Following the launch of the Infrastructure for South Africa report, Business Leadership SA CEO Busi Mavuso and Intellidex executive chair Stuart Theobald discussed with Business Day TV’s Michael Avery about reforming the public-private partnership frameworkAmong other things, Mavuso said that we largely agree as South Africans that infrastructure investment is central to our economic recovery. Theobald said that the record level of private sector investment was back in 2008 before the global financial crisis and since then there has been a sharp decline and it has trended sideways ever since. 

Watch the full interview below.

Business Leadership SA launched a new report, drawn up by Intellidex, on infrastructure investment and how to boost volumes toward the National Development Plan’s target of 30% of GDP, Infrastructure for South Africa.

Download the full report here

Download a one page summary of the report here

Download the presentation slides here

Watch the launch recording below.

Intellidex estimates that the economy was losing about R700m a day from loadshedding pre-crisis and the number is slightly lower since the pandemic began. To deal with the crisis, Minister of Minerals, Resources and Energy, Gwede Mantashe, announced eight preferred bidders for the emergency supply of 2,000MW of power as part of the Risk Mitigation Independent Power Producer Programme. It’s a welcome, but overdue, intervention.   

Featured in Business Tech. 

Peter Attard Montalto, director at the SA Chamber of Commerce UK and head of capital markets research at Intellidex, spoke to South Africa Reserve Bank (SARB) Governor Lesetja Kganyago in a recent webinar. Following revisions to some forecast by SARB, one of the questions Attard Montalto asked the governor is what the revised growth forecast was telling us about investment that we see in the next few yearsKganyago said, among other things, that “the shock from the pandemic was significant and it has come from both the supply and the demand side. 

Listen to the full webinar here


The Land Bank restructuring has set a poor precedent as an early test casfor the Treasury’s approach to managing distressed debt, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured in Business Day. 

Eskom ultimately seems to have one option and we are honing in on that: the sovereign taking the risk, says Peter Attard Montalto, the London-based head of capital-markets research at Intellidex UK. Featured in Business Tech. 

The Infrastructure Fund is important to crowd in the private sector. But to lift investment, we need a macro solution, says Intellidex chair, Stuart Theobald. Featured in Business Day. 

President is wrong to chide banks for not rolling out R200bn-worth of loans.

This column was first published in Business Day.

The president is upset that banks have not rolled out R200bn-worth of loans in the loan guarantee scheme. The scheme formed a big part of the R500bn Covid-19 economic response and the president’s critics have lambasted him for the shortfall in delivery. Only about R18bn has been lent.

According to reports, last week the president told a masterclass arranged by the National School of Government that the “disappointment, for me, has been in how our financial sector has managed the Covid guarantee fund that we put up, which was guaranteed by government … we put up R200bn and we said ‘assist the private sector and let’s protect the jobs so that companies are able to operate through Covid’”.

He slated the banks for being monopolised and “the profits that our financial sector has been making have been huge … and quite a lot of that money is … not in assets that we would like to see producing jobs”. These comments are misguided.

The context might have played into his remarks — it was an event headlined by Mariana Mazzucato, an international economist who persuasively argues the state creates more economic value than it is given credit for. She is now a special adviser to the government and her writing is leapt on by those who want the state to be the primary driver of economic activity. That is an atmosphere in which it is easy to bash the private sector and talk up the state.

Let’s start with his last point on banks’ assets. I wrote in my previous column that during the Covid-19 crisis there has been an astounding 32% growth in banks’ holdings of government bonds. I agree with the president we would rather have banks lending to the real economy and financing growth that would create jobs. But it is the government itself that is crowding out private lending by bidding up the cost of funding. It is redirecting funding away from the real economy and into financing the government’s deficits.

Next, I would call bank profit levels dismal rather than “huge”. Banks’ profits fell 58% last year. Their return on equity was 6.93%, less than shareholders could earn by putting their capital into government bonds. No company would be able to survive by offering shareholders lower returns than government bonds.

But let’s talk about the R200bn loan scheme. First, I must point to my own interest here. Together with colleagues at Intellidex I developed a proposal for the scheme that influenced its design. We have subsequently written several papers on how to improve its functioning.

Let us be clear about how the scheme works. The R200bn was not “put up” by the government, which implies there was a budget allocation of R200bn. In fact, the biggest problem for the scheme is that the government put up exactly zero to fund it. It was deliberately shaped to almost eliminate the probability that it would cost the government a cent.

At the start of the Covid-19 crisis the problem was that banks faced a huge credit shock. Their normal reaction would be to become more conservative given that their capital might be at risk if default levels spiked. There was also a risk of a liquidity crisis had the financial markets panicked. The scheme helped deal with these issues by giving banks a line of liquidity outside their existing funding and then a guarantee that effectively put a ceiling on the amount banks could lose from new loans (of 6% plus 2% per year). This protected the economy from a collapse of bank lending if the Covid crisis turned into a financial crisis.

