This column first appeared in Business Day

So what now? On Friday, investors reacted suddenly to news of the Omicron variant, having largely shifted attention to other issues, particularly the inflation and interest rate outlook. Covid-19 was, in many minds, something that developed markets, at least, had under control. That has changed quickly.

SA was the epicentre of a global shock because the spread of the Omicron variant seems to be most entrenched here. While the JSE all share index was down 4.5% in dollars, the MSCI World wasn’t far behind, falling 2.5%. Markets price an uncertain future. It could turn out that the variant is clinically mild and well controlled by vaccines. On the other hand, it could presage a new wave of strict lockdowns.

Given that the progression of the variant is most advanced and studied in SA, markets will again be driven this week by what happens here. While businesspeople and tourists were rushing to get out of SA over the weekend, I would expect that smart hedge funds would be sending their analysts to our shores to be closest to new information.

Decision theory counsels that choices should be guided by what delivers the highest probability-weighted payoff. We are faced with a set of possible worlds from the benign to the malevolent. Think of these as options in a lottery and our jobs as decisionmakers are to assign probabilities to each possible world. Then we must make our investment decisions based on expected payoffs.

Investors the world over are going to be focused on calculating those odds. Some of those can’t be done in the laboratory or through theoretical modelling but must be observed. And those observations are going to be happening in SA.

Analysts will be keenly focused on test results and hospital wards. What is the admissions trend relative to the underlying positivity rate? How many of the patients are vaccinated and with which vaccines? What is their clinical outcome? We can expect that the variant will quickly be detected across the world, but given SA has a high prevalence it is likely to be best positioned to offer answers on what the rest of the world can expect. These answers will drive markets with SA at the centre of global attention.

On Friday, investors were overweight the worst of possible worlds, with gold and gold companies among the only spots of green on the equities market, while government bonds rallied on views that the upward interest rate cycle may be stayed. Typical safe havens like cash retailers were down (Clicks was the one exception — perhaps it will benefit from a fourth wave). Internationally, the winners so far in the pandemic, tech stocks like Amazon and Meta (Facebook), were also down (though vaccine makers rallied). Financials were among the worst off both here and abroad as investors had to sharply revise expectations that the credit outlook was improving.

I expect this will look rather different on Monday. With a weekend to ponder and more information coming to the table, decisions will become more rational. Investors have been focused on the inflation outlook: will that now be fundamentally shifted? Commodity prices were down decisively on Friday, with oil more than 11% lower. That, like the equity price plunge, may have been overdone. If inflationary forces are being driven by supply chain disruptions while underlying demand remains stable, we may see Omicron as a contributor rather than suppressor of prices.

SA, however, will diverge from the global outlook, particularly if the variant turns out to be benign. That is because the damage will be severe here regardless, because of the effect of global restrictions on travel. Our tourism industry desperately needed a strong December and that has been torn away in an instant. It is the most vulnerable corner of the economy and the distress there will inevitably spill into greater risk aversion and a worse credit outlook more broadly. This could be compounded if new lockdown measures are taken in SA, which have so far disproportionately affected the hospitality and tourism sectors.

The variant shock confirms that Covid-19 is becoming an endemic feature of our lives. The fight against it is gradual and ongoing, our task being to slowly limit its impact through vaccines and other interventions. New variants are going to be an ever-present risk, and our management regime needs to explicitly prepare for periodic new variant shocks. If last week taught us anything, it is that the possible worlds we face all include a level of Covid-19 vigilance, with societies always on guard and ready to quickly implement measures to control anything that may hit us in future. Preparedness is the one thing we can control, and last week we got a sharp reminder that investors need to be ready.

• Theobald is chair of research-led consulting firm Intellidex.

South African investment analysts and portfolio managers are currently sharing their opinions on the quality of investor relations from the JSE’s listed companies in the inaugural Intellidex Top Investor Relations Survey.

The study is asking both sell-side and buy-side analysts to assess the quality of investor relations at South Africa’s listed companies to get high quality insights from investment professionals that will inform public awards.

“We’re calling on the entire South African analyst community to participate in our first Top Investor Relations Survey; it’s their opportunity to improve the quality of engagement they have with listed companies and ultimately encourage better communication and engagement – so there is a clear upside for buy/sell side to provide input,” says Dr Stuart Theobald, founder and chairperson of Intellidex.

The Intellidex Top Investor Relations awards are going to become a critical barometer of how companies are doing and they will vie for recognition from the industry, just like with many other Intellidex awards.

Dr Theobald said he was looking forward to seeing how South Africa’s listed companies are rated, not just in general terms but in the finer details too. The findings will award investor relations teams in the main JSE sectors and an overall winner; special mentions will also be made based on the outcomes of the research.

