Everyone is picking from the unrest what they want to fit their purpose. Complex, conflicting, cross-cutting narratives and drivers are not allowed.
The reality is messy — a mix of political, criminal and opportunistic as well as socioeconomic factors. Yet simplistic narratives are combining with a great sense of guilt now emerging in some quarters — with long-term strategy on the left to push for a basic income grant (BIG) that is seizing their moment — and then with some criminal modelling and analysis from proponents of BIG.
Economist Isaah Mhlanga detailed in these pages the problematic attempts from Applied Development Research Solutions (ADSR) to show huge transfers are neutral for growth. This model has been called out by SA Reserve Bank researchers in the past.
There were also mistakes here on Friday that a BIG would mean a one-off 2% of GDP rise in debt, when in fact a debt-funded 2% of GDP BIG will mean a cumulative 2% of GDP more debt each and every single year — forever.
The Institute for Economic Justice (IEJ) has come out and said that R250bn a year in additional taxes can be raised to pay for a BIG. That is another 4.7% of GDP in taxes every year, an increase in revenues by 20%. It glosses over the consequences of raising such a huge amount in a low growth economy with a steep yield curve that is reliant on markets buying bonds.
Is a new social security tax of 1-3% really going to lose only R140m through behavioural changes for every R10bn it is meant to raise? About R40bn a year of resource rents to be extracted is on the table from a mining sector that is barely investing given how unattractive a jurisdiction SA is. How is this meant to avoid further damaging the poor investment case?
There is a more fundamental problem. The idea is to remove R250bn a year from a narrow tax base of those who supposedly save too much and give it to those who don’t consume enough — yet with little effect seen. This is a public policy choice that could be made but has serious consequences needing mitigating actions and is why we need a proper debate and proper modelling considering the behavioural reality of how the economy works.
SA is already a low savings economy with financial markets that need more inflows, not less. Who exactly is expected to buy the government bonds or invest in the equity of new companies that are meant to emerge to service those being paid BIG? Those getting the grant won’t be.
The shift in incentives to invest and build businesses — such as now in KwaZulu-Natal — are forgotten. It is not the rich who will suffer but the middle-class entrepreneur who wants to set up a new shop or restaurant but faces 3% more social security tax, a five percentage point higher dividend tax and especially a wealth tax on their success under the proposals of the Institute for Economic Justice. The hurdle rates for investment and to take risks go up as a result.
Bond markets being asked to buy an extra 1% of GDP in bonds every year forever is not going to go down well when debt levels are around 90% GDP. There will be a faster grinding higher in debt service costs that are already squeezing out other spending. The Bank is not going to magically bring a money tree to the rescue and buy bonds to fund a BIG.
So who is meant to pick up the pieces when a social security tax raises half of what it is meant to, given these behavioural changes?
At that moment the politics of BIG will mean it will sit there like a whale on the fiscus — not able to be cut — creeping upwards as unemployment continues to rise. Instead deep cuts will have to come, to fire public sector workers en masse, to the police and army, to infrastructure spending (and the private sector won’t be able to pick up the pieces).
The problem is cast as contrasting not just the cost of doing a BIG but setting it against the cost of not doing a BIG. Yet the full set of reactions on both sides of this equation are never transparently laid out by proponents.
SA needs a social security net — there is no doubt in that. But the fallout risk from throwing around large numbers is not being debated. It is precisely because I want SA to have an effective social security net that I am interested to understand it in its totality. A destabilised fiscus that loses market access at sustainable interest rates is no help to anyone, in particular the poor.
We need to ask more basic questions — what is affordable here in the short term (where, yes, there is limited cash available) and what is affordable in the long term in permanent changes to spending are very different?
Cash transfers are not the only option. An expansion in Employment Tax Incentives to get people out of unemployment and deal with the root cause of so much poverty and inequality is an option. An ETI allows for skills transfer and has wider known benefits including better income for the individual than just the cost of the ETI to the fiscus.