There were problems with the scheme design at the outset that limited its appeal, such as requiring borrowers to put up personal surety, restrictions on the use of proceeds and the fact the scheme only kicked off more than six weeks into the lockdown.

But the biggest factor was that the financial impact of the pandemic was not as bad as worst-case scenarios suggested. There was no liquidity crisis — in fact, the opposite as bank clients ramped up cash holdings. Credit performance has also been relatively benign, with bad debt levels not reaching those of the 2009 recession. As a result, it didn’t make sense for the banks to use the scheme (which costs them a fee to access) when they were in a position to continue lending through the “normal” channels they ordinarily use.

I don’t see that as a failure. It is a good thing that the economic impact of the pandemic has been limited and our financial system is not in the state of crisis that would lead to the R200bn loan scheme being used. It is like an insurance policy we haven’t needed to claim on. This has also been the experience of many other countries who created similar schemes.

The president should be talking up the positives of the scheme in successfully protecting the economy from a serious risk in this way. It is not a failure.

The Infrastructure for South Africa report, commissioned by Business Leadership SA and drawn up by Intellidex, seeks to advance the conversation on infrastructure investment.

The report recommends several interventions to improve the volumes of infrastructure investment, focused on mobilising private sector funding and supporting public sector capacity. It calls for structural reforms in energy, mining and spectrum availability to rapidly boost private sector investment, which can be achieved at no cost to the public purse. It also calls for greater use of public-private partnerships (PPPs) to bring together the strengths of the public and private sectors to deliver maximum value for investment to the public. It calls for reforms to the PPP framework with complexity aligned to project size and risks, and for PPPs to be used more by SOEs to overcome balance sheet constraints to funding investment. It also recommends reforms to the on-budget procurement framework to reduce the skills constraint faced by public institutions in procuring infrastructure. Business is also focused on contributing skills to bridge public sector capacity constraints though initiatives such as Tamdev, a National Business Initiative project to strengthen the state’s capacity to improve service delivery and create jobs.

Access the full report.

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Business Day TV’s Michael Avery and guest experts unpack the bank earnings report released by PwC Africa. Intellidex senior banks analyst Nolwandle Mthombeni commented on the big four banks. Key issues were: a 6.2% non-performing loan ratio tells us there is deterioration in Absa’s book overall but at another level it is also due to management conservatism;  FirstRand has largely closed the taps, saying that the environment is too risky for lending; Nedbank has huge exposure to commercial property and we have seen it come under pressure due to the high vacancies; and Standard Bank managed record disbursements of home loans.

Watch the interview here.

While Operation Vulindlela injects a sense of burrowing persistence on reform, however the unit is unlikely to move the needle much on growth until business responds with increased confidence and investment, says Intellidex’s Attard Montalto. Featured in Financial Mail. 

Intellidex says a future loan scheme should be tweaked to reduce suretyship requirements, introduce an upfront commitment to targeted loan volumes by banks, and potentially lower interest rates. Featured in Daily Maverick.

Together, Mastercard and Visa hold over 75% market share in global purchase transactions and are the two largest card schemes, but SA could be the latest country to challenge the duopoly, says Nolwandle Mthombeni, senior banks analyst at Intellidex, on News24. 

Absa CEO Danile Mminele recently unpacked to News24 how the bank is reinventing itself to claim its place in Africa. Commenting on Absa, senior banks analysts at Intellidex, Nolwandle Mthombeni, said that while Absa had some footprint in Africa under Barclays, it never set its eyes on being a big Pan-African bank before. The push towards growing its operation in the rest of Africa gave Absa a distinct brand identity, especially when the bank summed its intensions through the “Africanacity” phrase. This created a break from the direction Afrikaner-founded Volkskas Bank or the Barclays -shackled Absa pursued.

Access the full article here.

One of the major issues facing South Africa is how to fund higher education. There have been big protests this week given the frustration felt by young people trying to get into higher education. Intellidex’s Peter Attard Montalto spoke to Newsroom Afrika and said that directing the bulk of funding either towards higher education or TVETs is the sort of question that needs to be answered. He also pointed out that There were three reports that came out between 2015 and 2017 looking at the future of higher education funding which never fully got implemented.

Watch the interview below.

Student protests are a live example of the politics of austerity in action.

This column was first published in Business Day.  

Student protests in emerging markets are an emotive issue. Overexcited analysts love jumping to Arab Spring analogies.

Yet young people undergoing political awakening, mingled with raised expectations through the end of the Zuma administration of what was possible from university education, is a potent mix as it crashes into the brick wall that is the fiscal reality.