Invitations to participate in the survey have been extended by email to all known investment research firms (sell-side) in South Africa and be open to individual analysts in each firm and to fund managers (buy-side).

In media partnership with Business Day, the results will be published and promoted in early 2022 through their print and online platforms. The project adds to Intellidex’s leading research in capital markets including Financial Mail Ranking the Analysts and the Intellidex Top Securities Brokers surveys.

Investment analysts and professional investors are eligible to complete this survey here.

By completing the survey, Intellidex will donate R50 on your behalf to one of the following organisations:

Intellidex launched South Africa’s inaugural Investor Relations Survey on 12 October 2021, and results will be published in Q1 of 2022. 

This column first appeared in Business Day

I have been called out for something by someone I respect and it worried me. After the conclusion of my usual client webinar with some top fiscal experts after the medium-term budget policy statement in which we were stuck in the geekery of buoyancies and the politics of grants, said person asked why I hadn’t mentioned or quizzed my panellists on the July unrest.

I did a double-take, trying to work out how I could have made such a slip. My knee-jerk conclusion was that it was in the past and people had moved on, which worried me more.

Of course, the deep implications of July have not ended — the security upgrades and rebuilding costs, the higher insurance premiums forcing local and foreign direct investors (FDIs) to think twice. Judging by the data, the formal sector seems to be bouncing back fast, yet the informal sector seems to be ignored. There is no Covid-19 National Income Dynamics Study — Coronavirus Rapid Mobile Survey (Nids-Cram) yet for KwaZulu-Natal post-July. One suspects that, as usual, there is a deepening of poverty, with asset destruction and a widening of inequality.

Local investors and corporate clients have stopped asking about prosecutions and justice for those implicated in the July unrest — the instigators and the criminal and mafia elements who bought professional angle grinders to the ATM looting party. International investors and FDI investors survived until recently. But our regular “What’s going on?”, “Nothing” patter has clearly worn thin now.

This doesn’t mean it isn’t grating. It’s an issue ratings agencies are looking into and that still concerns investors and corporates when asked about it.

If July was a one-off event that we could say is done and dusted, then fine. But we are now moving into a year of major political tumult (postmunicipal elections coalition governance reality, ANC elective conference as well as its campaigns through the year and the policy conference). Add increasing evidence at Eskom of “passive” sabotage (ignoring a warning light and so on) and “active” sabotage (cutting cable ties and so on) now being a real possibility.

The government seems to allow these incidents to wash over it. The recent east coast port fires are a case in point in which the government has published no details about the strong possibility of sabotage. There has been only silence after an initial low-key statement.

The initial July failings were one thing — the painfully slow deployment of forces ingraining a sense of impunity. But the lack of justice being done or seen to be done is deeply problematic and shows a shocking lack of leadership. The capacity issues are only so much of an explanation — yes we know about the problems at the NPA and so on, but if the government was showing people being arrested and at least attempts to try instigators through the justice system there would be a different vibe. Instead, there is silence.

I am now in SA, seeing a broad range of investors, businesses and policymakers, and the whispered question is why this can be and what the implications are. Such a question is whispered because it is not nice to think that despite notionally such strong institutions there is a broad blanket of impunity and lack of justice hovering over our country. People are clearly torn between a blinkered view that life can carry on regardless, and the gnawing sense of something not being quite right.

Uneasy juxtaposition

This damages investment from locals as much as foreigners. As usual the government can gloss over it, the announcement of the Heineken deal being a case in point.

Wondering about the northern suburbs of Johannesburg as well as Pretoria and Cape Town after a year — but also spending some time in the townships with Breadline Africa, a charity of which I am a trustee, one gets that uneasy juxtaposition of shininess and newness, and status quo — of widening inequality — of investment and building but also of the realisation why investment as a share of GDP is at 14% under the newly rebased GDP.

A more problematic possibility emerges that is generally skirted around in the public debate — that KwaZulu-Natal must be mollified — kept on board to prevent something worse happening inside or outside the ANC through the elective conference next year and the national elections in 2024. We will see how the slates work through December 2022 and how much cotton wool is needed for the KwaZulu-Natal leadership.

Is this really sustainable politically, let alone in terms of the economy at large? One wonders if the ANC might not keep its vote share much higher elsewhere in the country by more decisively dealing with KwaZulu-Natal.

There seems to be no realisation of the damage that a situation such as that of Umgeni Water does to investor confidence. The ANC at the highest level should swiftly call out games being played as people start thinking about what the ANC losing provincial majority control in Gauteng in 2024 or nationally then or beyond looks like.

So maybe this is why I subconsciously didn’t want to talk about July on my webinar, you end up down a rather worrying rabbit hole. Matters such as those regarding Eskom start becoming more unpredictable and harder to see turning. At least Eskom’s management has been swiftly suspending people and referring issues to the police and Hawks. We all know there are issues in the criminal justice system, but things can be held together with a sense that at least maximum effort is being made.

All this points towards 2022 being a rollercoaster — even if the endpoint of a Ramaphosa re-election is often seen as a forgone conclusion, the damage in getting to that point can be real.

The lesson in all this is to not make too many assumptions that breed complacency. There are forces out there that certainly are not complacent.

Science can help us make the best choices on whether welfare can be funded without economic growth, or if higher debt causes weaker growth.

This column was first published in Business Day. 

Economists like to believe that what they do is scientific. Many are right. They create models that represent behaviour in an economy and use them to make predictions that can be tested. They publish papers marshalling evidence one way or another. Some models become widely accepted as their explanatory power is corroborated.

Policymakers should aim to work with these. This leaves them open to accusations of “orthodoxy”. They must deal with such accusations by becoming applied theorists — testing policy options and gathering evidence directly. This is what the much-hackneyed phrase “evidence-based policymaking” is meant to be about: identifying a set of feasible policy choices, then testing to see which option delivers the intended outcomes.

The issues being considered can be highly contested. They can concern fundamental questions such as the responsibilities we have to ensure the least well-off live good lives. They can also be influenced by elites protecting their own interests. This can sometimes make it difficult to let the science happen without interference.

This contested terrain is no more apparent than in arguments about social welfare in SA. There are strong emotions and ideological commitments: welfare is about supporting the most vulnerable. There are also obviously vested interests: welfare must be paid out of tax revenue, reallocating wealth from the rich to the poor.

On one end, advocates have argued for a universal basic income grant: a no-strings-attached payment that is made to everyone. On the other end, some argue social welfare causes economic malaise by creating a dependency culture. If any must be paid it should be narrow and drive improved behaviour leading ultimately to self-sufficiency.

We need the rigorous science to help us decide. The National Treasury gave some of its answers last week in the medium-term budget policy framework. Social welfare is not going to be provided out of increased debt spending. The Treasury is bedding down the consolidation that has been taking place in the past two years to turn the dramatic escalation of debt that the country has built over the last 10 years (it is still growing, but the peak at least is now in sight).

“Weak growth is compounded by the rapid increase in public debt,” it said. Moreover, “government will continue to consider measures to support employment growth [but] joblessness cannot be solved by fiscal resources: it requires strong and sustained economic growth”.

The Treasury is saying that welfare cannot be funded without economic growth. It is also saying higher debt causes weaker growth.

There has been a series of arguments from think-tanks such as the Institute for Economic Justice, allied by the likes of former Goldman Sachs SA CEO Colin Coleman, that challenges this. They argue for substantially expanded public welfare in the form of a universal basic income grant. The clear case made for such an approach is the moral imperative to support the most vulnerable. But they recognise that debt can’t alone do the job of paying for such a large increase in spending, so advocate tax increases and argue that growth will be substantially stimulated by such welfare payments.

In contrast, the Treasury argues that spending enhances growth more when it is investment rather than consumption. It is protecting planned investment in infrastructure, which means limiting welfare spending and other consumption line items like wages.

Different policy options

We therefore have very different policy options. Will growth be stimulated best by increased welfare spending and higher taxes, or will it be achieved best through targeted spending on investment that supports economic activity? The good news is that these questions have been much studied. The Treasury has in fact modelled a lot of them itself. Given our history of welfare spending in SA we should have data to decide whether you get economic growth with high multipliers. I would be intrigued to see the model that suggests this outcome, and then data showing it has been observed in specific cases.

There are further questions that can be settled on the science. Can SA increase taxes to fund higher welfare? What are the economic effects of doing so? Obviously higher taxes mean lower spending by those who are taxed. It may also mean less economic activity as those being taxed keep less of each marginal rand earned by doing more work (at least in SA).

Again, the literature is replete with good models to assess these effects, and we should be able to find good data in SA. If we cannot raise substantial revenue from additional taxes, are we kidding ourselves that welfare increases can be done without increasing debt levels? And if the debt outlook deteriorates, what then does that mean for growth? And if growth continues to be weak while spending grows, what happens eventually?

The one thing I know for sure is that we cannot afford to take bad decisions. The state capture years turned a robust government balance sheet that had massively increased welfare spending into a subinvestment grade mess that was an existential risk to the country. We must make the best decisions, which means bringing the best science to bear.

Theobald is chair of research-led consulting firm Intellidex.

This column first appeared in Business Day. 

Events regarding the budget and medium-term budget policy statement lead to a kind of political madness.

There is an expectation — raised in various places in the past week, such as in the cabinet statement — that somehow this is a chance to lay out economic policy and solve issues holding back the recovery. “The [medium-term budget policy statement] is a call to action for all sectors of society.” This seems to miss the current context the budget fits in.

