The Overton Window describes the acceptability of policy ideas to the electorate.

Radical and unthinkable ideas fall outside it, and within are the range of options that an electorate would consider sensible or even popular. Radical populist politicians can expand it, widening the space for more mainstream politicians to be seen as sensible.

I recall this concept because it is vaguely like a problem I’ve been trying to describe about financial markets: how big is the window of economic scenarios that investors are comfortable with? That window has been expanded dramatically in the past few years because once radical and unthinkable events have happened, and we’ve survived. We have had a once-in-a-century pandemic, the invasion of a sovereign democratic country by a world power, and now generational inflation highs. Yet global markets have largely taken these in their stride. Almost any economic scenario, no matter how damaging to growth, seems to elicit barely a shrug from investors.

This is at least in part because of the credibility gained by central banks and policymakers since the financial crisis. When Covid-19 hit, they promised to do everything to protect economies and largely succeeded, relying on the playbook written during the financial crisis 14 years ago. But the kryptonite that policymakers have always acknowledged would undo their efforts is now here: inflation. It destroys the one superpower they have had, the ability to create money with little to no cost.

While global markets are down 14% in the year to date, that is from the record high at the end of 2021, which was 80% up on levels just before Covid-19. Equity markets seem to be pricing for a quick phase of inflation that will do little to trip up growth or policymakers’ efforts to stimulate profits. But debt markets are looking rather different. A year ago, interest rates were expected to stay under 1% for the next seven years. Today, the US yield curve is showing that rates will rise sharply to almost 3.5% over the next year and stay close to that level for the next 30 years. That is a dramatic shift in the cost of capital in the global economy, yet equity markets aren’t feeling it.

It’s not that no-one is saying anything. JPMorgan CEO Jamie Dimon two weeks ago caused ripples by saying he saw a 10% chance of avoiding a recession, and then put equal odds on the kind of recession being mild, “harder” and “something worse”. Other global bank CEOs have also been sounding alarms. Goldman Sachs CEO David Solomon said in an interview last month: “Any time you have high inflation and go through an economic tightening, you wind up having sort of an economic slowdown.”

This view is largely shared by our banks, though the language is more guarded. Nedbank noted in its results earlier this month that “the global economic environment is expected to deteriorate further before recovering”, and Standard Bank said “global growth is expected to slow as tighter financing conditions take effect”. Both banks are more sanguine about local SA prospects, protected by a somewhat better inflation outlook and a stronger post-Covid recovery trajectory.

The worry is that global inflation may take hold, cascading through supply chains for years even as energy prices fall. The Ukraine war looks interminable with long-lasting effects on food and energy prices. Supply chains are still not working at full capacity thanks both to ongoing Covid-19 disruptions in China as well as the war.

SA benefited from a spike in commodity prices, particularly platinum group metals, through Covid-19 and into the Ukraine invasion. That had a particularly positive effect on government finances, allowing SA to turn the national debt trajectory a little sooner than expected. But those prices are now at pre-Covid levels, and a global recession would likely push them down further. There are certainly countervailing narratives — climate change adaptation is going to drive consumption of several commodities that SA produces (from chrome to nickel) so even within a recession, prices will find support. But overall, things are not going to be as robust as they were the past two years.

So what should investors be doing? My view is that the economic Overton window has expanded too far. We are too at ease with a seriously negative outlook. The era of cheap money is over and if there is a global recession, SA’s relatively stronger story is not going to stand against it for long. If inflation proves persistent, markets will have to adjust to price in a higher cost of capital and a darkened earnings outlook for companies. Both should be sharply negative for asset prices.

Of course, we should always hope for the best, but we must prepare for the worst. At the moment, the worst is not being priced in.

 Theobald is chairman of research-led consulting house Intellidex. This article first appeared in Business Day.

Intellidex Chairman joins Bruce Whitfield on The Money Show to discuss what greylisting is and why it matters.

“[Greylisting] means that South Africa will be subject to increased monitoring by counterparts across the world. Which means an additional level of due diligence is applied to any South African counterpart when doing business with them. Largely in the financial system when banks are dealing with South Africa clients or other banks. There is a new layer precaution that obviously implies additional costs,” says Dr Stuart Theobald.

