Intellidex’s Head of Capital Markets, Peter Attard Montalto was a speaker at the SAVCA Private Equity conference on 25 – 26 May 2022 in Cape Town, where he briefed delegates on the macroeconomic environment and what is needed to turn the tide. He also moderated the Infrastructure Debate.

See his presentation Turning the Tide below:


Some interesting things have happened since 2019, driven no doubt by the strange underlying forces of economics as opposed to anything more sinister.

There has been a flight of several restaurants from Cape Town to Johannesburg. Indeed, some seem to be charging more now than they were in the past despite the view that Cape Town is so often the more expensive place to be. Quality is as good if not better.

Similarly, the hotel sector in Cape Town seems to be taking a little longer to bounce back than Johannesburg.  

Johannesburg has benefited from a less volatile economy, being much less reliant on tourism, while Cape Town saw a sudden stop in about a third of its economy during the height of Covid-19.

Now that tourism is bouncing back surprisingly quickly, we will no doubt get a healthy pickup in restaurant competition between the two major hubs.

The idea of interprovincial or intermetro competition is remarkably underappreciated and little discussed in SA — even by economic policy panjandrums. Obviously, they want to keep up with whatever anyone else is doing on infrastructure or similar. But the idea of cut-throat competition is not really there. We seem to be happy to think that SA could find a path towards productivity and growth through exports and export competitiveness. Yet the idea this could happen domestically is underappreciated as a friendly and fruitful form of development pathway.

The issue will become increasingly important for a range of reasons — in particular related to the just energy transition.

As metros move at different speeds to secure their own electricity (eThekwini maybe marginally pipping Cape Town and Johannesburg a little further behind, with others barely out of the blocks), so businesses and households will naturally be attracted to them. The internal migration flows — already ongoing based on simple drivers such as service delivery — will be important to watch, and with it the changes required to town planning, social and employment support and the risks to social stability if these cannot be met. Thinking through the circular problem of successful municipal generation procurement attracting more electricity demand and so the need for yet more procurement is an interesting — good — problem to think on.

Similarly with production of hydrogen as a future industry — where its production takes off fastest in SA in a rapidly emerging global market will be important. Photovoltaic assembly plant construction is meant to be directed towards Mpumalanga to absorb coal-related job losses. However, its far from obvious why it should be based here versus Johannesburg or Cape Town (which, after all, has an existing green special economic zone). The competitive propositions of each of these potential locations will be important to inspect. Mpumalanga may well require (and indeed is likely to get access to) cheaper financing or other support to skew the eventual choice for public policy reasons.

Prices have traditionally adjusted as a result of movements of people and demand for property and so on, however in future prices could well be a cause if we start to think about differential climate change outcomes affecting insurance prices or insurance availability and the same lens applied to insurance from a social unrest perspective too. Start adding on top of that a differentiate view between a larger number of provinces and metros based on where service delivery happens and things start to become very interesting.

Risks and opportunities

Businesses are just starting to think about these kinds of risks and opportunities in a more structured way, and as boards interact more with them, we may well start getting more interesting choices and outcomes.

Municipal risks bend slightly as domestic immigration happens, but not quickly. Those without power procured from independent producers will see sharp reductions in income from electricity provided through legacy distribution networks. However, central government grants will still be a major source of income until the equitable share process cycles through updates and funds get cut.

A key political economy trend of the past five years — a timely observation, of course, as we move towards the ANC elective conference in December — is that taps have been turned off. This has happened at a moderate degree at state-owned enterprises, as metros have been lost from control and some municipalities have transferred too. This will be an additional pressure.

Some interesting solutions could be found to support such shifting risks. Fiscal funding flows will increasingly have to follow individuals through processes such as health and school vouchers. Capital market structures like insurance risk bonds can also smooth the process to some degree, but probably only by delaying the inevitable.

The larger point here is that all this should be eminently plannable change. It requires some innovation and some forethought, but nothing here is not being researched somewhere, either in academia or within some places in better provinces. The recent “shock” from policymakers at the climate issues behind the floods is a good place to generate some collective focus perhaps on these issues towards some solutions.