A medium-term budget policy statement is a “mark-to-market” on the revenue situation (taking into account new growth forecasts) but does not announce new revenue measures (that is the February budget). It includes a peppering of financial sector policy reforms (firmly under the Treasury’s purview), and the key focus is on expenditure.

People seem to forget that the point of a medium-term budget policy statement is the culmination of a five-month negotiation process in the government to decide on expenditure for the next three years.

No-one seems particularly happy with where we have ended up — as cabinet-level demands about medium-run spending steadily mount (many reasonable, some not), there are short-run revenue boons from the mining terms of trade, yet these are unsustainable, and neither will be cheap interest rates (in SA or globally), which have slowed but not halted the pace of increase of debt service costs in the fiscal framework.

There is no capacity for proper zero-based budgeting. The accounting and planning capacity within departments and most other spheres of government is weak so as to not really be able to engage with expenditure restraint. The cabinet is unable to fully engage in prioritisation and trade-offs.

The Treasury is often depicted as somehow being happy with the status quo — I don’t believe that is the case. It would be far better to have a cabinet prioritising and making active difficult trade-offs and waiting for structural reforms to bear fruit rather than passively having them imposed by pushing down more uniform top-trimming of expenditure.

Political calculations

The terms of trade boon is likely to allow some pause in the pressures for significantly more top-trimming in the short run but it does not remove the problem of the lack of active trade-offs being decided on by the cabinet.

Such trade-offs require political calculations and often political capital, something that is likely to be even harder after the disastrous municipal elections for the ANC. Some of the risk aversion might be fair. The sequencing and timing of wider important social security reforms, for example, that have to wait until the economy is in better shape is clearly deeply challenging in this environment. But some — such as state-owned enterprise spending, SAA, Eskom bailouts that shouldn’t be made if decisions over debt deleveraging were actually taken — should not be challenging and should not have negative effects on the electorate.

The medium-term budget policy statement is too early after the elections to see any changes now. But the budget in February is sufficiently far away for the full force of the internal political blowback within the ANC, the culmination of the basic income grant debate and a looming public wage round.

More fundamentally, we are likely to see a test of whether politicians believe in a budget constraint. So much of the debate about the basic income grant or the contestation over solving unemployment or inequality crises becomes unbridgeable because some people believe in a budget constraint and others don’t, that busting through it in a low-savings economy with a free-floating economy would have negative consequences, or not. Those proposing a step up in debt financing can’t explain who exactly is meant to do it, and at which interest rate, using which funds.

The ANC could well be tempted to test the limits of the budget constraint more fully than it has done previously — or bust through it — with an eye on 2024.

SA has historically been an oddity in this regard — in many emerging markets we see strong fiscal cycles with spending heaped out the door before elections. While SA may well struggle with keeping to a consolidation path, it has not had these cycles before at the macro-fiscal level.

These are all choices, however, for February, not so much for now.

Supercharge spending

There is another scenario. The ANC has a tendency to curl up and die inside after losses. We saw that in the Western Cape 12 years ago. The national executive committee could simply become increasingly head-in-the-sand and the status quo-binding nature of the budget constraint could be kept wrapped firmly around pandora’s box by the Treasury. Yet this would not be an optimal outcome without more prioritisation and trade-offs.

The stunning news in the last week of a political declaration around a $8.5bn climate finance facility reinforces a key point. More money (revenue or foreign concessional finance) is needed to supercharge more spending. The market still doesn’t understand that the climate facility is for doing crucial Eskom decommission, social planning and transmission investment spending that wouldn’t otherwise be possible or fundable.

This is precisely why business has called for progrowth reforms to drive more revenue increases to be able to spend more on social policy, education and health in a sustainable way that doesn’t raise interest rates.

What links all this together is a difference between what is good within the current constraints but is really suboptimal when one zooms out — versus what is actually required.

We should remember that in the week ahead as we see what the market is likely to interpret as a “good” medium-term budget policy statement that uses some short-run flexibility from the terms of trade boon to revenues and sees less of a future increase in debt issuance than was previously pencilled in. Is this really what the Treasury would want an optimal budget to look like under the current constraints, if trade-offs and reforms were possible?

• Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company.

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As the COP26 climate conference gets under way, much focus will be on the climate finance pledges from high-income countries – which have so far failed in their commitments to mobilise $100bn a year for developing countries. Intellidex’s Peter Attard Montalto says while finance is causing a buzz, underneath all that is discussion about whether we are committing to the right level of nationally defined contributions across the various countries.

Watch a recording of the webinar below.

Decarbonising the electricity sector – responsible for most of the country’s greenhouse gas emissions – will make a good case for SA to funders at #COP26, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured in Fin24.