This is a live example of the politics of austerity in action — less than a month after the budget.

The political awkwardness of the fact the students’ demands are not affordable has been swept under the carpet and funded with “reprioritisation”. This is a euphemism. Actually, what will happen is not just cuts elsewhere, but double cuts given the pressure the February budget was already bringing to bear on higher education funding cuts and infrastructure spend cuts. There are no simple choices — only the least politically painful.

Protests will probably grow this week and continue until the term has got fully under way and so more “reprioritisation” (that is, cuts elsewhere) will be required.

So we will probably get some salami slicing — maybe Technical and Vocational Education and Training (TVET) colleges; some infrastructure projects; or slow the pace of new student accommodation. The salami slicing will find its way to areas we don’t even think about: administration, research, maybe even filling vacant posts. They will alight in places that don’t make a noise until later down the line when quality and service delivery suffer.

The Treasury has little option here but to force intra-departmental budget shifting, but this is not efficient. The slicing might be better in, say, provincial administration budgets or SOE transfers or inefficient incentive schemes rather than from one area of higher education to another.

But we don’t know because expenditure reviews, zero-based budgeting and the challenging conversations over priorities are not had in cabinet. A serious debate to be had is what reduces inequality by more over time — more people going through universities or TVETs?

I don’t claim to know the answer to that but the biggest differences to unemployment and inequality come at the boundary between the informal and formal sector. It’s an incredibly important thing for the government to have a view on.

Higher education budgets have increased by 50% in the past four years. Surely at some point enough is enough, but students have political power and will end up being successful. The bigger fiscal issue is the crystallisation of student debt which Treasury might be forced to bail universities out of. The figures may be too large in a given year. Let’s not forget there was a student debt write-off of just under R1bn at the start of 2019. Another this year of about R750m believed to be outstanding starts to become problematic every two years.

The central issue here is that after #feesmustfall in the 2015 period through to the flurry of reports on funding that came out in 2017, there was no firm choice made about funding models. There was an increase in grants paid out (made suddenly at that moment by then president Zuma) but no shift to income-contingent loan repayments or a graduate tax. Income-contingent loan repayments in particular could see a state issuing entity place social bonds directly into the capital markets in a self-funding (government-guaranteed) entity.

The promised funding assessment to be undertaken between now and the October medium-term budget policy statement (MTBPS) cannot come up with any new options as all were on the table in 2017. One simply has to be chosen.

The student protests, however, place in sharp relief the lack of much outcry at all since the budget on the real-term cut in grants or indeed the general lack of more than a whimper from the Left about the grants cuts, the public sector wage bill freeze or the deeper salami slicing cuts pushed down below the surface through government. The same is true of the 15.63% rise in Eskom tariffs to come shortly.

Why the silence? The Left normally loves bashing the Treasury for being this all-powerful neoliberal enclave with a secret basement room in Pretoria’s Church Square where Treasury officials are bashing the poor like a piñata to get something sweet to feed to the rich. Yet in the face of understandable, yet genuinely questionable and debatable, policy choices made two weeks ago, we get a wall of (near) silence.

The Treasury has again triumphed on command and control of the process against a backdrop of the ANC not knowing what it wants and the cabinet not having difficult discussions.

But looking back, this is normally how budgets work. We see February and October budgets as the Treasury performing “well” within the political space afforded to them.

It is the major blowouts in between budgets that periodically happen — the higher education spending commitments in 2017 (and before), the VAT debacle of 2018, and the Eskom special appropriations bill of 2019 that all grew midyear.

This cycle will be similar as demands will be built before this MTBPS with politically loud elements. There are also risks around the public sector wage bill. The big one to land of course is the basic income grant in the next year or so, which could cost as much as R100bn a year.

With the recovery looking a little better, budget estimates likely to be even a little low on revenue and nominal GDP in the short term, political decisions to spend that little bit more will be easier to make. This is why I think a primary surplus is impossible to ever see.

Let us see in the months ahead as Eskom tariff hikes hit, public sector wages are frozen and social grants fall behind inflation; and as food and lower-income inflation spikes higher for the rest of the year. If there is still only a whimper from the Left, then the Left will be dead. There is no other real threat on the horizon — especially if the local elections see a shock, with more voters staying away as opposed to voting against the ANC.

But the mistake the markets have made — and similarly much of the comment after the budget — is to think that this is an optimal outcome. It isn’t.

Attard Montalto is head of capital markets research at Intellidex, a South African research-led consulting house.


Investors in SA equities and bonds are thinking a lot about the environmental impact of their investing activities and SA sticks out like a sore thumb, says Intellidex’s Peter Attard Montalto on CNBC Africa.