July 2021 taught us that subnational narratives and differentiation will become increasingly important. Insights and research is there but will have to deepen and broaden to catch up with this shift in importance. Debt markets will catch up when such trends are increasingly important for the fiscus and so ratings.

For now, watch where the restaurants compete.

• Attard Montalto is head of Capital Markets Research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.

Upward-heading interest rates aren’t bad news for everyone. SA banks have finally shrugged off the Covid-19 blow to their share prices, significantly outperforming the market over the past year. Had you bought at the lows of March 2020 you would have more than doubled your money.

Why? The prospect of higher interest rates isn’t all good news for banks. On the one hand, banks’ interest margins grow but on the other hand more customers find it harder to pay as the cost of prime-linked debt rises. That can be catastrophic — indeed, the record interest rates of 1998 (reaching 25.5%) triggered such borrower distress that several banks collapsed. Given the astronomical unemployment rate that continues to head upwards, you might think that consumers particularly were highly vulnerable to higher rates. Unemployment reflects a generally weak economy that has no chance of growing average per capita incomes for years to come, so even those who are employed are under increasing pressure.

But banks are in a good position for an upward rate cycle. Covid-19 forced them into an unprecedented programme of working vulnerable customers out of their debt exposures. The result is that banking books, from a risk perspective, are in strong territory. Average loans-to-value ratios in asset-based loans are high. Commercial clients that managed to trade through Covid-19 have dialled down their financial risk and are resilient. Plus, banks put aside an unprecedented amount for bad debts in 2020. That money was expensed then but many banks have continued to hold it on the balance sheet, ready to write it back into income and help profits.

The 125 basis points of rate increases we’ve had, with 50 of those this week, help banks’ bottom lines. Interest margins have been creeping up since the rate cycle began, with the industry sporting  a healthy 3.86% in March (the latest data available, though still below the pre-Covid levels of 3.89%). Margins had been growing anyway, driven largely by savings on banks’ cost of funding. Depositors have been putting more money into call accounts relative to fixed deposits, cautious about liquidity in these uncertain times. That means banks have had to pay less interest.

But short-term deposit accounts are often not prime linked, if they pay any interest at all. So banks’ “endowment” — the amount of funding they hold from shareholders, depositors and others who don’t have to be paid interest — is currently at very healthy levels. One indicator of that is the amount of overnight deposits they are holding for customers — it is now at 22% of their balance sheets, a record as far as I can tell, meaning banks are less sensitive to interest rate hikes on their cost of funding than ever before.

So the improvements on interest earned from banks’ assets are now adding more to profit ratios. This has been helped a little by a cyclical shift during Covid-19 into asset-based lending. Banks switched out of unsecured lending and into lower-risk lending like home loans. Those are more sensitive to prime, so margins will be more responsive to the higher interest rates.

Over the longer term, banks’ earnings growth drivers tend to cycle between non-interest revenue (think fees and insurance premiums) and interest earnings. The inflation outlook is likely to put pressure on fees, but the interest margins will more than make up for it. Happy days for bankers.

But the problem banks are going to face is a stubborn refusal of the economy to grow. While they may be more profitable, the overall economic outlook means it is going to be tougher to find new business to do. That will be the binding constraint on future profitability — there is only so much that bigger margins on a finite book can do for you. Eventually you need the book itself to grow.

For now, bankers will be content that their share options are well in the money. Shareholders will want to see evidence of bankers nevertheless looking for new ways to grow their businesses. There are some opportunities to do that: one obvious one is financing new electricity generation plants, which will kick off once bureaucratic obstacles are cleared for companies to generate for themselves.

But the critical question is when the corporate sector more widely is going to start investing. It is only then that the appetite for debt will pick up at a macro level. That will require better business confidence as well as a higher level of capacity utilisation across the economy. In other words, companies need to believe that people want to buy their products, and that their existing capacity isn’t enough to meet that demand. Until electricity is sorted out, as well as wider confidence in reforms being delivered to how the economy works, I don’t see that happening.

