thing. Indeed, divorce and custody law reflect not just a tolerance of this, but an expectation of it. The idea that a death might result in children losing their homes strikes most of us as abhorrent.

Many also think there’s nothing wrong with families accumulating multigenerational wealth. Plenty of us would rather direct our custom to a “family-owned business” than a corporation. We could not have such things if businesses could not be passed on to the next generation.

There is also an economic argument. If you could not leave assets to family, many would choose to spend the wealth instead. That would reduce savings, particularly the kind that finances long-term investments that are essential to expand an economy to create wealth for all.

There are also practicalities that are important. Much of the inequality that De Vos sees transferring between generations stems not from wealth but from intellectual and social capital that families endow in their children. So, an inheritance tax, even if it were possible to implement, might do little to solve the problem that De Vos is concerned with. Hence Plato’s more radical proposal.

As Gouws pointed out, the practicalities of such a tax also have to contend with the many loopholes and ways around it. An army of tax practioners would welcome the fees to create new structures for clients. Parents who deeply want to leave assets to their children can find myriad ways to transfer assets to their hands before they die, not least through emigrating.

The awkward compromise we have now — an estate duty, but not too much, exemption for spouses, but not too much — reflects the clashing of all these different moral instincts and practical concerns. Twitter, however, is no place to air them.

Theobald is chairman of Intellidex.

SA’s major problems are inequality and poverty and we need to question whether an inheritance tax is an effective way to deal with these problems – I doubt it is, says Stuart Theobald, financial analyst and chairperson at Intellidex on The Money Show, 702.

Other than the IMF, other routes that SA is considering for borrowing are Brics’ New Development Bank, the African Development Bank and the World Bank – and all of these have money they can give SA, particularly for infrastructure, says Intellidex’s Peter Attard Montalto on SAfm. 

Intellidex’s Covid-19 Stress in SA report finds that even companies within the same industry are being affected differently. Those with strong balance sheets will fare better, says Phibion Makuwerere, equities analyst at Intellidex, on CNBC Africa.

An IMF programme may be inevitable. Countries must either reform themselves or reform is eventually imposed upon them, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured in Daily Maverick.

This column was first published in Business Day. 

What does the tripartite alliance believe in? There are meant to be communists in there, some labour bods, a party that talks about a National Democratic Revolution. One maybe should expect some anticapitalist zeal, a sense of a profoundly different world with different priorities and different ways of operating the state.

In other words, a bit of spark — that you might disagree with, but you can still see the vision and internal consistency.

Reading Jeremy Corbin’s Labour party manifesto in the UK last year I got angry, I got passionate, I fired off rants on WhatsApp to friends (and ANC Labour party supporters), but I saw its framework of logic and understood fundamentally where it came from, even if I disagreed with it.

Instead, reading the recently released tripartite alliance paper on the “Political economy of the global Covid-19 pandemic and SA’s response”, I fell asleep. This was not stirring stuff.

It reminded me of a number of occasions I’ve been spoiling for a fight on TV with various leftists only for them to fall flat on their face and not put up a fight.

This speaks to a deeper set of problems that must be confronted as we now enter the crucial next phase of contestation, and then negotiation, and compacting on the post-Covid reform path.

The first is that no side has any new ideas. This is not a bad thing necessarily. SA is good at diagnosing its problems, and even coming up with solutions, its just not good at constructing those solutions into a sensible and implementable whole, regardless of what part of the political spectrum you are on.

Not having new ideas is an issue because the coming period is going to struggle with the sense we are going around in circles and it can breed distrust of lethargy from each side. Saying the same thing over and over again can lead to people switching off even before you’ve started.

The second issue is that there is no time. The Ramaphosa administration before the Covid crisis was mapping a 10-year governance master plan and happy to move at a snail’s pace in the short run with a longer term path in mind (wrongly, or rightly). That just isn’t going to work now.

The 2021 risk-reward balance for doing business, investing and creating jobs needs to be rapidly shifted which means change  is needed right now. There is quite simply no time.

This means that year-long Nedlac processes are not going to work unless the government is happy to sacrifice a year of temporary job losses becoming permanent and constrained fiscal space hindering a social wage.

Parts of the government do of course know the need for boldness and speed. The third issue, however, is the government’s need to resolve its internal differences and act in a concerted way.

Reform seen as negotiation raises certain requirements for success — the key of which is that the other side will always be able to exploit your weaknesses if you are not firm and united on what you want. This is where the tripartite alliance has been successful against the government in the past two years — playing off the government’s own risk aversion, but also where additional delays creep in.

The fourth issue is that the government needs to build a reform framework that plays to its factual weaknesses which is its lack of capacity; rather than its pipe-dream strengths of a well-functioning state.

The government should focus on this rather than trying to do everything to please all people. Similarly, it should be aware of being captured by particular interests that can divert it from its focus.

The same is true in terms of expanding fiscal space. New tax measures that might theoretically work (a land tax for example) are too complex to introduce. Rather, the government should focus on shifting existing taxes (say increasing inheritance tax) or dealing with leakages and actually kick-starting growth to expand the tax base.

The final, fifth issue is that all parties can easily be distracted by the need for circus and spectacle in speaking to their base, pet issues and vested interests that don’t actually move the dial, and by easy scapegoats.

This will be particularly testing with respect to the banking sector. The loan guarantee scheme was seen as the answer to the need for some policy to do the heavy lifting, yet has seen very limited take-up so far (given some design flaws that have crept in — such as the need for personal surety). Such problems are better rapidly dealt with behind the scenes through policy design adjustments rather than making them into political economy footballs.

History would suggest that we are about to see a huge flurry of positivity, Thuma Mina-ness and big numbers that then rapidly fades as the long slog begins.

Will this time be any different and these five historic lessons learnt?

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