Similarly, isn’t it better to try to transfer assets by redoubling housing programmes? Where is the debate between these other conceptions of support?
SA is about to take quite dramatic, permanent, policy choices — possibly in haste after a deep political shock. It’s a time for fast and intense debate to find the right, sustainable, answers, not saddling the poorest with a wider set of risks in the long term.
• Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company.
Is investment in renewables spurring change for ordinary people in the often-impoverished communities around the new facilities? Intellidex’s Dr Zoheb Khan addressed this in his article on The Conversation. He highlights that the Renewable Energy Independent Power Producer Procurement Programme has, by some measures, been remarkably successful. It has attracted over R200bn of private capital to the construction and operation of 77 solar and wind facilities. It also added roughly 5,000 megawatts of generation capacity to the country’s strained national grid.
Intellidex chairperson Stuart Theobald spoke with SABC News’ Alternative Investor, discussing how investors viewed South Africa pre-Covid and now. Theobald notes that in many respects, SA is an attractive market. It’s a middle-income country, a constitutional democracy and has strong financial sector infrastructure along with a strong legal system. While the country has had a reasonably compelling offering for investors since democracy, that has been severely undermined by the state capture years.
This column is endowed with the responsibility to look at current events from an investment perspective. It is a cold and calculating task amid the personal tragedy and loss of life we saw last week. But it was one that the financial markets were making as events unfolded.
The key question was: has the violence and mayhem of last week damaged the investment case for SA?
Looking at the markets, you would have to conclude “no”.
The currency showed some weakness on Tuesday and Wednesday when the looting and destruction of property seemed most widespread and out of control, but by the end of the week it was back at pre-crisis levels. Indeed, JSE-listed companies showed some strength on the worst days, particularly mining companies that benefit from a weak rand. Financial and retail stocks were down a few percent but, overall, the top 40 index ended up unmoved.
How can the destruction of billions of rand worth of stock and infrastructure not be reflecting in the values of SA companies? It is partly a function of the mathematics of valuations. Stock prices always reflect the future. A one-off event, even a large negative one, is quickly diluted in a long tail of cashflows that go into valuing an asset. One-off events can therefore be limited in their affect on share prices.
The real problem is change that leads to long-term underperformance. Has SA’s security situation fundamentally deteriorated to the point where investors must factor periodic riots and destruction of property into the outlook? There are other markets that work like this — investing in unstable regions, such as Nigeria’s Niger Delta or northern Mozambique, requires investors to factor in a large risk discount. It reflects that expected earnings are permanently affected by sporadic security events that must be “priced in”.
Foreign investors have been concerned about events last week. Billions of dollars of global savings are invested in SA shares and bonds. Was this a tipping of the country into widespread disorder and chaos that would permanently undermine companies’ ability to make money or the government’s solvency? The answer, by the end of the week, was “no”.
This is undoubtedly correct. The mayhem had more in common with the White House insurrection than a permanent or semipermanent security deterioration à la northern Mozambique (or, from a historic perspective, the security situation SA faced from 1976 to the early 1990s). It is an aberration that wider institutions of the country are able to absorb and deal with, even if they were caught napping by it.
As the drama unfolded, investors could take heart from the (belated) rollout of all security forces, the large-scale arrests and promises of swift prosecution of those involved, the reference to a deliberate political strategy linked to those close to former president Jacob Zuma.
Investors could also see the mostly peaceful rallying of SA citizens to work with security forces to protect property. Investors could interpret it therefore as the dramatic denouement of the state capture years, with the full might of Zuma reactionary elements expending themselves. It was an explosion, but one absorbed by the underlying strength of SA institutions and the will of citizens to stand up for law and order.
Of course, the poverty and inequality that besets SA was a contributing factor. This has been worsened by the Covid-19 pandemic that had already lost many people their jobs. Poverty is a powder keg that those wanting to foment violence could light, with the tinder of ethnic and racial tensions.