Listen to the clip below


It is funny how discussions of energy policy bring out the conspiracy theorists. Reactions within the SA public square to writing about energy might not be misplaced on the extreme ends of US political discourse.

Sometimes I think my life would be a lot more fun, and easier to boot, if some of the conspiracy theories about how the private sector actually works were true, but alas not.

Instead, it can be quite dull, yet important.

Take stories about the problems of a functioning trade tariff regime that were highlighted in the press last week. This is about as far away from Illuminati conspiracy theories as you can get. It’s about actually being able to be allowed to trade, yet is desperately important. The fiscus is losing about R1.3bn per year — not from some complex policy or ideological debate, but simply because the machine of government doesn’t function. As much as we might have big debates about the role of the state in Transnet and competition, and so on, the tariff machine issue is simply about what is meant to be the case currently — a certain regime for regulatory decision-making that is not working.

It is the same with issues like why infrastructure cannot currently be banked. The finance industry is going around and around in circles with government on the issue. There are technical issues about project selection and preparation and issues with the Public Finance Management Act’s (PFMA) rules on private-public partnerships (PPPs). The latter is now being changed, slowly but surely. But it is a highly technical process where there is indeed some consensus across the aisle about getting things such as risk-sharing right between the public and private sectors for such public-private projects. The issue is not ideology or conspiracy again but simply getting the “machine” around such projects (created by the PFMA) to actually work in a smooth, predictable and swift manner.

The Financial Action Task Force (FATF) greylisting is another case in point. The highly complex way that FATF works is an exceptionally dry matter that everyone was quite happy to ignore. Now, however, the political games played under the Zuma administration to make state capture easier by politically connected individuals are coming back to bite.

A decision will be made soon by a very technocratic institution that most people have never heard of and which will have profound consequences. Indeed, the lack of market reaction to this so far — given that it is everyone’s baseline that it happens — is quite remarkable.

To get off the grey list will take serious work, not just on  detailed technical issues but also on putting some oompf into prosecuting financial crimes. The FATF issue is so interesting because there are so many tentacles to it: changes will be required not just through the Reserve Bank and Treasury but also through the justice department, the department of trade, industry & competition and the private sector.  All these things must happen in concert but can still end in failure.

The spectrum auctions are a perfect example of how careful choreography is essential, yet the small details can trip things up. Despite having done an auction, with decent progress being made on digital migration, we are still not there on that issue because of the small details.

Energy is no different. The conspiracy theorists would have it that there are grand designs on such things. But in reality, individual businesses want constant, reliable electricity. As you start to pull on that bit of string it is the small things that matter — the licensing issues, the complexities of wheeling and grid codes, and so on, that pop up — not big ideological matters. Applying some simple lenses — like least cost and jobs — and then things start to take shape. The least cost is because businesses are profit-maximising and, when push comes to shove, people do understand that there are social licences to operate issues in any country. I don’t even believe you need a net-zero view to come out with the same energy outcomes if you apply a least-cost view. The sheer impossibility of doing something outside a net-zero pathway is simply too high for businesses, especially those that are exporting. Once you start to make the choices as a business to want to wheel or embed your own generation, the micro issues start coming to the fore.

This is why the government’s agenda for a capable state is so important. It is not just getting the grand flashy issues right but the boring micro details that actually make an economy work and where growth can be allowed to emerge from.

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

Global pressure on SA banks to cut out carbon emissions is intensifying. Last week a relatively minor occurrence was the separation of Standard Bank and its PR firm Edelman after the latter refused to work on Standard Bank’s involvement in the East African Crude Oil Pipeline (EACOP).

But that teacup has faced a minor storm compared with the increasing pressure coming from global investors and lenders.

The UN’s “Race to Zero” campaign, one of the most influential net-zero carbon pressure groups, has now declared that all members must commit to phasing out “unabated” fossil fuel projects as “part of a just transition” by June 2023.

