Covid-19 has changed just about everything — but in the wealth management space, tried and trusted principles still apply, writes Intellidex GM Colin Anthony reporting on the 2020 top private banks and wealth managers survey. More here.
Intellidex analyst Peter Attard Montalto has likened SA’s IMF loan to a kind of crossing of the ‘Rubicon’ as commitment to reforms by minister Mboweni and governor Kganyago are about to unleash a civil war within the ANC. Featured in Daily Maverick.
It is a pity that President Cyril Ramaphosa did not sign the IMF letter of intent because the promises made on debt, policy reform and budget cuts will have deep and wide political implications, says Business Day’s Peter Bruce in agreement with Intellidex’s Peter Attard Montalto. Read the column here.
As the tortuous process of the business rescue practitioners comes to an end, SAA still has no money and labour unions are getting restless, comments Peter Attard Montalto, head of capital markets research at Intellidex. Featured in News24.
By Timothy Sithole.
Covid-19 has removed the ability to conduct qualitative research because face-to-face interaction is mostly impossible. Despite the strong rise of online research techniques – driven by their efficiency and turnaround times – face-to-face data collection is still the most preferred research method as it enables the researcher to fully engage with participants and gain key insights.
The lockdown has enforced fieldworkers to be recalled and some research to be stalled. The role of a market researcher constantly needs to be evaluated to analyse key trends and ensure adaptability to produce the best research with minimal effort.
Market researchers must be intuitive and find new ground-breaking research that they can take to the public. Covid-19 threatens that process and it’s necessary for research houses to come up with new strategies to remotely source data and produce reports without use of traditional formats.
The most prevalent pieces of research we’ve seen related to Covid-19 are centred on the financial implications on households and people’s ability to conduct work. Because the virus will be around for some time to come, research ideas need to focus on other areas as well – as would be the norm.
I recently came across an articlethat highlights how people are spending less on personal grooming products, instead buying more cleaning products and disinfectants. Key insights can be gained from this that can be used to help the company deal with losses.
This begins by identifying why people are not buying as much deodorant – obviously, working in isolation you don’t need it as much, but in future they must get back to the routine. That’s where strategy research comes into play, to come up with ways to deal with that in the future.
Because it is impossible to conduct face-to-face research or focus groups to gain more insights into the issue, we need to turn to online research. Trusting technology is at the heart of doing this research. Online research is exceptionally good for quantitative studies: quick surveys, creative concept tests, product testing and, pricing. But by understanding the nature of your research, it can also be used for qualitative research purposes.
Covid-19 has presented us with the opportunity to deal with the imminent future of a digitalised world. It’s a trend not only for research, but one that most business sectors are facing. From having virtual offices to online focus groups through Zoom or other platforms, this is the future of the world and we need to reimagine market research.
Technology not only makes our lives easier, but it is efficient, cost-efficient and introduces more data efficiency. At the end of the day, it is still the human (you) who ensures that the data is collected and analysed correctly.
Out of a population of 59,62 million,only 40%  of South Africans own at least one smartphone and use it at least once a month. Out of that 40%, not all of them will have access to data or be knowledgeable enough to use online meeting platforms.
This is obviously a huge disadvantage in gathering sufficient data from people in the periphery – but a research strategy has been developed in Kenya that could possibly combat the problem. A group of researchers in Kenya  have advised their respondents to write up a journal answering questions that normally a researcher would be asking.
These are collected at an appropriate time by a researcher, and this remedies a situation where like in South Africa not everyone has a smartphone to do it online. For those who do have access, voice or video elicitation has been suggested and seems to be working efficiently for now to source data.
Researchers need to maintain a strong connection with respondents.  Promoting a stable relationship with respondents will help develop trust, while it assures them that they’re playing an instrumental role in the topic being covered. This also helps in ensuring that they are free to express their views in whichever way they need to. The interviewer must be ready for different outcomes, especially during research that happens frequently.
The first step to ensure that researchers get the best possible data from respondents is trying to include everyone that was originally defined as the sample frame. For example, with South Africa, the 60% of people who do not have smartphones will need to be accessed through telemarketing techniques.