But bankers haven’t had much to cheer about for some time. Watching those margins tick up will have put a smile on many of those faces, as well as their shareholders’. Let them be content even though the deeper growth constraints remain.

• Theobald is chair of research-led consulting company Intellidex. This article first appeared in Business Day.

Intellidex Chairman Dr Stuart Theobald joined Bruce Whitfield on 702‘s The Money Show once again this time to discuss the collapse of Ubank.

“Ubank is a fairly unique bank, a small bank operating in a specific area particularly focused on mining and workers on mines. It has been struggling. It has been losing money for what looks like, at least, a steady three years now. That has been eating into the capital of the bank and it’s reached the point where it is unsustainable.”

Listen to the interview here:


Several pieces of news in the past week jarred against one another.

On the one hand, the Mining Indaba was full of optimism for the future and SA’s opportunities were talked up. Our miner friends are so interesting precisely because they can look through several business cycles and think about the long term.

If one listened carefully, however, the message was more subtle. This positive outlook could be unlocked only if reforms and policy certainty arrived, and in the meantime about R100bn of potential investment would remain impossible.

Thinking through several business cycles maybe allows one to take such a view in a credible way, and prevents things seeming quite so at odds as at the Investment Conference — where positive views conflicted with the nature of investment commitments made (which was the whole framing of the event).

Mining volume output data for March out last week drove the point home, falling 9.3% on the year. Mining output is now about 6.5% below where it was on average between 2010 and the start of the Covid-19 crisis. This even as the Russia-Ukraine war was already under way (let’s not forget it started in the third week of February) and the commodity price moves and shifts in demand (and supply) had already started to occur in March.

Yet the output value was up 6.7% on the year — the huge jaws between value and volume growth here highlighting the effect of supportive commodities price moves. Similarly, despite weak volumes in 2021, we saw huge tax take and a supportive current account surplus develop — which has backstopped the rand and will continue to do so (somewhat — not totally, in the face of the quantitative tightening ‘reverse tsunami’ we are about to see from the US Federal Reserve).

I have asked this question before, but I will ask it again: is SA a mining country?

On some level this question is obviously absurd. But it challenges us to cut through the history to look at the facts of a declining workforce and lower output volumes and steadily falling spend in real terms on exploration and ask what is going on.

SA was able to “pay for” the SRD (social relief of distress) grant in the past two fiscal years with the proceeds of the nominal price terms of trade boon. Yet there isn’t the volumes impact that might suggest growing employment, for instance, or exploration that strengthens SA’s claim to be deeply embedded into the future technologies value chain.

Yet our mining friends are very much canaries in the coal mine (excuse the metaphor) on a range of issues. They have been the most vocal about Transnet’s problem, a narrative that otherwise is not quite sexy enough versus load-shedding for the media and the public, but where the deep logistical dysfunction from its state capture legacy and the holes seen in its current turnaround plan are being highlighted and pressure applied to address them.

Similarly, on the push for embedded and wheeled electricity generation capabilities, the miners have been ahead of the game at wanting to understand the opportunities, trying to seize them and then working to push through the blockages and for structural reform.

On both counts, SA and competitiveness more generally can benefit.

The lessons to learn may seem trite, but are nevertheless important.

Looking through multiple business cycles allows one to rise above the shorter-term noise and understand what is really important, prioritise and push for change. Similarly that you have to get stuck in there yourself and try to make change happen.

These lessons are worth bearing in mind when we think about the just energy transition. All social partners struggle to understand that the lengths of time we are talking about with the move to net zero are four or so business cycles. Your standard election cycle or business public affairs year-ahead plans or labour wage negotiation cycle-type view of dealing with such a situation simply won’t cut it. The Presidential Climate Commission is interesting and proving effective precisely because it is starting to lift the gaze above the next cycle to the path beyond.