From an investment perspective, poverty and inequality are already priced in. It costs more for companies to raise finance and government to borrow than it would if poverty were eliminated. Economic growth, and good policies that prioritise the least well off in distributing the spoils of growth, are important in themselves, but have the instrumental benefit of reducing the risk discounts investors apply to SA. That helps trigger a virtuous cycle as lower cost access to capital helps drive economic growth.
Considering the macro level does not obscure the devastating losses that people in KwaZulu-Natal and parts of Gauteng have experienced. Hundreds of small businesses may never open again. Large manufacturing plants and logistics nodes may never be rebuilt. This is a real loss.
The crisis may add momentum to the reforms that have been under way to change how the SA economy works; changes that investors can price positively into their view on the country.
The economic recovery programme already agreed by the cabinet can be accelerated — the crisis demonstrates the importance of delivering on it. Some of the political obstacles may now more easily be swept aside.
To those reforms we must add the repair of our intelligence and other security institutions to lock in the one-off nature of the crisis.
Ultimately, SA still has a path open for it to improve the lot of all South Africans, delivering a positive investment outcome in the process. Investors believe it can be done. We have work to do.
• Theobald is chair of research-led consulting company Intellidex.
In discussing how foreign investors and markets are reacting to the unrest in South Africa, Peter Attard Montalto tells CNBC Africa that the unrest and arson do not necessarily mean that foreign direct investment stops, but merely changes the risk-reward dynamic. This might see project sizes be curtailed and SA becoming less attractive to investors compared to other places.
Plans to send 25,000 soldiers on a peacekeeping mission have come too late, says Intellidex’s Peter Attard Montalto. Featured in Business Tech.
There has been a brewing concern about security issues among investors, given the recent looting. South Africa has not had this problem before. Has SA opened Pandora’s box and is there now a general shift in the security narrative altogether? Intellidex’s Attard Montalto discusses with Bruce Whitfield of 702. There has also been a panicked push by some to project a Zimbabwe scenario onto SA given recent events. We need to reject this view and hopefully we will see a decisive response from the president.
Before the distraction of the 2022 ANC elective conference, there is a key window from now to the end of the year for these conversations to happen.
So what — when all is said and done — is the point politically of successfully seeing the upholding of the constitutional order and former president Jacob Zuma jailed?
Are there not nettles to be grasped and sides to be chosen (and by implication people to be upset) to now advance the country? Isn’t a less risk-averse view needed of the shadows under the bed?
The problem of course has been that Cyril Ramaphosa’s presidency, until the reform dial started to quiver recently, has been defined by what he is not — not Zuma, not Ace Magashule, not anarchy, not state capture — more than for what it is. The convenient misnomer that somehow the dark forces of state capture have been blocking reform has therefore festered.
Yet Ramaphosa gained a supermajority in the NEC on the step-aside rule two months ago and has now navigated a serious potential cliff-related incident this past week. Arm-twisting (or dislocation) on the issue of energy sector liberalisation was already achieved before this moment.
The truth was that Zuma was not there secretly scheming in Nkandla’s fire pool to block energy reform or spectrum auctions or a more modern and appropriate visa system, just as Magashule wasn’t either from the SG’s office.
The convenient excuses fall away now and the fruits of three years of “germination” must be seen. There is nothing left to be the anthesis of and only something to be for — an agenda, a vision of change.
Your political capital is not really higher, yet you have a renewed sense of goodwill at your back. While sentiment may not move somewhere more positive on Zuma in orange overalls, the removal of a yawning set of downside risks is not for naught.
Maybe it’s a time for grown-up conversations about hard truths.
That performative land reform through unnecessary Section 25 amendments can be allowed to die now that the EFF and ANC have reached an impasse in parliament. The death of the process — a two-thirds majority to amend it is beyond reach —is not a negative but a positive that reinforces property rights and investor sentiment and removes distraction from all the hard but obvious things the presidential advisory panel on land reform recommended.