“Unabated” means no effort has been made to reduce carbon output such as the use of carbon capture and storage technology. The Net-Zero Banking Alliance and the Net Zero Asset Managers’ initiative are members of the UN campaign, and Investec, Old Mutual and Ninety One can be found on the global list of signatories. But that list includes many substantial international shareholders and lenders to our banks who can be expected to cascade their commitments onto SA institutions.

The worldwide effort to reduce carbon emissions has accelerated, driven by major high profile events such as the Conference of Parties (COP) and increasing evidence of the destructive impact of climate change. Countries such as SA are being swept along. As a major carbon emitter, SA is in a unique position as a global demonstration case on how emissions can be reduced. This is partly why the Just Energy Transition Partnership was set up at COP26 in Glasgow with promises of $8.5bn in funding from several developed countries to support SA’s transition. This gives SA the opportunity to access substantial funding, if it plays its cards right, and ensure a net developmental benefit from a transition.

The challenge we all face is to ensure that transition is not at the cost of development. The race to net zero seems to have become the dominant global driver of action, overshadowing other important objectives such as the sustainable development goals.

The 17 goals are based on a much broader conception of human development and flourishing and are tracked through 231 indicators, which cannot compete with the focus and simple messaging of net zero campaigns. The goals require complex development that is hard to measure and track, whereas reduction in carbon emissions is straightforward and now fits the developed world zeitgeist. There is a complicated relationship between net zero, sustainable development goals and the global environment, social, governance (ESG) investing movement.

There is growing evidence that the ESG movement is leading to a reduction of capital flows to emerging markets as investors down-weight countries that have weaker emissions standards or simply don’t have the necessary data.

While ESG practices vary widely, it is astounding how closely the factors that many ESG models use to upweight or down-weight countries correlate with how poor those countries are (corruption perceptions, media diversity, and so on). In contrast, investors aiming to improve outcomes in line with the sustainable development goals should be biasing capital towards the world’s poorest areas where one would expect it can make the biggest difference to the quality of life of citizens.

A single focus on net zero, without the more complex and nuanced consideration of wider developmental impact, risks compounding the impact on capital flows that ESG appears to be having. That was my immediate thought on reading of Edelman’s move. The EACOP has been controversial — it is displacing many people and the environmental concerns are obvious, but it also has economic effects in East Africa that will have positive development implications.

Good evidence

There is no evidence that Edelman or anyone else thought through these wider implications. The SA financial sector needs to clarify the investment case for international funders. There is a net-zero opportunity — the decommissioning of Eskom power stations and construction of renewables plants is obvious. The “just” part of the just energy transition needs to be fully conceptualised to include consideration of the wider developmental impact of transition, as conceived by the sustainable development goals. One of the biggest challenges is that developmental affect is harder to measure, but we need to become better at it.

We need good evidence for the effects of a project on the sustainable development goals. This data needs to be clear and available to sit alongside data on emissions impact. As it stands, the net zero focus is facilitated by the absence of data on the social impact of investment.

If we solve for the data problem, we can bring more balance to the conversation. We would be able to ensure that the race to net zero does not come at the expense of development. SA’s financial sector needs to prepare the case.

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

Senior Banks Analyst Nolwandle Mthombeni joins Michael Avery on Business Watch once again in a panel discussion on the trends of South Africa’s top banks based on findings from the Intellidex Banking Monthly.

“The latest metrics reveal that there is still some good momentum if you look at revenue as far as non-interest revenue items and non-interest income. There is also some good growth in terms of loads and actual loan growth and deposit growths are also tracking well. On the other side of the coin though we are seeing some slowing in impairments.”

Watch full video below.

It’s funny how things shift. A small intervention here, a little comment there, a line in an energy crisis speech buried there.

Sometimes things seem completely obvious once they take a step forward. The problem of course in contested terrain — and in particular SA’s political economy — is that the “clown car around and around the roundabout” phase of public discourse can go on for what seems forever.

Many issues in the energy crisis plan had that flavour, though none more so than the Eskom debt deleveraging operation that will be forthcoming in the medium-term budget policy statement (MTBPS).

