What is to be done in reducing Eskom’s towering debt? Intellidex’s Stuart Theobald helps us answer this question. Featured in the CBPEP Colloquium 2020 conference report. 

Scant insight into how government’s decision-making works is a problem that infects business and investor confidence.

This column was first published in Business Day. 

There is a strange omertà in the ANC that they don’t often spill the beans on how decisions are made. Notice how there are lots of books from analysts on politics, but political autobiography just isn’t a thing in SA.

It took many years, and the Zondo commission, to start to pry out details on state capture. Not the high-level narrative which was already well known, but the intricate details of who said what to whom and when.

During March to June, at the height of the coronavirus crisis, decisions were coming out of government with seemingly little advice, no public consultation and with glaring contradictions.

When was the last time anyone who used to work in the National Treasury wrote a book? The Treasury seems happy just to pop its head above the swamp twice a year as it hunkers down to protect the institution.

Viewed from afar, economic policy decisions can appear chaotic. Closer up, even more so.

The management of the economic cluster in the cabinet is a key example, as is its failure to come up with any decent, cohesive plans given its leadership’s tendency to spout easy platitudes.

Why is all this important? Because we have a problem that infects business and investor confidence, because we have a challenge in understanding the machine.

There are several possible reasons for things happening or not.

The first is the technocratic impulse to make the country a better place and solve its problems.

Second, this is then bogged down in a world of left-leaning, state-loving arguments regardless of if there is any money, capacity or ability for the state to deliver.

Third, things are reflected through a lens of vested interests including those of the unions, communist party allies, big business, and through the obsession with the social compact.

Now throw in some egos and a whole lack of state capacity and you begin to see why things are simply stuck in the mud.

The issue for business and investors is what percentage of the problem pie do you assign to each of these buckets?

The president would like us think it is mostly about capacity. But is that a limiting constraint? If you solved the problem of capacity, would dealing with rent extraction and vested interests still dominate? The issue that is not appreciated is that all these factors are interlinked and co-dependent.

We can apply some important issues to this framework.

If we take the fact that the government has made no fuss about the major step of gazetting a section 34 determination that will allow bid window five of the renewable energy independent power producer procurement programme to occur, you must then ask why.

There are good people around the president who might understand how important it is to trumpet this. But then we get stuck at the vested interest and rent extraction stage. It would seem that for so much of policy — spectrum, for example — one cannot trumpet and promote one issue ahead of others.

The same is true for SAA. No sound costed and transparent proposals have been made for why R10.4bn should be provided by the state when it will come from slashing infrastructure budgets.

The technocratic urge has not been there. Then you get a layer of ideology (the state must have an airline) and vested interests with the unions, and the need to stick with ANC resolutions, and you then have the SAA money drain going on and on.

Private sector capacity has been brought into the department of public enterprises to accelerate this crash-landing. But this also shows where this framework breaks down. The ideology, the vested interests, don’t seem to count for enough to explain what’s going on. At its heart, is it just fiddling for the sake of it in an ego battle?

The president has clearly picked the department of public enterprises over the Treasury, but on whose advice? Has he asked why SAA is not even really part of a cohesive wider transport policy? Does he then understand the consequences for a forthcoming World Bank loan? Does he know what this means for the public sector wage bill and the court cases around it? How can decisions be taken like this?

All of this breeds uncertainty and is why radical sunlight is needed and much more transparent decision-making too.

As long as decision-making is messy and in private it will remain easy for bad decisions to be made and we will only really know when it is too late.

Attard Montalto is head of capital markets research at Intellidex.


The debate around a basic income grant has been going on for about 20 years. While it could reduce poverty in SA by as much as 75%, affordability is the issue, says Peter Attard Montalto. Featured in Business Tech.

A compact does not bind any party and is not ‘the government recovery policy’ – even if a Nedlac plan is ‘noted’ by cabinet, notes Intellidex’s Peter Attard Montalto. Featured in Business Tech. 