As the institutions’ exposure to the sovereign rises, quality of the state’s balance sheet worsens.

This column was first published in Business Day.

SA’s banks have experienced a sharp increase in exposure to government debt. In 2008, government bonds made up 3.3% of banks’ total assets, but in December last year, the most recent data available, that had ballooned 9.3%. In nominal terms, that is a tenfold increase to R607bn, from R64bn 13 years ago.

The steepest acceleration has occurred during the Covid-19 crisis. From March to end-2020, there was a 32% increase in banks’ holdings of government debt. Much more of SA’s deposits are being used to fund the government.

There are several reasons for this growth. Banks have too much cash relative to the demand for debt in the economy. Since the Covid crisis began, banks have seen their liquidity balloon as businesses and individuals have put cash in the bank rather than invest or spend it.

There has also been a sharp reduction in borrowing by companies and individuals because of wider economic uncertainty. When there’s no-one to lend money to at a higher rate, banks do the next best thing, which is to park it in government paper. Another reason is that government paper is paying relatively high yields, even though short-term interest rates have been slashed. Long-dated government paper will give you more than 10% while the prime interest rate is 7%.

The problem is, while the banks’ exposure to the sovereign has been increasing, the credit quality of the government balance sheet has been worsening. SA lost its last investment grade credit rating in March last year, as the pandemic was breaking and things have worsened since.

Unlike what you expect a bank to do, instead of a reduction in exposure to deteriorating credit risk, there has been an increase. This means that the overall risk facing the banking sector is increasing faster than the risk represented by government paper, damaging the credit worthiness of SA banks.

Signalled concern

This so-called “sovereign-bank nexus” ties the fortunes of the banking industry to the government. It can create problems both ways: if governments rely overly on the banking sector, and the industry hits problems, it quickly becomes an issue for the government’s ability to fund itself. But the other direction is perhaps the bigger worry: if government finances hit trouble and doubts rise about the ability of government to meet its obligations, it quickly becomes a banking crisis. In the budget two weeks ago, the National Treasury forecast that gross debt will reach a peak of 89% of GDP in 2025/2026. The budget deficit will average 7.7% of GDP over the next three years. These are the worst figures SA has seen in recent memory — yet it is precisely when banks are landing up with the biggest exposures.

In in its Financial Stability Review in November last year, the Reserve Bank signalled concern about the growth in the sovereign bank nexus, declaring that the “interconnectedness between the financial sector and the sovereign has emerged as a major threat to financial stability in SA”. The European Central Bank, for instance, in which the average bank exposure to domestic government paper for the zone is less than 4% is concerned about Italy’s 11.9% and Spain’s 7.2%. SA’s 9.3% is clearly comparable.

Banks have limited options in dealing with their exposures. They could shift more assets towards private sector lending, reducing government exposure. But given the outlook for the economy, this may not be an effective risk reduction strategy overall. And the problem is that the regulatory architecture makes it hard to do this — government paper is treated as risk-free in bank regulation. Capital requirements are lower the more government paper banks hold.

Things would get interesting if the outlook for the economy improves. Then interest rates may be forced upward quickly as the government and private sector compete for the liquidity available, with government paper crowding out lending to the private sector. For now, banks’ only option may be to reduce funding by lowering the rates they pay for deposits so that they don’t have excess liquidity to park in government paper.

Banks have cut public exposures in some areas, particularly loans to state-owned entities which have fallen from more than 1% of bank assets in 2018 to less than 0.6% last year. The credit quality of Eskom particularly, but also Transnet and others, has deteriorated faster than the core government balance sheet. But there’s no getting away from the government balance sheet in the end.

The alarm bells have been flashing about government finances for some time. The budget was able to show a small improvement compared to what was presented in the medium-term budget policy statement in October last year, thanks largely to unexpectedly strong tax receipts thanks to high commodity prices. But we are still in trouble and navigating through the fiscal crisis is key to the outlook for the country. What people might not be as conscious of, is that it is becoming even more critical for the banking sector.

Theobald is chair at Intellidex. 

There is a lot of interest from international finance and development institutions in doing transition financing with Eskom. But it’s dependent on the sovereign making net zero commitments by 2050, says Intellidex’s Attard Montalto. Featured in Business Day. 

The South African government has highlighted infrastructure investment as
key to the economic recovery post the Covid-19 pandemic. However, the
local construction industry has faced increasingly difficult conditions over
the past decade. After the boom of the 2010 Fifa World Cup, government
contracts dried up while companies also endured difficulties related to long
contract approvals, non-payment and crime at construction sites. Some
companies filed for business rescue.

In this note, led by our equity research analyst Gershwyn Benjamin, we set out our views on whether the local construction industry has the capacity to meet the infrastructure pipeline that is envisaged.

Download the report here.