Madnesses can appear as one goes around the roundabout on an issue, and this was particularly the case during the recent period since 2019 when a deleveraging was so close and almost signed off until political actors got cold feet. The idea back then was simple enough: a voluntary transfer of Eskom’s debt onto the sovereign balance sheet with a plan (that is conditions) for how the unbundling operation should happen.

In the interim, however, all manner of crazy has been forthcoming, from listing Eskom on the JSE (how on earth would that be politically feasible?) to the infamous debt-for-equity swap. Union members should ask their baron overlords exactly why such an idea ever made sense to play around with their pensions? Why should a union member’s pension be sacrificed “Thuma Mina” for worthless equity in a company that was going to see its assets rapidly fall as it approaches net zero in the years ahead?  

Of course in many ways nothing has changed since 2019. All that the delay has meant is that Eskom has been refinancing itself closer to 9.6% on the R200bn not transferred off as opposed to about 6.7% on the sovereign balance sheet. This is a deadweight loss of about R2.9bn per year to the sovereign, on top of which it has been having to pay out bailouts of R21bn-R33bn per year.

Delays have costs. But all will be forgotten as we take a step forward at the MTBPS, and finally SA will be able to get some positive sentiment support from investors for solving a knotty problem.

The energy plan is much the same. We will look back as energy starts pouring onto the grid with increased momentum in the next two years and wonder what on earth went on before.

The energy plan may be a little different though. The power of liberalisation — an individual small, medium and micro enterprises (SMME) getting not only energy security from a bank structuring a lending package to buy some rooftop solar but also the ability to pay down the debt for it faster by selling electricity back into the grid and then actually making a small return out after a short while — will be something to behold.

This is a genie that will not be able to be put back in its bottle and will hopefully strengthen SMME, household and other business balance sheets.

This issue is linked to the first, however. The 100MW licensing threshold being gazetted in August 2021 was the starting gun to something much bigger. I still don’t think many people — business leaders included — really get how fundamentally the change is that can come from pulling on this piece of string.

As more people start producing their own electricity (including corporates), as municipalities and metros and traders and other corporates buy it rather than from Eskom, so the need for Eskom assets will start to fall, and fast. This demand tipping point is already nearly here —  given load-shedding  — as energy efficiency of companies has been rising. But it could happen very quickly.

This is not a negative if appropriately planned for. If we have a vibrant and dynamic National Transmission Company of SA spun out as an independent entity, we have the appropriate legislative environment (on the way). Eskom, however, may well need to accelerate its decommissioning — not for climate change reasons or anything else, but simply as the cost of supply from old power stations (driven up by maintenance requirements) will simply not match the cost of private-to-private power buying. This will be nothing to do with conditions or otherwise from funders but simply the natural, least cost, jobs maximising, security of supply maximising direction the electricity supply system will be taking.

Other things can suddenly seem obvious once changed. The collapse in the pretence around chicken import duties being one. This is an issue almost like electricity that affects such a large number of ordinary South Africans where the balance between the ordinary consumer need (cheap and ready supply) and the producer (as well as the developmental need, say, of employment potential domestically) clash. 

Productivity ultimately wins out, however, as trade happens on comparative advantage.

Other issues are less clear. The direction of change for the car industry is highly uncertain as foreign forces (the banning of sales of internal combustion engines) and the domestic policy issues (no policy support implemented from the department of trade, industry & competition for the subsidised industry and high import tariffs stymying the creation of demand for electric vehicles domestically) combine to make the status quo completely untenable.

It is useful to think on this example and what might appear obvious later on looking back. The creation of demand domestically would seem an obvious thing with hindsight. This is what we are about to see when there is successful implementation of the crisis energy plan.

One of the least complicated and most organic outcomes of the plan — yet not mentioned in it at all — will be the creation of a large number of SMMEs to install and service rooftop solar for other small businesses and households that will be able to sell electricity back to the grid. This will require no lists from departments of where pencils should be brought from, no subsidies and no master plans.

This is perhaps why the plan is so exciting. The economy has not had this type of shock liberalisation, which can actually shift the dial on the wider economy, the way it works and how smaller firms can latch onto a new seam of demand.

No doubt in a few years — when successfully implemented — we will look back and think it was all entirely obvious.

• Attard Montalto is head of capital markets research at Intellidex, a SA research-led consulting company. This article first appeared in Business Day.

Intellidex senior banks analyst Nolwandle Mthombeni joins Zinathi Gquma on Business Day TV‘s News Leader to provide insight on the performance of South Africa’s banking sector and what this means in the long-term.

“If the rate environment is increasing it means that consumers are coming under pressure. This means that there will possibly be more impairments down the line and also the lending environment becomes more difficult,” says Nolwandle Mthombeni.

Watch the full discussion below.

I suppose it could always have been worse. Imagine that Nkosazana Dlamini Zuma had won at Nasrec. Her former husband would be in comfortable retirement and the state capture machine (and other opportunists riding on the coat tails) would be feeding voraciously from every nook and cranny of the public sector. The government balance sheet would be shot, with ratings far into junk territory. The global financial system would have largely cut us off, alarmed at the criminal frenzy going on with impunity.

The country would be well on the way to total collapse. Lenders would have abandoned us, frightened off by ballooning debt levels. Economic growth would be in free fall as companies refused to invest, collapsing employment and tax revenue. The brain drain would be a flood as skilled locals left for more stable pastures. Eventually, government cash would run out and police, teachers and nurses would be paid late, and then not at all. Public services would collapse, with public servants not turning up to work. As a last step, we would have prostrated ourselves at the doors of the IMF, who would have imposed a regime of harsh austerity as a price for their rescue.

We avoided this fate thanks to the efforts of a technocratic elite at Nasrec who wanted to save us from disaster. They did that by persuading a razor-thin majority to back the Cyril Ramaphosa ticket. But it could never be a clean win. While we avoided the nightmare scenario, there were too many compromises for a total escape.

Five years later, as we head towards the next ANC elective conference at the end of 2022, are we truly better off for the achievements of the technocratic elite at Nasrec? What if instead we had collapsed into that existential crisis that was looming?

Societies learn from major crises. Globally, World War 2 was probably the last major global crisis in which elites failed to avert complete disaster. That led to fundamental reforms, including the creation of welfare states in Europe. Since then, we have drifted from one near disaster (such as the financial crisis) to another (Covid-19), in each case rescued by elites from complete collapse. As Financial Times columnist Janan Ganesh noted last week: “Unable to see that less responsible leadership would have led to mass suffering, we feel at liberty to take risks in the polling booth. And so the absence of disaster becomes its own kind of disaster.”

Purgative crisis

Had Nasrec gone the other way, there would, I wager, be no liberties taken at the polling booths in SA. The ANC would have lost far more local councils in 2021. We would be heading for a wipeout of the party in 2024.

However, even though existential disaster was avoided, I sense increasing recognition by the elites that there is no way the party can restore itself and that perhaps we would be better off if true disaster struck. A purgative crisis is just what the body politic may need.

Everyone is sure the ANC will lose its majority in 2024, with the only serious question being whether it will be by so much that it cannot lead a coalition government and ends up being forced out. This will be put strongly to the test in December — if the technocratic elites have abandoned hope that the ANC can be rescued, we may well see Ramaphosa fall. This is far from certain — even those opposed to him recognise that 2024 will be a disaster without him, and that is why I think on balance he will remain. But the elites may come to the view that an existential crisis is precisely what is needed to ensure no-one takes risks in the polling booth come 2024 and what comes after has the potential to remake the SA state in a fundamental way.

For investors, the real risk is what comes in the run-up to 2024. If Ramaphosa is forced out in December, what would the interim arrangement be? If it causes a disruption to positive economic reforms, what will the price be in terms of civil unrest and instability? If it threatens key economic institutions such as the National Treasury and Reserve Bank, what will happen to debt levels?

Let me be clear — a crisis should not be desirable. It will extract a high short-term social and economic cost. But markets price for the future. A crisis can be painful in the short run but, as in the postwar period and the immediate postapartheid period in SA, it can also set the scene for deep, meaningful changes that set the country on a new more positive direction. Perhaps the lost opportunity in Nasrec will still be grasped.

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