Difficult conversations still need to be had on national health insurance (NHI). Everyone wants to see quality universal coverage, but what is currently proposed is not only wrong in that it won’t achieve its aims, it is also mad. Mad in the fallout risk it will create for private sector savings and quality and an open door to the kinds of corruption that found their way so easily into the head of the department of health during the Covid-19 crisis.
The most difficult conversation Ramaphosa needs to have with his cabinet colleagues is on fiscal policy.
The status quo has meant damaging and inefficient top-slicing of all projects as fiscal restraint is pushed down uniformly across the government (though particularly affecting provinces and municipalities), rather than tough choices being made on what programmes could be stopped or shifted to implementation or funding by the private sector.
The government should be choosing to do less, and better, itself, and then marshalling wider forces to pick up the slack elsewhere. This can give room for the government to concentrate its efforts on the poorest in society, laying the regulatory and process bedrock for private sector-led growth and support private-sector funding of infrastructure, housing, health and education.
Difficult conversations are needed to drive home the fact that most across the government still simply don’t understand the unsustainable macro-fiscal situation and don’t get the need to do expenditure and budgeting within a macro-funding constraint.
Part of this is down to the fact that the Treasury always says that fiscal policy is “laid out in the Budget Review”. Yet this is actually not true. In the budget speech and the review one gets little hints and a multitude of priorities and implicit targets — we can try to guess what fiscal policy is, but it is never actually described.
The markets know this and with it the inconsistency of meeting targets over time and the problems divining a reaction function of what this current uncertain policy will do with the terms of a trade boon we are having now.
As such, difficult conversations on fiscal policy should result in a white paper published not by the Treasury but by the cabinet as a whole and which will then form part of ministerial contracts for monitoring and evaluation. This would start to push down the zero-based budgeting mindset in a far better way than the slow and uncertain progression of that process now just starting.
A different sort of dialogue on fiscal policy in cabinet would mean that we could have a more open and frank debate on the additional R50bn or so in mining corporate tax and royalty receipts that the Treasury will receive this year. There is a need to spend some of it on Covid grants and a package of deployable, credible measures for each Covid wave. What is also required is to cut bond issuance now and then save some of the receipts to cover government bond redemption risks in the coming two years that will help flatten the yield curve and allow banks and investors to support the recovery rather than buying government bonds.
Grown-up conversations require time and effort but also firm views of the president’s own to bring to the table with the right advice behind him. As the distraction of recent events falls away, and before the distraction of the 2022 ANC elective conference opens up, there is a key window from now until the end of the year for these conversations to happen.
Will the president seize the moment or remain concerned by the shadows under the bed?
• Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company.
Business Day’s Michael Avery talks to Peter Attard Montalto, head of capital markets research at Intellidex; Paul Miller, director of mining supply sales consultancy AmaranthCX; and Matthew Parks, deputy parliamentary co-ordinator for Cosatu, about the operating difficulties faced by mining companies. Montalto says that general sentiment regarding Zuma’s arrest is that we have avoided a massive downside scenario with him refusing to hand himself in or the police refusing to arrest him.
Celebrating its 10th anniversary, Intellidex’s Top Private Banks & Wealth Managers survey is a highly credible and entrenched survey. This year, Intellidex had Iress as gold sponsor of the awards and Financial Mail Investors Monthly as the media partner.
Some of the key findings:
21% of 2021 Top Private Banks & Wealth Managers survey respondents are extremely likely to recommend their private bank to someone they know.
48% of survey respondents are extremely likely to recommend their wealth manager to someone they know.
40% survey respondents say that their returns are better than market averages.
48% survey respondents say that their wealth managers consider sustainable investing when creating their wealth portfolios.
More than half of survey respondents say their wealth increased by between 1% and 20% since the start of lockdown last year.
Download the report below.
Standoff between ANC and EFF is due to people feeling they cannot accrue tangible economic benefits.
With the ANC and EFF at loggerheads over amending section 25 of the constitution, it may well end up not being amended at all. That is a good thing, but the question of property rights is far from resolved.
Countries with weak property rights have lower investment rates and lower economic growth. There are very few “facts” in economics that are so well supported by evidence. Thousands of studies corroborate this from countries as diverse as Benin to Japan. But don’t think just because section 25 goes unamended we have strong property rights.
Security of rights tends to be advocated at the expense of the accessibility and justice of rights. Until the latter two facets of property rights are dealt with, security will always be weak. Those who trumpet the importance of security lack credibility because they already have property and are concerned primarily with protecting their existing assets. The argument is thus unpersuasive.
The distribution of land (and to a lesser extent other property) in SA is profoundly unjust. It is the result of apartheid and colonial dispossession before it. Writers such as Tembeka Ngcukaitobi and Charles van Onselen have meticulously detailed how colonial administrations systematically disposed black South Africans before apartheid codified and enforced an all-encompassing property rights regime that systematically endowed white people.
Property rights are also not particularly accessible. About 60% of South Africans have no recorded land or property rights while those who do, face increasingly dysfunctional administration of these rights. Many, including beneficiaries of land reform, have tenuous and unclear rights that retard their ability to use their property to be economically active.
While the debate has been focused on amending section 25 of the constitution and the Expropriation Bill, societies that have reliable property rights have them because they are accepted as important concepts across a population. The wording of legislation must reflect social attitudes, or forever face instability. The political volatility around property rights exists because of the gap between legislation and social attitudes.
In the case of SA, we have not reached a level of social acceptance because we have not properly dealt with justice or accessibility. If people felt that property rights gave them tangible economic benefits and that the distribution of rights was about justice, we would not be having our current debate. In this environment you find radical populist policy such as the EFF’s, which would dispossess everyone of property rights, through to the ANC’s somewhat unclear policy of expropriation without compensation, but only when appropriate.
There is no easy fix. Security is fundamental but fixing historic injustice and making property rights accessible is often in tension with security. Despite it being clear policy, we have failed to deliver redress of past injustice and we have failed to make rights accessible.
We have been trying since 1994 to get this right. The land reform programme, while not aggressive enough in design, has manifestly failed on its own terms to deliver correction for past wrongs. As the Presidential Panel on Land Reform reported in 2019, the state has delivered 8.4-million hectares of land between 1994 and 2018, about 10% of commercial farmland compared with the target of 30% by 2014. We have also been notionally committed to giving the occupiers of land some degree of tenure over that land and fallen far short of targets.
It is glib to point out that this outcome reflects corruption and ineptitude on the part of the government. The failure of the land reform programme and land tenure is a failure of leadership and administration. This has been an awkward background fact for the ANC to deal with, making amending section 25 a politically easier focal point.
The political process, in which the ANC and EFF are at loggerheads — meaning there will not be the required two-thirds majority to amend the constitution — suffers the usual problems of populism rather than an honest grappling with the problems. The populism is driven by public revulsion at those who trumpet security of rights over redress or accessibility.
The political process should be much more honest about two things: the problems we face on land predominantly reflect administrative failures rather than the constraints of the law; and the undermining of the security of property rights will have very real and serious economic consequences. Those economic consequences are not primarily about land, though that is important.
The economic literature is clear that everyone from software engineers to subsistence farmers do not create assets unless they are confident they will continue to own them in future.
One obvious own goal that can be dealt with is the overly wide scope of the Expropriation Bill to all property — physical and intangible — that provides no benefit in terms of land reform and only harm in terms of security of property rights. But the fundamental reform we need will be a harder long-term process requiring genuine political skills and commitment to the public interest.
• Theobald is chair of research-led consultancy Intellidex.
Intellidex is a leading research and consulting firm that specialises in capital markets and financial services in Africa.
Privacy & Cookies Policy
Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.