This includes but is not limited to SMS surveys and phone calls to get the data and record it to transcribe later. Here, the number of open-ended questions must be minimised to ensure the researcher gets the best out of the interview.
An attitude and usage survey would work in an opinion-based study – for example, to answer how many parents are comfortable with sending their children to school during the pandemic. The survey would only ask the key questions through calls or SMS. Note that, should there be a need to reach more people, a twitter poll wouldn’t work here.
The future of market research was always going to be different to traditional research. We must adapt, put more trust in the technological advances thrown at us and ensure work continues.
With Covid-19 wreaking economic devastation across the globe, investors are grappling with what the future holds. In this time of heightened uncertainty, this crisis highlights the critical importance of quality research, which the Financial Mail-Intellidex Ranking the Analysts survey identifies.
This survey has been the leading assessment of investment banks’ stockbroking businesses for more than 40 years. It stands out as the definitive judgment on the performance of the sharpest financial analysts in the country.
Intellidex was chosen as the partner for this prestigious survey having developed a solid reputation for research, particularly within the financial services industry. The rankings and other results presented in this survey are drawn entirely from a confidential questionnaire process conducted with the domestic institutional clients of investment research and stockbroker firms.
Standard Bank SBG Securities is the top-ranked firm for research in 2020 for the fifth consecutive year. This overall team award is based on consolidated scores for all 40 research categories, with team scores used rather than those of the individual analysts.
RMB Morgan Stanley retains second place, while Renaissance Capital (Rencap) moves up to third from fifth last year, displacing UBS South Africa into fourth spot. Avior Capital Markets and Absa Capital both moved up two places into fifth and sixth respectively.
For the report as published in Financial Mail, click here.
For further information on the Ranking the Analysts project, click here.
Launched in 2012, the Top Private Banks & Wealth Managers survey is based on a comprehensive survey of the wealth managers and private banks as well as their clients, with high emphasis placed on client rankings of their firms across an extensive list of categories. This year 5,612 clients of wealth managers and private banks completed the online survey, with the high number of respondents enhancing the credibility of the findings.
There are three categories of overall winners with awards also for the best-performing firms in different client segments or “archetypes” of clients. PSG Wealth is the Top Wealth Manager of the Year: Large Institutions, with Standard Bank Wealth & Investment second.
Brenthurst Wealth Management is the Top Wealth Manager of the Year: Boutiques, followed by Gradige-Mahura Investments. Investec Private Bank wins the Top Private Bank of the Year award, with Standard Bank Private Bank second.
This is the second consecutive year that PSG Wealth wins in the category for large institutions with high ratings from clients securing it the award. The firm shows exceptional all-round strength, catering well to all investor archetypes. It is ranked second in two archetypes, passive lump-sum investor and young professional, and third in the wealthy executive archetype. Judges have been impressed with PSG Wealth’s entrepreneurial spirit as well as its constant efforts to evolve.
Brenthurst shoots up from fourth place last year to take the Top Wealth Manager award in the boutiques category. Founded in 2004 with Magnus and Sue Heysteck and Brian Butchart as the founding shareholders, the firm has enjoyed good growth, using a strong media presence to attract clients.
The winners of the archetype awards are extremely important because they reflect which firms cater best to different market segments, enabling investors to select the firm that best suits their particular needs.
NFB Private Wealth Management wins in two archetypes: passive lump-sum investor and young professional. RMB Private Bank is the top wealth manager for successful entrepreneurs, Carrick Wealth wins in the “wealthy executive” archetype and Standard Bank Wealth & Investment is the top wealth manager for internationally wealthy families.
The above awards use a combination of scores emanating from Intellidex’s assessment of the firms and the client rankings. The People’s Choice awards are based purely on client rankings and receiving the highest rankings from clients is cherished accolade. Gradidge-Mahura Investments is the people’s choice as the country’s top wealth manager, with Investec Private Bank being voted the top private bank award.
The People’s Choice accolade for Gradidge-Mahura stems from its relentless focus on putting client interests first. “We believe that we are here to serve our clients, and in doing so we will be successful. We aim to develop our staff and keep them suitably skilled so that they can add value to our clients on an ongoing basis,” says operations manager Cyril Chetty.
Covid-19 has changed just about everything but in the wealth management space, tried and trusted principles still apply.