The politics was decided some time ago as there was a resolution within the ANC’s NEC that SAA needed to be saved, says Intellidex’s capital markets analyst, Peter Attard Montalto, in his interview on 702.

This column was first published in Business Day. 

How is the sorry saga of SAA going to end? We are stuck in an Alice in Wonderland that company law writers could never have predicted, with a party repeatedly promising cash and failing to deliver, but creditors stuck with nothing to lose in waiting and hoping. Meantime, the business rescue drifts on, burning cash as it goes.

Creditors are meeting again this week to decide what to do after the government missed yet another deadline last week to arrange financing for the airline. A cabinet meeting is also supposedly going to come to final decisions on how to fund the rebirth of the airline. It has already promised R10.3bn to cover liabilities incurred and must inject more to finance its rebirth.

I have tired of asking why the government is so committed to this path. There are things you can never get a straight answer on. The cabinet has made its decision, albeit with many unaware of the consequences of it. It flies in the face of its own 2017 transport policy for one thing, and in the face of the fundamental principle of equity the government proclaims to support, pumping cash into something that will serve the middle class at the expense of social programmes. Ministers this week will have to decide what budget lines to slash to fund the airline.

But it is the practicalities of what it wants to do that is imponderable. First, it has to find cash to fund the airline while it works on its longer-term solution. It is running out of cash and will probably be dry come month end. On Friday, the department of public enterprises said it is expecting banks to provide bridging finance for the airline. Banks effectively tipped the airline into business rescue in the first place by not rolling loans. Since then, the government has lost its credit grade and the appetite for more exposure, even if guaranteed by the government, is not what it once was.

Public enterprises minister Pravin Gordhan may think he can lean on banks, but he should be cautious. Banks said “no” when all kinds of political hellfire was thrown their way to fund the Guptas’ acquisition of Optimum Coal or Iqbal Surve’s acquisition of Independent Media and they aren’t about to start buckling now just because we have a different president.

Banks are carefully structured to be impervious to political pressure — large exposure committees are subcommittees of the board with a set of clear directives in bank regulations and in terms of the Banks Act. One regulation is that all credit decisions are made on an “arm’s length” basis — that means threatening a bank with consequences such as the loss of current accounts cannot sway the committee. And if it were swayed by such threats, it would be breaking the law.

Of course, if the cabinet is able to reallocate money out of other budget lines and needs bridging until it can make it official in the medium-term budget policy statement or through an appropriations act, then banks will play a role as they would with any client needing bridging finance for the short term. It would have to be guaranteed by the Treasury. It can be done, but whether that would be politically wise for the cabinet is a different matter.

As is the economics of it. The government is still committed to a vision of a strategic equity partner buying into the airline, bringing management expertise and cash in return for a minority stake. Of course, any deal can be done at the right price. And the price in this case would be that the government hands over full management control of the airline to the partner and absolves it from any financial risk. There are ways of doing that — an ironclad shareholders agreement plus some form of put option such that the partner can sell back any stake it takes to recover its money if things go wrong.

The department of public enterprises has said it has had 20 “unsolicited” offers. I am reminded, though, that anyone with a pen and paper napkin can make an unsolicited offer. We have no idea how credible any of them are. But it has been reported that Ethiopian Airlines is one that is interested. The department might be able to make a deal attractive enough for Ethiopian, but will the cabinet go along with a scenario in which the government has no control while assuming all financial risk?

It would be wise to think through the economics of that — you’d have someone incentivised to take big risks with the airline in the hope of scoring from upside, knowing they face no downside. Sounds remarkably like the Coleman Andrews structure that saw him march away from the airline having banked incentives in the hundreds of millions.

The other possibility, which has a non-zero probability, is that creditors vote in their meeting this week to put the airline into liquidation. The business rescue plan envisages them receiving 7c/rand of their exposure. If it went into liquidation, they would get zero. But creditors have been messed about in an almost incomprehensible way. I would not blame them if they decided holding out for a possible 7c is not worth the pain of interminable deadline missing by the government and vote to teach it a lesson. That would at least bring finality to the mess.

There is, however, low chances of that, so I think we’re going to watch as banks are cajoled into keeping the airline’s lights on while the cabinet continues to pursue a deal no-one wants without terms it cannot accept. Oh, what a mess.

The 2020 Top Stockbrokers survey, which combines client ratings of their brokers’ services with an Intellidex assessment of the brokers’ responses to a questionnaire, was conducted between 8 July and 17 August, when the initial panic had subsided but volumes remained elevated. Clients had experienced how their stockbrokers had responded to the pandemic both in terms of investments and in coping with the shift to working from home.

Standard Online Share Trading/Stockbroking (OST) is the Top Stockbroker of the Year. Its all-round strength in each category we assess makes it difficult to beat and it is a formidable presence in a highly competitive industry. It came second to Rand Swiss last year but has won the overall award in the previous three years.

What has particularly impressed us over the years of conducting this survey is that Standard OST never ceases to evolve, adapting to changing market conditions but also looking improve the customer experience. Despite its size it pays attention to detail, striving to be a market leader in every product category. The outcome is a stockbroker with an extremely powerful offering for every archetype, from the young saver at the one end to an extremely impressive family office offering for wealthy families.

Rand Swiss, last year’s overall winner, put in another strong performance this year to secure the Top Online Broker of the Year award. Client ratings are particularly strong for this firm across all categories. It’s still a young company, formed only in 2015, but has quickly entrenched itself as a leading player in the industry. Based on our survey results, the foundation for that success is its excellent client service levels. The firm also wins the special mention award for the top tax-free savings account.

Another young company that is keeping clients extremely satisfied is Unum Capital. It wins this year’s People’s Choice award, which is determined solely by client ratings. Unum, formed in 2015 through a breakaway from Vunani Capital, came third in the overall rankings.

Holding in check the strong drive from the young, up-and-coming brokerages is one of SA’s oldest traditional brokers, Sasfin Securities, which is the Top Advice Broker of the Year. Sasfin itself was established in 1951 (as a textile trading business that expanded into financial services) but its roots go back even further: in 2000 it acquired Frankel Pollak Securities which was founded in 1890 and was a pioneer of client portfolio management and stockbroking in South Africa.

Other awards go to IG South Africa (Top CFD Provider of the Year) and EasyEquities (Most Improved Broker). PSG Wealth’s Carlo Amorin retains his award as Top Relationship Manager of the Year.

Download the summary report here.
Read the FM Investors Monthly feature here.

Watch a recording of the event below. 

The delay in the release of mobile spectrum is a perfect example of what is holding South Africa’s economy back from catching up, argues Peter Attard Montalto. Featured in Financial Times. 

The design of the bank guarantee loan scheme was based on the assumption that the lockdown would be extensive, but SA emerged from it faster than expected, says Intellidex’s Stuart Theobald in an interview on SABC. 

The purpose that the bank loan guarantee loan scheme was initially designed to meet – buttressing businesses during the lockdown – no longer exists, says Intellidex chair Stuart Theobald. Featured in Reuters. 

This column was first published in Business Day.

What happens when (if) reforms start happening? When there is change, implementation shifts forward. The question is important for businesses’ thinking — generally sceptically — about the recovery. The hurdle is high, so might take some convincing, but equally, one doesn’t want to be “late” in recognising a turning point.

There is a first-mover advantage to a business recognising a turning point early, though there are costs if the business gets it wrong.

The last week has felt like a blur.

First, there was the disappointment of the delay, by three months, to the Independent Communications Authority of SA’s spectrum auction timetable as a complex mix of vested interests and capacity constraints swirled. Given the rare event of President Cyril Ramaphosa personally deploying political capital on the issue within the National Economic Development and Labour Council (Nedlac) at the end of 2019, this seemed like a particularly poignant regressive step.

We then had a shift of gears on Tuesday, when the president held a webinar with the SA National Editors’ Forum. There was some subtle spark — a sense of deep frustration we have not really heard so explicitly before, calling out specific issues such as disappointment on the spectrum issue, bemoaning the lack of capacity to implement and the time taken to move the dial.

Yet it was the shift in language that caught my ear. The president normally has a grating habit of using the “collectivist we” in the ANC’s tradition, which seems to make him aloof to the issues he has as state (not ANC) president. This time it was personal. It was “I want”, and it gave the impression of Captain Ahab valiantly battling the (state capture-damaged, capacity-lacking state) whale.

Just as at the last ANC national executive committee meeting, the president was spurred into action by personal accusations that he didn’t care about corruption, and now it seems the accusations that he doesn’t care about reform have got to him. This is positive.

Rhetoric is important for gaining (and not losing) support and momentum. But it is no substitute for action, especially in a capacity-deprived state that is hampered by vested interests, corruption and obsolete ideology.

The never-ending disappointment has set the perception of probabilities against the president and, as such, businesses will be more willing to wait for actual action and maybe miss the turning point.

Has such a turning point come? We have a negative mark from spectrum, an interesting shift in language that we are reluctant to give a positive mark to, and then we have Renewable Energy Independent Power Producer Procurement (REIPPP) round 5.

Spectrum and REIPPP round 5 have taken on a life of their own far beyond their direct economic impact. They have the ability to drive animal spirits, to get businesses recognising a turning point in the wider reform agenda, earlier.

Yet what happened on Friday evening was odd. Deputy President David Mabuza buried in a statement by the Eskom war room that REIPPP round 5 would be “completed” by December.

The statement is nonsensical — there is no way you can “complete” REIPPP round 5 by December. What it meant to say is that the request for proposal (RFP) for the round will be published in December. This is still positive, given the Independent Power Producer (IPP) office specifically announced at the Sustainable Infrastructure Development Symposium that it would only launch the RFP in June 2021.

So what to make of it? Can business trust it?

It will still mean new energy is only likely to come online from the middle of 2022 at the earliest, and so there are still two years of an “energy hole” that will restrain the recovery.

But most important is capacity. The IPP office is still expected to be snowed under by the Risk Mitigation Independent Power Producers Procurement Programme “emergency” procurement round, as it says it will award preferred bidder status in December, only three weeks after final bids are submitted. How can it run two complex processes in parallel with budget cuts and a likely deluge of legal challenges around RMIPPP and the expected prevalence of vested interests there?

Herein lies the rub.

Reform is not a single event. Each reform comes with a hugely complex set of regulatory, bureaucratic and administrative actions that must each proceed smoothly and swiftly to get a reform to “happen” on time. As such, a date for an RFP launch is welcome, but it is only the first step, open to delay and attention that turns to the terms, ability to get generation licences, Nersa’s ability to shift paperwork, and Eskom’s ability to speedily work on its parts (which have been key delay points in previous REIPPP rounds) and the required guarantees.

The question arises from last Tuesday’s presidential exposition on capacity of what will be done? No answers were given at that time.

What happens if there isn’t an answer? If it is impossible to create the capacity in any reasonable amount of time in a fiscally constrained state?

The answer, of course, is to remove “access” regulators from vast swathes of the economy and liberalise. As yet, however, this endpoint is not even up for discussion, whether on energy policy or anything else.

Until a sensible debate on the topic of liberalisation is had, it will be very much “believe it when we see it” on reforms, just as for REIPPP.

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

The Investing for Impact report, funded by Ashburton Investments and produced by Intellidex, lays the foundation for much of the debate still to come. Featured in Todays Trustee. 

Companies must now expense the losses they expect to make as soon as their expectations change.

This column was first published in Business Day. 

Bank profitability has predictably been hit hard by the Covid-19 crisis. Profits have slumped between 43% (Standard Bank) and 82% (Absa) in the first half of the year.

The issue is how to judge this in context. Sure, profits have slumped, but the banks remained profitable and their financial strength has not been compromised. Nevertheless, I do wonder if this has been the worst performance in modern financial history.

It looks worse than during the financial crisis. In 2009, Standard Bank’s headline earnings fell 17%, Nedbank’s 30%, FirstRand’s 30%, and Absa’s 24%. But accounting rules have changed since, making it difficult to tell.

Impairments, the amounts banks must set aside for bad debts, were made according to IAS 39 (International Accounting Standards) then, whereas now they are made according to IFRS 9 (International Financial Reporting Standards). The detail of accounting standards can be mind-numbingly dull, but the differences make comparing financials between the two crises tricky. IAS 39 was based on an “incurred loss” model, but IFRS 9 is based on “expected loss” — bankers must expense the losses they expect to make, rather than the losses they have actually made, as soon as their expectations change.

You can imagine how this affects the figures banks are reporting. Even though the banks are reporting on the financial results to end-June, they have incurred huge costs for bad debt. Typically, a loan only counts as defaulted after a client has missed three months’ payments. With the crisis only sparking in March, the numbers of defaulting clients had thus not materially increased by the end of the financial period. But the banks are seeing what’s coming and ratcheting up impairments to pay for it.

Exactly how much the banks should be putting aside has been a matter of debate worldwide. The problem with IFRS 9 is that it is procyclical, amplifying economic shocks. In response to a bleak economic outlook, banks have to ratchet up provisions, which reduces their profits, leaving less capital to support lending, which decreases investment into the economy, causing a bleaker economic outlook.

Regulators have thus been walking a fine line in telling banks to go easy on hiking IFRS 9 provisions while also telling them to stick to the rules. The Bank of England briefed bank managers to not “kitchen sink” provisions. Locally, the Reserve Bank published several directives and guidance notes for banks on how to apply IFRS 9, telling them that loans they restructured due to the Covid-19 crisis don’t automatically represent higher credit risk, and that banks should “avoid procyclical assumptions in their IFRS 9 expected credit loss modelling”.

There was a remarkable language game at work between the Reserve Bank and the banks, in which the subtext was: we would never tell you not to fully apply accounting standards, but to the extent possible, use your discretion to not tank the economy.

As it happens, the banks that have reported so far took different approaches. Absa went furthest, booking credit impairment expenses equivalent to 2.77% of its loan books (up from 0.79% for the same period a year ago). Standard Bank took the lowest charge, at 1.69% of its book (0.76%) and Nedbank was in the middle at 1.94% (0.70%). These were higher than in 2009 when Standard Bank took 1.60%, Nedbank 1.49% and Absa 1.73%. FirstRand will report this week.

Payment holidays

Included in the provisions were management “adjustments” and “overlays” that reflect the discretion of the banks in putting aside money to cover expected losses. Billions of rand were set aside beyond what the models, which rely substantially on historic data, were saying needed to be incurred. Standard Bank took the least conservative approach, allocating just R500m to a central reserve for future losses, though arguably its loss models are more forward looking than the other banks. Absa added an extra R3.6bn of “management adjustments” to its retail and business banking book alone.

These decisions will now be tested by the performance of bank books. A key area to watch is the customers that have received some form of support during the crisis. It is astounding just how many customers had received some type of relief from their banks in the form of payment holidays or other kinds of loan restructuring.

For example, Absa provided some form of relief to 22% of its R975bn in loans, equivalent to R216.8bn. Nedbank provided relief to 15% of its loans and Standard Bank to 18% of its personal and business banking book. These loans will have to go back to fully performing or much greater provisions may be required in future.

The banks are guardedly optimistic. New business volumes have recovered quite well post the level 5 lockdown. As some of this will be pent-up demand, it will take some time to see what the new baseline for business volumes is. But ultimately it is the bad debt performance that will remain the critical issue for the crisis.

• Theobald is chair of Intellidex.

The past weekend seems to have been the triumph of over-simplistic reporting, the taking of spin and the need for many to have a moment of Ramaphoria again, says Intellidex analyst Peter Attard Montalto in a note to clients. Featured in Business Tech. 

