The International Monetary Fund has completed its routine engagements with South Africa and has highlighted that the Covid-19 pandemic has exacerbated SA’s growth and fiscal position. News channel eNCA spoke to Intellidex’s head of capital markets research, Peter Attard Montalto, in discussing South Africa’s economic outlook. He says vaccination will be important as a signalling message to investors as they are going to be looking at coverage of vaccine rollout across different countries.

Watch to the full interview below.

Structural reform will happen but not with the required speed, because of constraints such as an ineffective presidency machine, lack of deploying political capital, endless social compacting and negative fallout risk policies, says Intellidex’s Peter Attard Montalto. See Business Tech. 

The bigger problem is that the future business model of the Land Bank is highly uncertain.

This column was first published in Business Day.

SA’s financial authorities are pretty good at rescuing banks. Or at least they used to be.

In the same week that creditors who lost money in the restructuring of African Bank were granted another R400m from the wind down of the residual book, Land Bank creditors were shocked when the National Treasury took off the table a partial guarantee for restructured debt in the distressed state-owned bank.

These were unilateral changes to the proposed restructuring of the agricultural bank, after nine months of negotiations. Meanwhile, African Bank’s original creditors are doing better than many could have expected, having received R3.7bn of cash from the bad book.

These two processes are starting to look like night and day. What gives?

The main answer is that only one of these was a real bank. Only one was subject to the regulations of the Banks Act and overseen by the Reserve Bank. When African Bank wobbled, the Bank moved in full force, beginning with a period of enhanced oversight. When the decision was taken to pull the plug together with the Treasury, the Reserve Bank sought out the best bank restructuring experts in the world.

The Land Bank, in contrast, has no Reserve Bank oversight at all. Like the Postbank, Development Bank of Southern Africa (DBSA), Industrial Development Corporation (IDC) and other bank-like entities in the public sector, they operate in terms of their own legislation. It is the National Treasury that regulates and oversees them. And in the case of the Land Bank, this oversight has fallen short.

The Land Bank balance sheet is about two-thirds the size that African Bank’s was. Its financial woes are also considerably less. It defaulted on payments to bond holders in April last year, but it is not obviously insolvent as opposed to facing a liquidity crisis.

All of these should make it easier to resolve the Land Bank’s issues compared to African Bank. Indeed, the situation should never have been allowed to get into such a mess in the first place. Now that it has, we’re seeing a haphazard resolution process that risks damaging confidence among creditors to all public sector entities.

The unilateral changes imposed by the Treasury on the proposed resolution seriously undermine creditors. The original proposal, that seemed to have been a done deal, included a 60% government guarantee on the restructured debt. The restructured debt was to be in line with existing term lengths, so 13-month instruments, for example, were reset to their original maturity. The unilateral changes, however, impose a standard five-year instrument on everyone and without the government guarantee.

There are lots of reasons why this won’t fly. Many of the existing lenders are constrained by their fund mandates. A money-market fund, for instance, usually cannot invest in instruments longer than one year. They are facing having their short-term paper swapped into five-year instruments that they will not be able to hold.

But the bigger problem is that the future business model of the Land Bank is highly uncertain. As FutureGrowth, one of the bank’s main creditors, has noted, the book is tilting more towards development finance than commercial finance. This will have a different credit performance than historically and presents higher risks.

The Treasury, while acknowledging that an equity injection is important, has not put a number on the table for how much it will put in. The bank has also suffered a long period of management problems, with the current CEO having been in the role for less than a year after a string of acting CEOs in the previous two years.

Any creditor facing this outlook would be worried. The only possible way you could accept this outlook is if your risk was tightly constrained. A partial government guarantee was the only way to do this.

To my mind, the Land Bank indicates that we cannot afford to have banks that sit outside the Banks Act and subject to the proper banking authorities. This is generally recognised. The Banks Act was amended in 2018 to allow state-owned entities to register as banks. The Postbank is the most obvious candidate, though it has been trying to get into shape to meet minimum requirements for a banking licence for well over a decade. It is still struggling and instead operates under a series of exemptions granted from the act.

The Land Bank is the next most obvious candidate. Indeed, the current resolution process is missing a trick in not bringing the Reserve Bank and its restructuring expertise to weigh on the problems. The resolution could be an opportunity to reset the Land Bank for a longer-term future with a banking licence in hand.

The current resolution process also has serious implications for creditor confidence in state-owned entities more widely, as well as respect for the Treasury’s custodianship of the financial system. The Land Bank is relatively small fry compared with other government financial institutions such as the DBSA and IDC, which both rely on bond markets. As in the case of African Bank, the problems call for serious expertise to be brought in to manage it. The Treasury’s reputation depends on it.

