With the MTBPS scheduled for 28 October, Finance Minister Tito Mboweni has a tough task on his hands.

This column was first published in Business Day.

Does SA have two different presidents? I am sure the Cyril Ramaphosa giving the speech on Zoom last week was a different one from the Ramaphosa we saw in parliament the week before.

Despite a messy background process behind the economic reconstruction and reform programme the policies and documents remained identical from week to week. However, there was a noticeable shift in emphasis and tone.

In the first speech, infrastructure seemed to hang in the air with no purpose. In the second, it was front and centre, with more emphasis placed on support for private sector job creation.

The first speech was derailed by impossible commitments on energy security during 2022 (which will politically come back to bite), while the second sounded like a state of the nation address with more emphasis, however, on implementation.

While nothing but implementation matters now, rhetoric and vibe are important for attempting at least to stir them.

Still, there were open goals not taken on the implementation side, with scant detail given on Operation Vulindlela to win people over. For that, we must wait for Wednesday’s medium-term budget policy statement.

Is a good budget policy document even possible? What about the speech? We are not talking here how the initial optics play against market expectations that may be set a little too bearish, but the underlying reality of macro- and micro-fiscal policy will come from this document and not from anything said in the Ramaphosa speeches.

Finance minister Tito Mboweni will be hamstrung from the start by the fact that SAA’s defibrillation is cabinet and government (and ANC) policy and so must be funded, as is likely to be the case with Denel, the Land Bank and others. There is also the court battle on the public sector wage bill, which will begin on December 2, to consider. Add these to uncertainty on growth and revenue from here, and Mboweni has a tough task on his hands.

There are, however, far more subtle and hard issues to consider.

The key is where the credibility centre of gravity is between the fiscal funding cliff edge and the negative consequences of tightening fiscal policy going into a recovery with huge developmental needs.

The simple logistical reality of what can be cut at what speed is going to be an issue. The room to move may not be huge, but a more credible  path would potentially open up more funding room in markets than showing non-credible debt profiles.

This was a debate that began after the emergency budget that never took off, with neither the active nor passive scenarios being credible. The passive one was far too mild to be a debt shock, while the active one implied a mix of primary balance and growth that didn’t add up.

Our fear is that the Treasury will try to stick too close to the active scenario of last time on what “must” happen — when there is little real upside in doing so. A profile that does this, making assumptions on three years of nominal wage freezes for instance, can easily be dismissed. Indeed, this is likely to be the heart of the “optics vs reality” problem of this medium-term budget policy statement.

Similarly, there is more credibility in showing long-run growth at 1.5%, as they did in the emergency budget (a credibility free lunch), than there is in trying to convince people that the economic reconstruction and reform programme will lead to 3% annual growth over a decade.

Our imaginary friend, the R500bn stimulus package, should also not make an appearance. Some other non-fiscal baubles and details on Vulindlela could all assist in offsetting a negative and realistic growth forecast with hope.

There is then a choice to play games on cutting bond issuance at the margin to generate a short-term and unsustainable rally in bonds in the longer term when in the next fiscal year you have a huge projected cash usage and a large wage bill and SOE costs on the downside.

A thorough examination of the subtle balance of choices in the medium-term budget policy statement will therefore be crucial.

The second issue is that complex nexus of factors swirling about the stalled $2bn World Bank loan as the Eskom elephant in the room and its red-light-flashing Medupi loan, SAA and general fiscal issues all come home to roost.

There is bound to be a rude awakening for the government in dealing with international institutions asking awkward questions. This is an unfortunate precursor to the drama we will have when SA is likely to have to go to the IMF for a full conditionality-laden programme. Markets are mulling this precedent already.

The final subtle and hard issue is that this medium-term budget policy statement is occurring against a backdrop of weaker Treasury internal capacity than at the emergency budget or in February. This narrative will grow in the coming weeks after our recent focus on the issue in this paper and its sister publication, the Financial Mail.

This has played out in the inability to undertake detailed expenditure reviews and zero-based budgeting, but also in dropped balls on state-owned enterprises. Maybe people will only wake up when a dropped ball turns into an explosion.

The path towards an IMF programme seems set, with reforms and consolidation unlikely to happen at the appropriate pace and so many landmines along the way.

Wednesday will add a slowing or acceleration of the pace on the path, but it is hard really to see what it could deliver that would fundamentally divert us off this path.

Only the accumulation of surprises on implementation and a shift in the mindset outside the Treasury — ultimately a shift in the political economy — might achieve that.

Attard Montalto is head of Capital Markets Research at Intellidex.