Similarly, to deal with historic legacies that have not been effectively dealt with since 1994 — or indeed new legacies from the July 2021 unrest, Covid or now the floods in KwaZulu-Natal — will take a substantial amount of time to be sustainable and affordable in how they are solved.

A similar view of dealing with unemployment and the fourth industrial revolution might also be seen along similar lines.

This is certainly not a get-out-of-jail-free card to acting slowly or indecisively. Instead, the lesson from the miners is to get on with it now and push for change that is well thought through, deep and impactful — fully cognisant of the complexities of change and their dependencies.

A refreshed National Planning Commission could be an opportunity for this to happen. But this would have to decisively break from its recent history (where little was achieved with the exception of a series of excellent papers from Miriam Altman).

This is not to say this is easy. Certainly not. But a mixture of mindset and institutions are important given the complex intersection of “new” risks. A mix of institutions and mindset should ensure that issues and their solutions are well socialised within the government especially.

I am taken aback by the number of people who see the KwaZulu-Natal floods as a “wake-up call”. The modelling work on the effects of climate change on SA were broadly scientific consensus a decade ago. The same goes for Eskom and the shock at load-shedding still present in some circles.

The country’s problems are too complex to solve with a short- term lens — heads need to be lifted to see the risks coming, accept them and then take mitigation and adaptation actions now. 

• Attard Montalto is head of Capital Markets Research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.

Intellidex is recruiting a dynamic and driven professional to join our team with responsibility for administering sales opportunities with new and existing clients. This role has become particularly important as our business expands and you will be a key part of this expansion. 

About Intellidex 

Intellidex is a fast-growing global research and consulting firm specialising in capital markets and financial services in emerging markets, particularly Africa. This role will be based in Sandton and report to an assigned member of the executive committee. 

Most of our work is commissioned by major financial services companies, global multilaterals and investors, and sometimes our research leads to highly influential publications. We believe in having an impact in our markets by providing the insights necessary to make capital markets and financial systems work better for society. Our research has ranged from the impact of charitable foundations to advising on investment strategies of global hedge funds.  

We offer a small company environment in which you will have considerable latitude to shape your role. We will construct a compensation package with suitable incentives linked to performance for the right candidate. We believe in developing our talent and ensuring significant career development opportunities.  

Our standards are high. You will be working with MBAs, CFA charterholders and PhDs on our team to ensure that Intellidex delivers high levels of client satisfaction and responds dynamically to new business opportunities. 


Minimum requirements: 

Please do not reply if you do not have these minimum requirements as your application will not be considered. 

Ideal additional requirements: 

Please apply by completing the form below. Please ensure that your covering letter explains how you meet the minimum requirements and any ideal additional requirements that may be relevant.

Please note that failure to load the correct documents will result in your application not being processed

Is the renewable energy independent power producers’ programme (REIPPP) dead? It’s hard to believe that the ground-breaking programme came to life in the Zuma era but has foundered under Ramaphosa. Having been the one bright light in the energy sector, it is dimming, despite the electricity crisis being as severe as before.

The obvious symptom of the dysfunction is that not one project has reached financial close since the fourth bid window. That was conducted in 2015, though a spirited fight from coal-vested interests delayed financial close to 2018. But all projects procured since — especially the urgent “risk mitigation bidding round” that included Karpowership’s floating gas generators, and the fifth bid window — have so far failed to reach financial close, the point at which all contracts are signed and construction can begin.

To understand what went wrong, let’s first understand how it went right. Between 2011 and 2015 the programme mobilised more than R200bn of investment and pushed SA into the era of renewable energy.

I suspect that Zuma did not understand the implications when he signed SA up to aggressive renewable production targets in 2009 at COP15 in Copenhagen. The ANC was caught off guard. With SA hosting COP17 in Durban two years later, the pressure was on to deliver results. Zuma gave the green light for the National Treasury and the department of energy to make it happen. Only later would Zuma’s vested interests realise what the programme meant for their coal exposures.