Most of the corruption measures announced by the ANC were already part of the party’s resolutions and rules so while the dial is flicking on dealing with corruption, the bar has not yet been met, says Peter Attard Montalto of Intellidex. Featured in EWN. 

JOHANNESBURG – 2 September 2020 – Financial markets research firm, Intellidex, announced today the findings of a new study on entrepreneurship in South Africa showing key factors for building high-growth enterprises. The report, based on interviews with 25 of the country’s top entrepreneurs, reveals that relevant education, work experience and ultimately a desire for freedom are key ingredients for success.

In the midst of the Covid-19 crisis, it is more important than ever to create and nurture resilient high-growth businesses that generate employment opportunities. Collectively, the companies founded by the entrepreneurs who were selected and interviewed employ a staggering 312,957 people – an average of 12,518 jobs per entrepreneur.

“We opted for a research framework that highlights the interplay between the individual entrepreneur, the entrepreneur’s social context, the business, the industry and the economy. This helped us develop insights into the factors driving success for entrepreneurs in a new an interesting way”, says Dr Graunt Kruger, the lead researcher.

E Squared Investments funded the research. “Since the advent of democracy and reintegration of South Africa into the global arena in 1994, a new breed of entrepreneurs from different backgrounds, communities and business sectors has emerged. This report highlights the diversity of entrepreneurs in the country and their experience growing successful businesses in South Africa ”, says a company spokesperson.

The research finds that there is no specific formula to entrepreneurial success. The various experiences shared by entrepreneurs foster hope and a sense of optimism as they point to common character traits, attitudes and behaviours that successful South African entrepreneurs have displayed.

The entrepreneurial journey is rife with obstacles and challenges; one such challenge is appointing the right employees. Because businesses are, in essence, the embodiment of the people who work in them, the entrepreneurs in our study felt that their ability to address this problem was an essential factor of success.

They also stressed the importance of networking activities – at incubators and other industry gatherings, entrepreneurs meet other entrepreneurs, potential mentors and relevant industry contacts. Networking with other entrepreneurs is particularly important because they share similar challenges and experiences and are able to offer empathy and guidance.

We found that business ideas were a combination of passion, the right opportunity and applicable skills and knowledge. And successful businesses always have some way in which they distinguish themselves from others.

One finding that is encouraging considering our Covid-constrained economy but is also possibly counter-intuitive is that some entrepreneurs feel that it’s better to build a business in touch economic times. This teaches you to be lean, efficient and to maximise opportunities, enabling you to flourish when the economy swings back into a growth phase.

Intellidex and E Squared Investments are hosting a series of webinars based on the specific themes from the report findings, with successful entrepreneurs on the panel to explain the report findings. The webinar themes and dates are:

2 September: What are the psychological and demographic attributes of successful entrepreneurs?

9 September: What role do founders’ networks – their families, schools, churches, universities or communities play in enabling their success?

16 September: What does the entrepreneur have to get right in the business?

23 September: How do industry dynamics affect entrepreneurial success?

30 September: How do macroeconomic factors influence people’s decisions to pursue entrepreneurial activities?

For the full report, click here.

The Understanding South African Start-ups: Insights and Advice From Successful Entrepreneurs report is funded by E Squared Investments, an impact investor founded by the late Dr Allan WB Gray. The report, based on interviews with 25 of the country’s top entrepreneurs, reveals that relevant education, work experience and ultimately a desire for freedom are key ingredients for success.

Download the report here.

The Understanding South African Start-ups webinar series recordings:

1. How do networks enable entrepreneurial success? 
2. What do entrepreneurs have to get right to secure success? 
3. What are the psychological and demographic attributes of successful entrepreneurs?
4. How do macroeconomic factors influence people’s decisions to pursue entrepreneurial activities?

Investors are taking a forward-looking view that SA does not have the political capital to turn the boat around fast enough, either for fiscal measures or reforms for higher potential growth, says Intellidex’s Peter Attard Montalto. Featured in Daily Maverick.