Business wants to see National Treasury doing whatever is in its power to boost economic growth that doesn’t require the say-so of other departments, says Intellidex’s Peter Attard Montalto in Business Day. Featured in Daily Maverick. 

 

Green financing would not reduce the size of Eskom’s debt burden but would rather be a cheaper form of financing, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured in News24. 

Why lenders and borrowers have given the government’s bank guarantee loan scheme the cold shoulder.

This column was first published in Business Day. 

Is it time to write the obituary of the R200bn Covid-19 bank guarantee loan scheme?

Lending through the scheme has remained dismal even though big changes were implemented at the end of July to make it easier for borrowers and banks to use it. But since two weeks ago just R16.08bn had been lent, not even R5bn more than when the changes were made. It is clear now that the scheme won’t get anywhere near the R200bn target.

Despite this poor performance, the scheme is regularly touted as a big part of the R500bn recovery plan, including in last week’s economic recovery plan speech by President Cyril Ramaphosa.

What has gone wrong? I think there are several issues.

First, the banks themselves have not found the scheme particularly attractive. In part that’s because it costs a 0.5% fee to use it. In return, banks get a guarantee in that the government will cover any defaults beyond the first 6% plus any margin earned. In the first year, the government covers roughly 92%, then 90% in the second year and so on decreasing for the six years of repayment period.

This would have been a useful risk mitigator for the banks if the economy was in far bigger trouble than it is. But the credit outlook has turned out to be more benign, at least so far. So why pay 0.5% to get insurance that you don’t need?

This was hard to predict at the time the scheme was initially set up. I argued then that banks should be required to commit to certain lending targets (much like they do under their BEE charter). The decision on whether to commit to insurance should be made at the time when the risks are unclear, rather than down the road when it may not be needed. The scheme design effectively granted banks an option that is now out of the money.

Second, a structural flaw in the scheme is that no specific amount was budgeted to cover losses. The R200bn headline figure is deeply misunderstood. This was a number the Reserve Bank was committed to lending to banks through its discount windows to finance the loans. In other words, the Reserve Bank was going to “print money” but then take it back from the banking sector as loans were repaid. This was a clever way of using money creation as part of the emergency economic response. But it is not some pile of government money waiting to be spent, as some assume.

Because the Reserve Bank cannot take any risk, the National Treasury underwrites the guarantee (though any profits the central bank makes absorbs losses first). So, if there is a loan default, the Treasury takes it over and repays the Bank.

The problem is that the Treasury never put a specific number on the table for how much it was budgeting. Internally, numbers like R15bn were talked of, but because this was not a formal budget, one couldn’t calibrate the scheme to ensure that it was met. If the design approach had been “Here’s R15bn, let’s calibrate the rules so that we get that amount of losses while maximising the amount lent” there would have been a different design. Plus, the figure of R15bn would have stuck in the public mind rather than R200bn.

Third, the banks have not shown great enthusiasm for the scheme, even aside from the fee. There has been a marked divergence in bank appetite. By far the largest user has been Standard Bank. As at the end of June, the last period for which results are available, it had lent R8.3bn while Nedbank had lent R1.2bn, Absa R500m, and FirstRand R345m. The figures would have been far better if all banks had shown the enthusiasm that Standard had. It got to its numbers because it automated the assessment process for clients faster. Plus, the scheme loans it offered to clients were often cheaper than its normal loan offers.

Fourth, demand. A big problem is that the scheme became available about seven weeks after lockdown. By then distressed clients had accessed forbearance measures or made other plans to manage their finances. The scheme specifies that the credit assessments must be based on financial performance up to the end of 2019. The universe of clients that both performed then and wanted additional debt after lockdown is not that big. That market has now been exhausted.

What now? Debt is a stimulus lever that can be pulled only so far. Ultimately, interest rates are the driver of debt demand, and those are at or near the lowest they can get. A government scheme can’t drive debt demand much more, especially when the government can’t afford to take huge losses onto its balance sheet.

I expect we will see large-scale deleveraging by households and businesses as they adjust to the uncertain economic outlook. In 2008 when the financial crisis hit, SA households had record debt of 86.4% of annual income. That fell steadily to 71.9% in 2018 before recording its first post-crisis rise to 72.8% in 2019. The downward trend is now going to resume.

The president, however, is left with a political problem. The R200bn figure is nailed to the mast. There are efforts under way to think of potential reforms to the scheme, but I expect these will be fruitless.

What we need now is something fundamentally different, something that reduces risk for businesses. Interesting schemes are being developed by the Gauteng government, among others, to underwrite equity in businesses rather than loans. So far, these are small scale but are more like the sort of solutions we need.

Theobald is chair of Intellidex

South Africa dropped off the World Bank’s 22 October meeting because discussions on a $2bn loan facility had stalled, says Intellidex analyst Peter Attard Montalto. Featured in Daily Maverick.

Some of the reasons why Treasury had to push the MTBPS back by a week are the need to accommodate SOE bailout decisions and digest President Cyril Ramaphosa’s speech today, says Peter Attard Montalto on The Money Show with Bruce Whitfield on 702. 

This column was first published in Business Day.

The launch of THE recovery plan on Thursday by the president is a seminal moment which will define the path to economic doom or recovery.

The bar should be set high — there are no free lunches and spin won’t cut it — so that all the correct ideas are on the table just for the picking. Equally compacting counts for nothing for a recovery itself, only the quality of implementation.

Much of this will rotate on credibility as much as specifics — how implementable any such plan is from the president in parliament into action. The plan is meant to give the medium-term budget policy statement some clothes after a “naked” emergency budget in June that lacked the credibility of a whole-of-government recovery plan.

Hearing more about “boring” implementation logistics of existing policy would be more exciting — how the president’s political capital can be deployed through Operation Vulindlela to turbocharge the initiative.

The cabinet lekgotla last week was told in stark terms how important getting it right was. In the back of a slide deck it was presented from the economic cluster it said bluntly that “non-implementation of the economic reconstruction and recovery plan could lead to … collapse of the supply capacity, consumer and business confidence, the labour market and increased vulnerability of the poor.” Quite. (I would add a fiscal crisis to that too as the hippo gets jaw lock).

Yet if the plan is meant to mitigate against that risk, the plan the lekgotla was presented misses the point.

There is a core of illogicality here. The president decries state capacity; yet at the same time the government looks to a plan that is a hodgepodge of 1,000 different ideas that even a government with capacity would struggle to understand and implement. If you don’t have the capacity, then logically you can’t do a plan like this and someone else must run with driving growth (that is business).

There are simpler issues to consider on Thursday. The lekgotla plan mentions nuclear. Will that still be there on Thursday? It might not be fair but this is a fact of life. Any recovery plan that has “nuclear” in it anywhere will have zero credibility and will be a laughing stock. Similarly, a plan that stuffs renewables and a just energy transition in the back will lack credibility, given this will be a central and defining issue for social as much as energy security reasons in the coming decade.

There is also a question of language. A real plan can’t throw around words such as “accelerate implementation”, “deal with”, “strengthen”, “ensure”, “improve” without explaining what is going to happen specifically.

This all sounds harsh. But business and investors are sceptical and the bar is set high. There have been too many failed plans. Let us not forget the R500bn stimulus, which has crumbled on closer inspection. Then there is also the September 2018 economic plan, which has actually achieved small gains especially around red tape, but was quickly forgotten given its lack of moving fast enough on implementation.

There is no “free lunch” of animal spirits that can be prodded to life to bridge the phases from announcement to implementation. Banks are not going to pre-emptively open the credit taps. This is the roadblock that unbankable infrastructure will run into. This is unfortunate, but it’s a fact the government is shackled to given its track record.

What has been lacking since the start of 2018 is a central driving agenda, a focus that can build to a narrative. This is clear in the lekgotla presentation on the recovery plan. The same was true it must be said of the B4SA (Business for SA) plan as well.

The point in a recovery plan is you are going from somewhere (bad) to somewhere else (good). At the moment a “recovery” back to where the economy was before and 1.5% growth at best would still mean a fiscal crisis.

It needs to be something uncontrolled, organic and unstoppable. Something buzzworthy, where local content follows instinctively rather than being a dirty word, jobs growth happens naturally and there are larger multiplier effects through the whole economy.

Real energy policy liberalisation and a quickly spun out independent transmission system market operator that is tied to a world-leading hydrogen production and local industrialisation plan could be such an agenda and narrative to generate such animal spirits. It would solve the fact that the economy is on the road to far more frequent load-shedding in the coming two years than the government cares to admit.

Yet the blockages are personality and political based.

There seemed to be some sense in the cabinet lekgotla that the plan they were presented wasn’t quite right and so we await what finally emerges on Thursday. The bar cannot be set low. The stakes are too high.

But the fact that such a dense 1,000-point yet vague plan that lacks any narrative could even be tabled signals the urgent need for fresh external blood into the cabinet to sweep away the reform blockers and vested interest and status quo blockages. Such a cabinet reshuffle would add credibility to any recovery plan.

Every country is in this position. Investors like a sense of credible narrative turning point after a crisis. Egypt recently managed that as an example, Poland after 2008. There are no second chances.

Thursday is very important.

Attard Montalto is head of Capital Markets Research at Intellidex.

There is already R16.4bn in the medium-term budget for the grounded national carrier so it’s probable that SAA will remain a never-ending drain, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured in Business Day. 

There is serious prosecutorial ambition in the VBS case, says Intellidex chair Stuart Theobald in an interview on NewzRoom Afrika.

This column was first published in Business Day. 

In normal times we become, perhaps unwisely, comfortable with what statistics mean. We see a number — GDP growth, unemployment — and immediately think we know something about how the world is changing.

But Covid-19 has caused what statisticians call a regime change, because the underlying conditions that generate the data fundamentally changed during the lockdown. Simultaneously, the act of data gathering itself was disrupted.

Consider last week’s Stats SA unemployment numbers. The headline statistic from the Quarterly Labour Force Survey is that unemployment had fallen to 23.3% from 30.1%. In “normal” times, champagne would be flowing at this remarkable improvement, especially in a period of major economic contraction. But the figure is meaningless because the world changed fundamentally.

The more useful figure is that the number of employed decreased by 2.2-million to 14.1-million. This is a 14% fall in employment from the first quarter to the second and is shocking. But we can’t determine from that how many people are unable to find a job. One of the features of those defined as unemployed is that they are actively seeking work. During lockdown you couldn’t actively seek work, so that’s why it appears that the unemployment rate decreased.

The number of “not economically active” workers reported by Stats SA increased to 20.6-million from 15.4-million the quarter before. As a result, the number of officially unemployed fell from 7.1-milllion to 4.3-million. But that’s only because people were confined to their homes.

What if we add the 2.2-million lost jobs to the unemployed in the previous quarter when there wasn’t a lockdown (until the last week)? That would give us 9.3-million unemployed. We would need, though, to also adjust the size of the labour force to make sense of that number as an unemployment rate.

If we use size of the labour force in the first quarter, rather than the much-reduced labour force of the second quarter when people were stuck at home, then we end up with an unemployment rate of 39.7% compared with 30.1% in the first quarter. That is a more meaningful figure for the sake of comparison.

But what of the change in collection methodology? Usually, Stats SA does face-to-face data collection, but it had to switch to telephone-based collection because of the lockdown. It tried to phone the same households it usually talks to face-to-face but it didn’t have phone numbers for some, others were wrong or unanswered and others had moved.

All told, the national response rate to the survey fell from 87.7% of the sample to 57.1% (the sample has about 33,000 “dwelling units”). What difference does this make? The lower response rate means the statistics are less robust. There is greater margin for error. But some bias is likely because telephone numbers are probably not evenly distributed in the population — those without phone numbers are more likely to be unemployed, for example.

To compensate for this source of bias, Stats SA “rakes” the data, which means it adjusts the weights of different response groups to compensate for the different characteristics of respondents compared with the normal sample. To do that, it looked at the results of the first quarter and compared outcomes on various measures for respondents with phones compared with those without phones. This resulted in “bias-adjustment factors” it could apply to the results of the phone survey to extrapolate for the population as a whole.

This is the best one can hope for in the circumstances, but given the scale of disruption caused by the lockdown, we can’t be sure that the bias between respondents with phones and not in quarter one will have been consistent in quarter two. For example, respondents without phones in the first quarter may have been particularly vulnerable to unemployment from the lockdown so were more affected during lockdown than they were in the first quarter. We just can’t know. The “real” unemployment figure could be quite different.

GDP figures released earlier in the month were also bedevilled by technical details of this sort. Some media rushed to print with the headline that GDP had “fallen 51%” in the second quarter. Any sensible reading of that would be that the economy had halved in size in the second quarter compared with the first. That was not the case by a long shot. In fact, the far better figure is to compare the size of the economy to the matching quarter in the previous year, adjusting for inflation.

That change was 17.1%. The 51% is the “seasonally adjusted, annualised rate” that assumes the quarterly percentage change would be compounded in the next three quarters at the same rate. Normally that statistic works fine because trends do tend to hold. But now, obviously, the second quarter was unique and the loss of economic activity a one-off, not a trend for the year.

Our desire to make sense of how the world has changed means we are hungrier for data than usual. But it is now important to go back to first principles to understand what the data is telling us about this new world, compared with what it used to tell us about the old one. Otherwise, we will come away profoundly misinformed.

Theobald is chair of Intellidex.