Theobald is chair of Intellidex

The weak status of the fiscus means that tax hikes were bound to happen anyway even if there was no need to fund a vaccine procurement programme, says Peter Attard Montalto, head of capital markets research at Intellidex, in his Classic FM interview.  

Intellidex made a submission to National Treasury following requests for public consultation on the Financial Inclusion Policy Paper: “An Inclusive Financial Sector For All”.

Key highlights

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Amending Electricity Regulation Act could unlock rooftop self-generation investments and jobs.

This column was first published in Business Day. 

The president has insisted there is no money to support the economy through the current lockdown. The Treasury has clearly “won” a battle to keep the status quo.

Yet the notion is untrue, the bizarre decision to bail out SAA should be replaced by monies being redirected to supporting the economy, paying for vaccines and extending the Covid-19 top-up grant.

Cuts could be found elsewhere with some proper expenditure reviews, including reducing mid-level public workers to hire more nurses and doctors. There are choices that are not being made, debates not being had. We seem to be on course for a rather dull status quo February budget.

The context is important. The Treasury lost several battles over reprioritisation and cuts in the medium-term budget policy statement. Opening up these kinds of discussions and the likely resulting slippage would accelerate the fiscus over the cliff edge. We are therefore stuck in an equilibrium that is understandable but unsatisfactory. The political economy is holding us in this odd place.

The required, logical step is not taken. If the fiscus cannot provide and the Reserve Bank will not cut interest rates, the government must step back and allow the private sector to provide through radical liberalisation. This is true especially of infrastructure and energy.

There is limited discussion of reforms to public-private partnership regulations, the Public Finance Management Act and the Municipal Finance Management Act rules that would unlock a faster pace of private sector-led infrastructure investment but would mean that the government loses control of a politically and vested interest-directed process.

No-one cares

There is limited discussion in government circles of an actual plan to liberalise schedule 2 of the Electricity Regulation Act that could unlock a wave of large and small business rooftop self-generation investments and the jobs and new businesses created to support that. Vietnam has shown an astonishing ability to increase rooftop capacity by 9.3GW in just the past six months of 2020. Exactly the same demand exists in SA.

Stage 2 load-shedding, which Eskom forecasts is likely to last until mid-April at least, even when electricity consumption was down 2.1% on the year — should be cause for panic, but I suspect no-one cares. Stage 2 load-shedding has become far too normalised in our psyche. We need some proper stage 6 load-shedding to get some action.

The problem is social partners — the government, business and labour — are all quite content with tick-box policymaking. So supposedly the Integrated Resource Plan (IRP) 2019 solves all problems.

This is far from accurate. At the time it was released there was such a relief and a view that it would unlock Renewable Energy Independent Power Producer Procurement (REIPPP) round 5 immediately (we are still waiting) and its flaws were ignored. Instead, we are stuck with a plan that will lead to record levels of load-shedding in the coming three years as the economy slowly recovers, constantly butting up against energy constraints.

The IRP was seen as the reform, as opposed to the reality that would flow from it.

Dangerous distraction

The flaws were deep, such as about pricing path assumptions for renewables, battery storage and artificial, unjustified assumptions made on throttling procurement volumes for new renewables. They assumed the energy availability factor rapidly returning to 75.5% from the 65% average in 2020, despite the consensus of energy experts and even Eskom’s own internal system modelling being that at best it would stabilise at 70% and likely lower.

It was assumed in IRP 2019 that there could be new coal to the tune of 1.5GW in the coming decade, despite banks stating at the time they would refuse to fund it and the global trends already being obvious. We will now see a wild-goose chase in 2021 trying to get new coal “because it’s policy”. A dangerous and pointless distraction. Equally, it was already consensus within energy expert circles that Inga 3 could not provide another 2.5GW to SA within any reasonable time frame, yet it was still part of the planning.

The most serious problem now is nuclear, which will again be a serious distraction in 2021. Nuclear appears “beyond the window” of 10 years in the IRP, but it is now within ministerial performance contracts released by the government before Christmas that new nuclear should be procured by 2024 given the lengthy build timelines to get power on grid by this point just after the IRP window.

A wake-up call — new nuclear will not be built. It’s not financeable, it’s not affordable, and it will drown in environmental NGO court cases. There are no commercially viable small-scale reactors with adequate proof of concept that can be procured under law by the government. Nuclear was only pushed through Nedlac by fringe elements of labour working with the department of mineral resources & energy.

Different versions of the IRP and of cabinet reports from Nedlac describe nuclear in different ways yet it is now in performance contracts and is “policy”. In 2021 we will again be off down the garden path.

Even if what it awards preferred bidder status to will actually be viable and achieves financial close, the ongoing REIPPP risk procurement round will get bogged down in gas and environmental impact assessments. Getting 2GW of energy on grid end-2021 will not happen and is likely to delay REIPPP round 5.

Yet all this is known, indeed Eskom seems clear on this front, but nothing changes. A stronger line from business on wild-goose chases down garden paths, and a broader pro-jobs line from labour is required. Both need to point out that SA is running to stand still with some procurement taking place but not enough to solve load-shedding and a 5GW energy gap in the coming few years.

No doubt the answer will be to compact an updated IRP, ensuring that all actors are happy, which will take another few years, but the government can’t direct, and compacting is inappropriate. It must stand back, admit that having a piece of IRP paper means nothing, and allow problems to be solved and growth to emerge in more efficient emergent ways.

This will be the test of 2021 and the credibility of the state of the nation address.

Attard Montalto is head of Capital Markets Research at Intellidex.

 

This column was first published in Business Day.

Will the post Covid-19 recovery be like the Roaring Twenties, a period of flourishing economic growth and prosperity after the Spanish Flu pandemic? Or will it be like the prolonged recession after the global financial crisis, with businesses and consumers restraining consumption?

The case for a strong recovery works as follows. The pandemic has created pent-up demand. Because of lockdowns and other restrictions, consumers have not been able to spend. Once life goes back to normal, they will have both the money and desire to go on an economy-driving splurge.

The first premise — that people have been saving — is borne out by data. Savings have hit record highs. The US personal savings rate hit 34% (being the amount of disposable income saved rather than spent in a month) in April 2020 and has remained far above its long-run average of 7%-8%. In Europe household savings rates rocketed to over 24% in June but have fallen faster and now are only marginally above the long-run trend.

In SA we’ve seen similar trends. We measure savings as a percentage of GDP, in which corporate saving jumped to 22.5% (annualised) in the third quarter from a long-run average around 13%, with even the notoriously low household savings rate leaping to 2% from long-run figures of closer to zero. That has been matched by deleveraging figures that show both households and, after an initial jump as companies accessed overdraft facilities, corporates, reducing borrowing sharply.

So, the bullish case has it that all this money, combined with pent-up demand and our repressed desires to party hard, will combine for a roaring economic recovery.

There are two problems with that story. First, a higher savings rate doesn’t mean more savings overall. The economic effect of the crisis means incomes are sharply lower, even if more of them are being saved. Not everyone has kept their jobs and have faced wage cuts. SA GDP for 2020 is expected to be about 7%-8% down.

However, while it is bad for poverty and inequality levels, it appears the jobs impact has been primarily on the more economically vulnerable. Formally employed people, especially public servants, have been unscathed. That means savings have accumulated in the hands of those with a higher propensity to spend. Indeed, Reserve Bank data shows that net wealth, while hit in the first quarter, recovered in the second quarter.

The main thing to understand is how much of the savings rate is driven by forced delays in consumption, and by households’ fears about the future. We can expect delayed consumption to unwind, but precautionary savings will not. The global financial crisis also saw increased savings, but only because households were afraid. It took five years for that to dissipate.

On balance, my view is that there will be a splurge to some extent. Forced saving is a reality of this crisis that is not shared with the financial crisis. But this is vulnerable to overly hasty efforts by governments to repair their balance sheets. While households and companies had a spike in savings, governments did the opposite. In SA, the government dissaved at about 9% of GDP (annualised, seasonally adjusted) in the second and third quarters. Worldwide, governments will need to repair balance sheets, which means increasing taxes and choking demand. But all governments are promising not to do this too quickly.

Of course, none of this will happen if we don’t get to the other end of this pandemic. The countries implementing vaccination programmes will do sooner. Unfortunately, SA belatedly conjured up a vaccine strategy last week while other countries have had task forces on it since April 2020. That means it will probably take until the end of 2021 for local consumption to rebound.

Luckily for us, global demand will drive our economy even if domestic demand is delayed. It will come to us through increased exports, which have been a surprise strength in the past six months. Our strongly positive trade balance has supported the rand while helping corporate earnings in some main sectors. As global demand recovers, we should expect export demand to be a strong channel of support into our economy more broadly. Of course, the delay to domestic demand will mean we lag other markets overall.

The recovery, then, will be positive, though not as strong as some optimists are suggesting. Many who have been damaged by this experience will be cautious and want to derisk by increasing savings. We also must be wary of being overly reliant on short-term froth. The Roaring Twenties, after all, turned into the Great Depression a decade later. It was also helped by supply-side factors such as large-scale electrification and motor vehicles.

Consumption-driven demand does not support long-term growth the way investment in capacity and efficiency does. SA needs a policy environment that drives companies in particular to invest. The risk is that a consumer-driven recovery allows policy reforms to drift off the agenda and before long we’re back in the malaise of zero growth we were before the Covid crisis.

Theobald is chair of Intellidex.