As the markets crashed in early March at the onset of the pandemic, wealth managers spent much time assuaging client fears, persuading them to adapt portfolios where necessary rather than panic and sell. This task, they say, was smoothest with long-time clients with whom they’d developed trust, having managed them through previous market crises. Wealth managers emphasise that communication with clients has been key during this trying period, with reassurances prevalent.
Intellidex has been extremely impressed over the nine years we have been conducting this survey at the extremely high standards and professionalism of SA’s wealth management sector. That excellence has come to the fore in dealing with the Covid-19 pandemic.
For the full survey report published in FM Investors Monthly, click here.
The gazetting of the list of infrastructure projects earmarked for potential investment is welcome but seems to lack any detail at all and we still await a policy statement, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured in Business Tech.
Details about government’s infrastructure plans are still scant so it is difficult to determine how viable the financing plans really are, says Stuart Theobald, chairman of Intellidex. Featured in Bloomberg.
The state has given nod for easier credit criteria, but is a 6% writeoff a price worth paying for banks?
It should now be much easier for businesses to borrow from banks in terms of the Covid-19 guaranteed bank loan scheme, thanks to changes made last week. But this depends on whether banks play their part in pushing R200bn of loans into the economy.
The scheme has been a disappointment so far — according to most recent figures, just R11.7bn has been lent and the growth rate was slowing. The scheme is a big part of the president’s R500bn economic relief package. Now, the conditions on which loans will be granted, as well as the credit assessments banks must undertake, have been loosened. Banks have been given discretion to apply liberal credit criteria.
The problem is that it is still not clear how much the National Treasury is going to absorb in losses for the scheme. This is fundamental — a specific budget should be set as a target. The scheme should be about leveraging a budget set aside for stimulus into a large amount of funding for the economy.
Instead, loosened criteria will mean more losses for the Treasury but we don’t know what would be reasonable. It has hinted it is lining up external funding to cover losses on the second half of the R200bn, which might fix this issue, if we ever get the volumes out the door to reach that point.
A lot will depend on how banks exercise their discretion and whether they actively market the loans. One of the weaknesses of the initial scheme was that banks were required to apply their “normal” credit assessments. So even though the Reserve Bank, guaranteed by the Treasury, would absorb 94% of the defaults on loans (less any margin banks earn) the banks couldn’t loosen their risk appetite.
If they did, their claims in terms of the scheme could be rejected. That has now changed — the wording is now about “reasonable” credit process in line with the “emergency spirit” of the scheme. There is a suitable level of vagueness to cover banks who take a liberal approach to granting the loans.
But just how liberal will they be? If banks wanted, they could grant loans based on assessment of the applicants’ performance up to the end of 2019 (previously they had to consider performance up to March 2020) looking only at bank accounts to assess whether they were in good standing (previously they had to use audited financials). They can then make the loans and require no personal suretyship from the owners of companies that borrow (previously they had to get suretyship).
Now, if banks choose, company owners would not have to face putting their homes and families’ livelihoods on the line to access the scheme. Company owners can also now pay themselves if their remuneration is normally in the form of dividends.
The incentives for banks are tricky. They still face writing off the first 6% of any loans that are made. That is R12bn of losses across the industry if the full R200bn is lent, though potentially spread over several years (there are tricky accounting issues around this). They must also use any margin they earn on the loans to cover further losses before they can claim on the guarantee. So, the scheme is not intended or likely to be profitable. The discretion granted to banks is in recognition of the financial risks they still face and in equipping them to manage those.
But there is an indirect way the banks benefit from the scheme. The guaranteed loans rank behind all other creditors. If a borrower goes bust, the Covid-19 loans rank alongside equity. So, if a bank has an existing loan to a client, the guaranteed loan provides a new buffer to help the client continue servicing the existing loan.
This, I think, is the main incentive for banks to lend in the scheme, but that depends on them applying liberal criteria, and it drives them to focus on clients in their existing books. They could also package Covid-19 loans with other senior loans, improving the overall credit outlook for the bank. There is a good case for banks to look at the 6% write-off as a price worth paying to improve the performance of their core books.
The other benefit, of course, is from the wider economic stimulus of the scheme. At about 4% of GDP, it would provide material support to the recovery with wider benefits to banks and everyone else.
Loans also now can be used to finance reopening (previously it was just the overheads during lockdown). This is important. Imagine a restaurant that has the option to reconfigure its layout to offer more outside seating space and put in other social-distancing measures but has spent down the financial resources it would need to do so. Now it can access the cash to finance its recovery.
The terms of the loans have also been somewhat loosened — borrowers don’t have to start making repayments for six months after the last drawdown (up from three months), so up to one year from the loan being granted. They then have five years to pay it back and the prime interest rate is charged (now at a historic low of 7%).
Of course, more could be done. Rates could be reduced, the use of proceeds could be widened, and the cash flows could be made up front. But this is a material step in the right direction. Other countries have calibrated their guarantee schemes to get them to meet objectives. Some are more liberal than SA, but others less. We will see if the calibrations now do in fact allow the scheme to meet the targeted loan amounts, but much depends on how banks rise to the occasion.
• Theobaldis chair of Intellidex, which produced an initial design for the bank guarantee scheme.
There is a risk that Du Toit’s successor at Denel will also leave because of similar challenges. The fundamental problem of SOEs is the need to move with decisiveness and speed, which isn’t there, says Intellidex’s Peter Montalto. Featured in News 24.
The ANC’s vision for the future of the Development Bank of SA seems to be it should be backing projects that the private sector is unwilling to back, says Peter Attard Monto in a MPC preview discussion on Business Day TV.
The joint letter from finance minister Mboweni and public enterprises minister Gordhan will be enough to move SAA’s business rescue process forward. But it actually provides no commitment to funding, says Peter Attard Monto. Featured in News24.
Sometimes we become immune to things when we hear them too much.
Something a lot of people have always said to me is “government is happy because it discussed the issue, no-one has given a thought to implementation”. This phrase has been more regularly heard since President Cyril Ramaphosa came to power more than two years ago and in particular in relation to the recovery planning process now supposedly happening.
It is completely mad. Why would the government — whose job is ultimately to make the country a better place — be happy to stop at discussion?
Perhaps this is laziness — implementation is hard with a lack of capacity in the state. Perhaps it’s a shyness from taking on vested interests such as the taxi industry. Perhaps it’s the active kowtowing to such interests that favours the status quo more than implementation and change.
Perhaps it’s historical and cultural — the inability to transition fully from being a struggle organisation to an implementation machine.
An example has been energy policy over the past three years, where despite numerous promises of liberalisation, the process has moved at a snail’s pace and the government will have to live with the consequences of load-shedding through the recovery in the coming years.
This issue of talk vs action sounds almost comical, but is crucial for recovery. For instance, wider government outside Treasury seems happy for the moment with a geeky discussion on fiscal multipliers rather than an analysis of what it is spending on what implementation.
The contrasts between the ANC recovery plan and the SA Communist Party (SACP) plan on the one side and the Business for SA (B4SA) plan and the “Tito paper” on the other is stark in this regard. Ignoring prescribed assets, the ANC’s references to the Reserve Bank and import-substitution obsession can broadly be nodded along to. Yet such a high-level debating document has no detail and is lightweight. There is no sense of drive to implementation.
The “Tito paper”, by contrast, is specific and, shock, evidence-based with references to background detail. Yet both have notionally been accepted by the ANC.
The contrast between the SACP paper and the B4SA paper is stark too. The SACP paper takes up a good majority of its space talking about the basics of epidemiology and is backwards-looking on what the government has done. The SACP doesn’t even succeed in laying out an interesting vision of a socialist state.
The B4SA presentation, by contrast, is (a lot of) detail on what must come next to unlock growth, with a focus on specifics that needs change across the whole of the government. The B4SA paper can be criticised for its length and complexity but is still an important exercise in showing the volume of what needs to change to unlock growth.
The fear I have is that a government that can’t implement cannot even begin to make decisions on a document such as this. It can kick it for touch into the long grass, and into social compacting, yet this is the wrong place for such specifics, which by their nature cannot be compacted.
I have been struck in the past two weeks in interactions with people right across the ideological spectrum how much pessimism there is for Nedlac as an institution of social compacting. While there is a recognition that a social compact is needed for a recovery, there seems a growing consensus that Nedlac is not the place to do this.
Powerful central leadership is needed that can make and deploy implementation directives, which can hold the machine of the state accountable, and can be solely focused on implementation after it has sensitively created the new social contract.
The alternative is lowest-common-denominator policymaking and a hunt for free lunches. If you mash the ANC and B4SA plans together in a lowest-common-denominator machine, you are going to get nothing much out — but something closer to the ANC plan. Or put another way, the B4SA plan without the implementation specifics.
The dawning realisation after that point that there are no funds to deploy, a fiscus that cannot perform, employment rising and a fiscal cliff edge becoming inevitable means the option will be attempts to grab hold of the Bank and Treasury power as well as the power over more than capital deployment through “real” prescribed assets. There will be no other choice because it will be too late and the final lever left.
Now the plans are on the table, we have a problem in a lowest-common-denominator world. Much of what business asks for, and much of what is in the ANC paper, is notionally agreed to in the government or is in the Tito paper or the National Development Plan (NDP) as examples. The government seems too happy to point at them and say “look, the Tito paper is accepted by cabinet”.
The response instead must be “so what?” If something isn’t implemented fully to conclusion, it doesn’t exist in the reality business operates in and ANC voters live in.
It will take everyone to call out the nakedness of policy without implementation and highlight its consequences pushing towards more than the fiscal cliff edge.
There is no doubt that National Treasury will be aware of the negative signal that funding SAA will send and the dangerous precedent this sets for SOE employees being backstopped by the state, says Intellidex head of capital markets research, Peter Attard Montalto. Featured in Sierra Leone Times.
Seldom has there been so much agreement on one policy intervention. Infrastructure is front and centre of economic revival policies from the ANC, business, the government and economists on both left and right. The problem is that it is much easier said than done. The fact is that public infrastructure investment has been shrinking and the causes of that cannot be wished away.
There are deep reasons for this, despite some attempts to solve it. The Presidential Infrastructure Co-ordinating Commission was created a decade ago to follow through on the National Development Plan’s infrastructure vision. Little has come of it. Now we have the Investment and Infrastructure Office in the presidency too, tasked with unblocking a pipeline for the future. There is much hope it will be able to deliver, but it has a long way to go. Its Sustainable Infrastructure Development Symposium two weeks ago was long on vision but short on detail.
There is good and bad infrastructure. Infrastructure should be about the long-term economic and social benefits it provides — the return on investment. It is not valuable in and of itself. To listen to some government ministers describe it, infrastructure is about the jobs created through the construction period. That’s really not the point. Those should pall into irrelevance compared to the jobs created by the economic catalyst of infrastructure. Whether a power station or a railway line, the measure of success must be the long-term economic activity it generates.
Everyone agrees that the private sector must play a major part in funding that infrastructure. It is, really, the only way it can be done in the context of the serious fiscal constraints on the government. Again, easier said than done. There is huge potential for the private sector to play a role. Infrastructure assets suit the investment needs of several large pools of capital — done right, it is long term and low risk, exactly what pension funds and insurance companies need. The independent power producers’ programme shows what is possible — it mobilised more than R200bn of investment in just five years from local and global sources. But that was a rare exception in what has been a long-term decline of private investment in public infrastructure.
But there is not a lack of investor appetite — there is a lack of supply, which is why talk of amending regulations for pension fund investment into infrastructure is misguided.
We were better at this before 2008. The first major public-private project (PPP) was the N3 toll road in 1998. After that, another 27 large infrastructure projects were developed between the public and private sector. But come 2007, it slowed to a trickle. Since then, almost all the public-private infrastructure projects have been office blocks for government departments, perhaps the lowest economic multiplier projects there are (really a disguised form of sell-and-lease-back). Exceptions were the Gautrain and Gauteng highway project, though both were done outside the “normal” infrastructure framework.
The golden age of public-private infrastructure was that of the Thabo Mbeki presidency and Trevor Manuel finance ministry. Through strength of will, they drove the public sector to develop public-private infrastructure projects. But they were pushing against gravity. The fact is that the public sector is institutionally designed to resist private sector investment in infrastructure. And in all the talk of infrastructure as policy centrepieces, there has not been specific discussion of the design flaws in the way the public sector procures infrastructure.
There is no systematic assessment of infrastructure plans across the government to test for value for money. But more importantly, there is no systematic assessment of whether they are best funded on the government budget or set up as projects the private sector can fund (and manage). If you are a municipal infrastructure manager, you have the choice of whether to plump for public budget allocation for infrastructure or to structure it as a PPP. But if you go the latter route, you must put up with years of viability assessments and agree to have the National Treasury breathe down your neck throughout. It is the far harder route. Yet that is now what we’re suddenly expecting the whole of government to do.
If we’re serious about a new golden age of infrastructure, let’s fix what needs to be fixed. There must be amendments to the Public Financial Management Act and the Municipal Finance Management Act to change the way infrastructure is financed. We need to be able to develop projects that can be funded by the private sector in return for access to the cash flows that infrastructure develops, whether it be rates for water and sewerage or fees for railway lines.
We need to redesign the way PPPs are assessed and procured with streamlined processes for smaller ones, with the Treasury playing a central role in assessing all infrastructure plans to determine optimal financing strategies (the presidency is not the best place for this kind of work). It must systematically parse public infrastructure plans to assess which are best on the public budget and which done by the private sector. Good project design is not just about the financing, but the effective operation and maintenance of infrastructure. Those are critical to shape the risks appropriately to attract private capital.
Until we start having conversations at this level of detail, we’re not going to turn the policy visions into reality.
The ANC’s Economic Transformation Committee discussion document, on how SA can rebuild its economy to recover from Covid-19 effects, doesn’t have the necessary “oomph” to move the debate forward, says head of capital markets research at Intellidex, Peter Attard Montalto. See News24.
Intellidex is recruiting an equity research analyst to join its capital markets team, taking a role in leading equities and ETF coverage for our retail investor client base. This is a mid to senior position with leadership responsibilities for research in our retail investor segment.
The analyst will be part of a team that studies South Africa’s equity markets broadly, and some markets in other countries. In particular, he or she will lead the preparation of equity research reports on a broad range of JSE companies with an emphasis on small- and mid-cap sectors, as well as Intellidex’s coverage of local and international ETFs. This position involves financial modelling, valuation, discounted cash flow calculations, fundamental business analysis, general market awareness and participation in the capital markets team. While the role will be focused on servicing retail investors, the candidate will also have the opportunity to contribute to institutional research, servicing our global institutional client base.
He or she will also need a deep understanding of ETF regulatory guidelines and product structures to provide insight on the evaluation of a range of local and foreign ETFs, write ETF notes and conduct ongoing macro/micro research to identify developments that could impact ETFs covered by Intellidex.
The candidate will also provide support to strategy and market research teams.
Essential requirements are:
CFA designation or equivalent
Previous experience in a sell side or buy side research role in a stockbroker or fund manager
Excellent knowledge of company financial statements
Strong financial analysis skills
Able to provide examples of previous research reports
Only applicants who meet these essential requirements should apply.
Additional requirements are:
Good writing skills
Curious and enjoys problem-solving and creative thinking
Intellidex offers a unique environment that draws together top academic skills, financial markets research and insight on South Africa’s financial sector. We work with investors, financial institutions and domestic and international policymakers to improve outcomes for all South Africans. Intellidex is well-recognised for high quality research and you will become a core part of a highly skilled team, providing significant learning opportunities to advance your career.
Performance will be judged by the delivery of high-quality research projects and reports, as well as engagement with clients and other audiences. We have offices in Sandton, where this position will be based, London and Boston. The position will report to the head of capital markets research.
We offer a small company environment in which you will have considerable latitude to shape your role. Remuneration will be a mixture of basic (in the senior researcher range) and performance-based pay.
Our standards are high. You will be working with MBAs, CFA charterholders and PhDs on our team to ensure that Intellidex delivers high levels of client satisfaction and responds dynamically to new business opportunities.
If you are interested in the position, please send a covering letter in which you address the eight requirements listed above, using the form below. There is no deadline for applications, but the role will be filled as soon as a suitable candidate is identified.
Intellidex estimates that if the R500bn fiscal package were fully implemented, then SA’s GDP could contract by 10%. However, without proper implementation of the package, the GDP contraction is likely to be more than 16%. Featured in Daily Maverick.
Declaring that a cabinet subcommittee has agreed to reach a primary balance means nothing without the decisions to get there.
We’ve had the emergency budget, we’ve had the infrastructure symposium, but we haven’t had a sense of a cohesive, accepted plan.
The budget was, therefore, left quite naked.
It wasn’t meant to be this way. I am sure the government would have rather had a loose “phase 3″ recovery framework to announce before the emergency budget, but instead all eyes are being focused on the medium-term budget policy statement in October.
This is an awfully long time to wait. Indeed, it will seem even further away as we see in the third quarter of the year furloughed workers turned to unemployed workers, shuttered businesses turn to liquidated businesses — and then the prospect of temporary grants stopping in the fourth quarter.
Anchoring around this point panders to the lack of oomph seen on busting through political blockages and the urgency that should come from a joint humanitarian crisis feeding off an economic crisis. This is of course what we saw with the late announcement of the “phase 2″ stimulus plan at the end of April.
The problem is that in sticking one’s head in the jaws of the hungry hippo that’s standing on the fiscal cliff edge, delays and nakedness take on a different and more immediate role.
A new growth recovery plan that showed strong leadership, positive panic, the deployment of political capital, seriousness and speed could have added credibility to the Treasury’s active scenario. Left naked, however, it lacks credibility with investors.
The issue is more pressing because we are yet to go through the peak period of daily Covid deaths, which will change the political economy and balance around the Treasury. This is why saying a cabinet subcommittee has agreed to reach a primary balance by 2023/2024 means nothing without the decisions to get there.
There is no point in saying what “must” happen; bond market investors only care about what “will” happen. Investors know the Treasury has the right growth reform ideas. This isn’t the point. I “must” buy a huge villa with an infinity pool in Camps Bay, but that doesn’t mean it’s going to happen any time soon.
The “passive” Treasury scenario also isn’t credible because it is defined as a “soft” debt crisis when there is never such a thing. Debt crises are sudden stops that happen uncontrollably, and debt wouldn’t keep going up after a sudden stop but would be forced lower by (real) austerity and an IMF conditionality-based borrowing programme.
When the fiscal cliff edge is about strategic communication as much as anything else, the Treasury runs a risk with its presentational choices. The Treasury risks losing investors by trying to speak on behalf of the whole of the government, as it did on a number of investor calls about reforms after the emergency budget.
The Tito paper may well be accepted by the ANC national executive committee and the cabinet de jure, but it is not accepted de facto, which is clearly evident from actually what is (or rather is not) happening in terms of reform.
The mood of investors after these recent calls was more than glum but increasingly fractious. This has been a troubling move for the Treasury, compared with the more predictable outcry against the budget from the Left (who do, actually, make some decent conclusions even if one disagrees with their reasoning).
SA Reserve Bank bond buying (to compress the bid-offer spread in the bond market) prevents some signals from investors being transmitted back to the government. The Reserve Bank is treading a fine line between preventing a financial stability shock and not providing a free lunch to the government. They will be severely tested through the rest of the fiscal year with higher issuance week after week. If they are serious about not giving the government a free lunch, they will have to at some point allow the bond market to break and then come in and pick up the pieces.
Many in the Treasury know the risks here — indeed, one risks being too harsh on them because there is in some sense little else they can do here. But equally the fantasy of two scenarios will abruptly come to an end at the end of July after the disbursal of the IMF’s rapid financing instrument of $4.2bn to the Treasury.
At that point the IMF will have to publish a staff report with a credible debt-to-GDP baseline. The IMF cannot give scenarios of what must happen, it must present what will happen. It is likely to show debt stabilising much more slowly at a much higher level than the Treasury does — and even this will have question marks over it. The IMF has been there too many times before with lists of necessary reforms in its periodic Article IV reports that are then not implemented.
The rest of the government should be cautious about what happens when an increasing majority of investors see a proper crisis a few years out as a baseline forecast. Things can become inevitable. We need to see positive panic — a favourite of these columns; some hands-in-the-air-style screaming.
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