After a false start via the National Energy Regulator of SA, the concept of the IPP office was created. This was an odd creature — it was formally a joint venture between National Treasury and the department of energy. Yet it rested on the Development Bank of Southern Africa (DBSA) as the conduit for its budget, which was funded by the projects themselves.

At first that worked. Then finance minister Pravin Gordhan and Dipuo Peters as energy minister had the right chemistry. Karen Breytenbach, an experienced Treasury insider, was appointed as CEO. With the respective directors-general, things moved fast — teams were hired, standards were designed using an army of private consultants from across the world, and procurement rounds held. Remarkably, that until the coal interests began fighting back, there was not one legal challenge in more than R200bn of procurement.

No heart

But it worked because of a remarkable chemistry at the time, not because the institutional design made sense. The three parties overseeing it — Treasury, department of energy and DBSA — were not necessarily aligned; it depended on the personalities involved. They were able to break through resistance from various political quarters. They had faith that the private sector could deliver, provided the incentives were designed properly.

Now things have changed. The energy department has been merged alongside mineral resources under Gwede Mantashe. To put it lightly, the minister does not have his heart in energy, and certainly not renewable energy.

Over at the Treasury, finance minister Enoch Godongwana, while long a supporter of the programme from the sidelines, does not have capacity to pay it much attention now.

In the middle, DBSA has become more robust in holding on to the institutional reins, even though its role was an accident in that it provided an institutional backbone for the IPP office. It is conflicted as simultaneously a major funder of projects in the programme. Under its gaze, capacity at the IPP office has dwindled. Breytenbach left in 2019 and several other senior technocrats soon after (though there are some notable ones still there).

The IPP office has lost its political champions. In the vacuum, others have moved in. One is the department of trade, industry & competition. While the programme has always had a local content requirement, this was calibrated to the capacity of the country to produce components needed to build renewable projects.

Under minister Ebrahim Patel, the localisation agenda has been pushed far more aggressively, but without the insight required to understand what is possible. This is the main reason for delay in closing projects for the fifth bid window — the various successful bidders cannot all simultaneously procure enough to meet the localisation targets.

During the delays, commodity prices have soared making many projects unprofitable, so they won’t be able to get funding. It is a mess. And now the sixth bid window is open with bids expected to be submitted in August.

Larger scale

The IPP office has a critical role to play in procuring large-scale electricity production, but its role will diminish. With Eskom gradually being restructured, drawing out an independent system operator that can procure directly, the IPP office will not be the only place the private sector can get access to the electricity market.

With private production now allowed up to 100MW without a licence, the future may include many private producers all individually selling to the system operator as well as directly to each other. The IPP office would become redundant.

That is some way off, though. Given the electricity crisis, we do need the REIPPP to work, much more like it did from 2011-2015, but at much larger scale: 1,000MW projects rather than 100. That will require renewed political will.

A revised institutional structure for the IPP office was developed last year but no moves have been made towards implementing it. If the ANC is serious about solving the energy crisis, it needs to invest political capital in the IPP office.

• Theobald is chair of research-led consulting company Intellidex. This article first appeared in Business Day.

Intellidex’s Senior banks analyst Nolwandle Mthombeni joins The Morning Review with Lester Kiewit to discuss why banks are closing branches and what is happening in the bank industry in terms of a consumer interface.

“We’re really in a digital age now where everything is moving towards banking in a digital manner. For the most part banks are also trying to usher the South African consumer a long by sort of forcing them to adopt digital channels and business done by even just reducing the footprint as well as adding self-service terminals,” says Mthombeni.

Listen here to the full interview here:

Intellidex‘s Chairman Dr Stuart Theobald joined Bruce Whitfield on 702‘s The Money Show to weigh in on Bounce back loans.

Bounce back loans are loans that are available to businesses that have experienced difficulty in the last few years and they have support – some level of guarantee from government – to enable banks to take on extra risks. To be able to support businesses who don’t necessary have the assets or cashflow to access credit at the moment.

Listen to the 7 minute clip here: