Intellidex’s chairman Dr Stuart Theobald was a panellist on Daily Maverick’s webinar titled The potential economic consequences of SA being greylisted, alongside journalist Ray Mahlaka and Ismail Momoniat, National Treasury acting director-general.
Watch the webinar below.
South Africa needs to unlock an enormous amount of financing from various sources of capital, both domestic and foreign, to fund its just energy transition (JET). The highly complex process that will unfold over the next three decades will require concerted efforts from all stakeholders in the financial ecosystem to maximise the probability for South Africa to successfully transition to a net zero economy. Financing is required at scale, continually, in a way never seen before and will not be able to rely on the public sector.
Intellidex is delighted to have partnered with the African Climate Foundation to write a series of reports on aspects of scaling finance for South Africa’s Just Energy Transition. The first report focuses on scaling private sector finance.
Download the report below.
Holidays in pretty places are a funny thing.
Sitting here tapping this in Plettenberg Bay looking out to the mountains in the distance everything seems fine with SA. Tourism has rebounded and there is a buzz. I’ve had rather too much nice SA food and wine in the past two weeks and everyone is thinking about winding down for the year (well South Africans at least — the rest of the world of course doesn’t quite take Christmas off like SA does).
Parliament is breaking next week and won’t be back from their slumbers till after the state of the nation address in February. The government is closing down already for Christmas but also for the ANC’s elective conference (which has already been a distraction since the ANC’s policy conference a few months ago).
One would think there is no work to be done. Indeed, for the upper crust perhaps there isn’t, the downside risks are too far away and too remote to see through the holiday period. Load-shedding, after all, is now only less than 60 seconds long while the generator kicks in.
Yet sitting here with the view, there is a gnawing problem that cannot be wished away. Spending some days recently on the Cape Flats in some of the poorest communities drove this home to me. More prosaically, the pot holes in Johannesburg have also become meaningfully worse (even in the northern suburbs) in the past few months.
The new year may well bring a number of themes home to roost as we sit between two elections. The ANC’s internal battles are likely to show a messy top six already clambering for 2027 and realignments of power even if ignoring the radical economic transformation (RET) faction; and the national elections which are likely to be similarly messy with coalitions required and no obviously good outcome.
First, we are likely to see the inequality between provinces widen. Internal migration as well as emigration are accelerating based on the latest Stats SA data and forecasts, as well as anecdotally, and will create a shift in productive skills availability between provinces. At a country level this may not really show up — growth and other data might be unaffected if some areas are growing faster and others slower as a result. Yet the widening inequality will create increasingly challenging social and political risks that we perhaps are only dimly aware of — though the July riots last year provide a clear warning. We should not forget the problems of those areas, in particular the need for more rapid house building and urban planning.
The triumph of infrastructure spin over actual infrastructure momentum that is cognisant to shifting demographics, climate adaptation and security risks will perhaps finally become apparent and spark a turning point — or not. Several years have been wasted on the promotion of infrastructure PR over reality. Budget allocations will have to be rethought in this environment, as will how the private sector can work with and fund increasingly dysfunctional municipalities and provinces. If answers aren’t found to these problems in 2023 then areas of the country will start to become uninvestable.
Second, linked to this, is the rise of corrupt “business forums” and mafias. The inability of the state to battle these is getting worse and will require tough choices in 2023. Some in the private sector are making things worse by paying them off with 30% cuts. Yet doing this simply forces new mafia interests into the system, with the government playing little role in trying to combat these.
KwaZulu-Natal, crucial not just in terms of size but also routes to export, in particular needs to be watched and is increasingly concerning to international and local investors as well as insurance companies and funders. Some tough choices will be required in the new year unless parts of the country are to become no-go areas, further increasing social unrest risk.
Third, we will see political change around spending and the budget in a way we haven’t seen in the past. It is tempting to jump in with extra money in this period between elections to paper over cracks, yet the case for an ability to effectively do expansionary fiscal policy — in other words to actually be able to spend the money productively through line departments and programmes to have an impact on the economy — has not been made with a dysfunctional state.
The easy way out then is a pathway towards a basic income grant. Until now the ANC has failed to link the bluster of conferences to government action on spending, but has not had the existential electoral threat it now faces before. Next year will be key to see if the conservative line holds.
Fourth, we will have to break things to move forward. Great steps have been made on the reform front in the past year, but many will not actually fully affect the economy or the business environment until beyond 2023 (such as energy investment to end load-shedding or private sector participation in logistics). Things may be politically, as well as practically — let alone in terms of stamina, difficult in 2023 to keep momentum going. This will be a year where old thinking and status quo can be thrown in the way and must be bust through to keep momentum, even if short-term payoffs are less clear.
Energy policy as usual will be key here. A new Integrated Resources Plan (IRP) will be circulating and open to buffeting by vested interests and stuck-in-the mud status quo ideologues. It is an amazing opportunity to reset but might be lost.
Next year could be a lost year if not seized by the scruff of the neck. It will throw up a range of challenges that are not normally well dealt with in such a politically hot year — indeed they would have probably been more easily dealt with this year than before, but that is always the case. It will be no time for relaxing.
•Attard Montalto leads on markets, political economy and the just energy transition at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.
Something odd has happened in SA’s lending markets since Covid-19. There has been a remarkable acceleration in mortgage credit granted.
The lockdowns of 2020 led to a dramatic fall in lending across all credit types, but the recovery since has shown a surprising outperformance of mortgages. Secured credit (largely vehicle finance) has resumed its pre-Covid trajectory and unsecured credit granting has lagged. But mortgage levels are beating records from before the global financial crisis.
Some of the explanation is undoubtedly that the lockdowns led to pent-up demand, as new homeowners were forced to delay taking transfer, which flooded back on the resumption of activity.
However, in rand amounts, the total mortgage lending in the 10 quarters since the start of 2020 now marginally exceeds the previous 10 quarters. So even with the lockdown period included, there has been more mortgage lending than before. Plus, while we should expect some recovery post the lockdowns, these should have caused a pause in the housing market, pushing everything into the future and causing an overall fall in property activity.
Indeed, property sales did fall and have not recovered — in 2021 there were 305,000 property transfers recorded by the deeds office, whereas in 2019 there were 353,000 (there were 270,000 in 2020 when lockdowns disrupted the market).
So, the mortgage growth figures are not being driven by more property purchases, so much of the lending is happening to existing homeowners. Scratching into the National Credit Regulator’s statistics gives more clues.
All the additional lending has been in larger mortgage sizes — over R700,000. In that category the previous quarterly record was the R36bn lent in the third quarter of 2019; but in the second quarter of 2021, R58bn was lent, 61% more. Indeed, smaller mortgages, those below R350,000, have continued their long-term declining trend.
The after-effects of lockdowns and the wide economic outlook do not presage a great credit market. Reserve Bank statistics for the banking industry show that impairments for bad debt have been growing since the lockdowns, as we’d expect. Overall, then, bank credit appetite has been tepid.
Here is my view on what is going on. First, until the last quarter 2021, prime interest rates were at the lowest level since the 1960s. Compounding the low prime rate, data from mortgage broker ooba shows that lenders have been offering the biggest discount to prime rates on mortgages since 2010. Mortgage borrowing is one of the most straightforward ways to access this low-cost finance. So low rates have unsurprisingly done the trick of encouraging more borrowing.
What are people doing with the money? Ooba’s data shows there has been significant growth in transactions for properties worth more than R1.5m, suggesting people are buying more expensive properties. The data also shows a lot more borrowing for buy-to-let properties.
Those who are borrowing against existing properties seem to be doing it to finance home alterations. Stats SA figures for building plans passed for alterations by larger municipalities reveals record numbers in recent months. Those record numbers are focused on the Western Cape, which is also the province with the highest level of overall credit growth. Of alterations plans passed, in the third quarter of 2022, 31% were in the Western Cape whereas in the equivalent quarter of 2019 it was 25%.
So, these factors explain the mystery: borrowers took advantage of very low interest rates, leveraged up their existing properties and used the money to make additions and alterations, or to buy more expensive homes than they otherwise would have, or to buy properties they will let out, particularly in the Western Cape.
Bankers I speak to say that the underlying work-from-home trend has been a major theme and the data is consistent with that. Large numbers of people seem to be improving their homes particularly in more “lifestyle” destinations like the Cape.
Can we expect this trend to hold? The rebound in interest rates is obviously one factor leaning against it. Rates are now back at pre-lockdown levels, though still some way below the average levels of the past 40 years. The bigger driver might be the future trend in work-from-home.
No doubt the baseline of those working from home, particularly for higher income employees, will be higher than pre-Covid for the long term. There may be some rebalancing with more office presence over time, but never to previous levels.
So, demand for home improvements from those spending a great deal more of their days at home will be robust. Overall, I expect mortgage lending to continue to show strength.
Climate finance and SA’s ability to finance the costs involved appear to have become increasingly contorted as evidenced by events at COP27 last week.
The argument goes that as SA is already overindebted there is no room for more debt to fund the just energy transition. But that only serves to confuse and conflate a range of issues.
There has been a build-up of government debt to a level that is seen as bordering on problematic. Debt service costs as a share of GDP will rise from 3.6% three years ago to a forecast 4.7% in the next fiscal year. That has started crowding out other forms of spending.
Through the pandemic there has been concern that banks and investors would rather buy government bonds than lend more money into the economy. The concern was that that lending rates would have to be so much higher to compensate for rather buying high-yielding government bonds. This is the crowding-out effect.
The binds on the fiscus are related to its ability repay the debt, given constraints that ultimately come from its ability to issue new debt at low interest rates and on its ability to raise much more tax. Pushing too far on either debt issuance or tax has adverse consequences in the economy, including higher interest rates (compounding the crowding-out problems) or slower growth and lower tax take.
This paradigm for the fiscus is not true generally in the economy. While government bonds aren’t tied to underlying productive revenue streams, for the just energy transition they often are.
Debt to build photovoltaics (PVs), wind or battery storage is tied to tariff income (tariffs that are now lower than what it costs Eskom to produce electricity). Debt to build a hydrogen plant will be linked to export volumes or revenue from domestic use. The same is true of electric vehicles exported or sold domestically. Debt to build a local manufacturing facility for PVs, or for an SMME to have working capital to do rooftop installations again has productive revenue sources. Debt in these cases are used to smooth future income.
This should be as true for a profitable, sustainable Eskom as it is for any private entity. The issue has been huge corruption and cost overruns that are divorced from this logic. Someone ultimately has to pay to clean up the mess, and that’s why the inevitable swapping of Eskom debt for sovereign debt will finally occur next year. Deleveraging Eskom’s balance sheet is the only plan that has ever been on the table, despite the many fanciful distractions in the media of debt for equity swaps and so on.
The point of the debt swap is to take about R200bn of Eskom’s debt — and service costs of about 9.6% — on to the sovereign balance sheet and allow the government to refinance it at a lower rate of about 7%. Ultimately, this is a saving to the taxpayer and a reduction in the risk of large, disorderly — and more expensive — bailouts.
Eskom, meanwhile, then has space to take on new, much cheaper climate loans and so its annual debt service bill can fall, perhaps by a third. This certainly doesn’t solve all Eskom’s problems, but it does allow space for new funding.
Cue the problem of counterfactuals. The “debt is bad” view says that Eskom shouldn’t be relevering, or shouldn’t be relieved of the debt in the first place because you are just replacing it with other debt. But where else is the money to fund huge transmission build expected to come from?
Bizarre, deep-seated views emanating from the Left permeate SA’s political economy on the evils of financialisaton. The financial community may have many problems — greenwashing tendencies, the obsession with ticking ESG boxes and so on — but ultimately there isn’t a viable alternative. How else are you going to find R1.5-trillion over five years to fund the just energy transition? The antifinancial alternatives simply don’t add up.
The default, easy, option has been to plead the charity case and ask for more grants, but there is little sympathy for SA as a middle-income country that for too long didn’t fix Eskom or the broader electricity supply industry.
Frankly, it is demeaning; there are far more deserving cases of charity among lower-income countries with underdeveloped financial systems. SA has a deep savings pool and a huge appetite for funding projects that are properly formed with good look through to underlying revenue sources. SA also has a complex insurance sector and deep capital markets that can deal with adaptation finance, as well as loss and damage funding domestically.
Everyone has a role. Offshore official-sector support can be efficient in derisking and lowering the cost of borrowing domestically. For its part, the government needs to concentrate on flattening the sovereign yield curve to lower the cost of funding for everyone associated with the just energy transition — a policy with economic benefits that always seems to be overlooked.
A core problem around the hype of the Just Energy Transition Investment Plan is linking the funding requirements to a viable investment case to unlock domestic funding rather than just looking offshore.
The hard work on that starts now. It will require a different approach to the cap-in-hand offshore view, given the scale of need domestically and the competition from more deserving peers.
•Attard Montalto leads on markets, political economy and the just energy transition at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.
Globally, ESG investments are expected to reach $53-trillion (R957-trillion), according to estimates by Bloomberg, which could be close to half of the world’s institutional assets. There are many positive implications of this shift, but there is also a significant negative one: it could make it hard for SA to attract international investment.
SA is an outlier on some global environmental, social and governance (ESG) measures. Climate change is now the most prominent issue in the global ESG conversation, and SA has the unique feature of being an emerging market with developed market levels of carbon emissions. It is the world’s 32nd biggest economy but the 15th biggest carbon emitter. It also scores poorly on several governance indicators such as corruption perceptions indices, and components of the World Bank’s Worldwide Governance Indicators, though it also scores well on others such as freedom of the press.
Social measures such as inequality also count against it. In practice, investors use indicators like these to create screening models that either downweight or eliminate investments that score poorly. The practice is already diverting capital away from SA, as investors either downweigh or rule out investment in SA debt or equity. This trend will likely intensify as ESG becomes more universal in investment practice.
This presents a unique challenge for SA. On the one hand it needs to attract very large amounts of investment to finance the transition of the economy, particularly in how it produces electricity. That alone will require investment of up to R14-trillion (R252.8-trillion) by 2050. But on the other, global investors are increasingly shunning it in the name of ESG.
This national picture reflects at the level of companies. Many have weak emissions profiles and score low on sustainability given their reliance on coal-based power and the economy’s bias towards extractive industry. But, again, companies also need to finance the transition of their activities, requiring significant additional capital investment.
The result is perverse. One of the aspirations for ESG is that it helps to allocate investment towards improved environmental and social outcomes, measured against global aspirations like the UN Sustainable Development Goals. But to achieve that, governments and companies need access to funding to invest in the infrastructure that will transition energy systems to reduce carbon emissions and reorient production to more sustainable outcomes.
The ESG approach that screens out or downweighs investments is mostly an outside-in exercise that scans the market for threats to profitability without necessarily changing how those profits are derived. Also, at the same time that it diverts investment from emerging markets, it often enables continued investment in companies domiciled in developed jurisdictions that score highly on the secondary indicators that feed into ESG ratings despite not being truly “sustainable”.
Continued investment in companies that worsen social conflict (for example through arms sales or labour abuses) or that damage the natural environment (for example through fracking, deep-sea mining, or fossil fuel exploitation) will eventually destroy the base from which all profits are made. The costs of escalating social inequalities in some parts of the world and of the climate change crisis are already being felt by businesses and investors.
For example, increasingly severe and more frequent natural disasters damage physical assets and harm the workforce, damaging productivity. The same can be said of riots and protests. As social and climate instability intensifies, the stability of the financial markets and the ability to generate dependable returns deteriorates as well.
Taking an inside-out view that accounts for the effects of business and investment on society could be useful. We might call this approach an “ESG output” orientation, where investment is seen as a tool to actively drive transformative and tangible, measurable change for people and the planet, rather than passively screening out investment opportunities based on incomplete and historical secondary data. It is concerned with the additionality of investments.
This is about whether an investor enables the achievement of some positive environmental or social outcome that would not be possible, or that would be unlikely, without her investment. SA presents a clear opportunity for additionality: by directing capital to finance transition and wider development, ESG investment can actively reduce emissions and improve social outcomes. Additionality can actively reduce negative climate and social effects by proactively investing in and thus being a stimulus for change, rather than merely screening out investments that are linked to negative practices.
However, this is complicated in practice. How do we measure ESG outputs, additionality, transition and change, in clear, consistent ways that are not prohibitively resource-intensive? Most ESG tools are backward-looking in that they rate companies on historic data. ESG additionality, however, is forward looking: it requires assessing the impact that an investment will make on future ESG performance. This requires estimates and forecasts that have not been part of most ESG strategies in the past.
It is clearly in the national interest to advance thinking on additionality. To do that, Business Day has partnered with Sanlam and Intellidex to launch a research and thought leadership project called the ESG Barometer. With the barometer, we will assess approaches and practices relating to ESG additionality among SA’s biggest companies, through a survey of listed companies. The survey findings will be used to identify case studies to explore particularly interesting phenomena in greater depth.
Together, the survey findings and case studies will help us to create a typology of practice, and ways that ESG additionality can be factored into investment decisions. The intention is to highlight to investors how additionality can be far more impactful in their ESG strategies and therefore why it is appropriate to allocate capital to SA.
Investor relations and sustainability officers at listed companies are invited to an information session to explore the project in more depth on 8 November at the JSE in Sandton. For details, please visit:
• Khan is a principal consultant and Theobald chairman at Intellidex. This article first appeared in Business Day.
Astral’s 2H22 proved challenging following a solid interim period and we anticipate a subdued FY23, particularly in the first six months. Following our interaction with management before the closed period together with the group’s FY22 trading update, we put a hold on this stock with a fair value of R193.2.
The trading update indicated that headline earnings per share (HEPS) for FY22 are expected to be between 118% and 128% higher (at between 2,677c and 2,799c) compared with the 1,231c achieved in FY21. Based on our analysis, we anticipate HEPS at 2,750c for FY22e mainly due to increased volumes in poultry supported by capital expenditure to enhance capacity and economies of scale. Furthermore, earnings growth was supported by enhanced margins derived from efficiencies in broiler production and partial cost recoveries.
Despite this, 1H23 is likely going to deliver a muted performance due to elevated soft commodity prices. Management note that broiler operations are unable to fully recover the feed costs via poultry selling prices. In addition, disruptions from loadshedding are adding operational costs with the group having to implement production cut-backs in October 2022. The delay in applying anti-dumping duties in SA as well as unreliable water supply add pressure on revenue and profitability in FY23.
I am often asked to sense-check SA investors on the outlook for local markets. Domestic investors notoriously suffer irrational pessimism. I often hear foreign investors complain that if they want to get a good sense of how SA is looking, the last person to ask is a local.
We South Africans tend to sport an ingrained cynicism, inflamed and encouraged by those who make their money selling offshore investments. It is also influenced by myopia — the tendency to be overly influenced by what is most obvious, but thereby missing the bigger picture. During load-shedding and water outages it is understandable to think you should don your veldskoens and run.
The problem is that markets are not driven by personal experience. In fact, they are driven by a global picture in which SA is only a small part. And what matters is not what is happening right now, but what the future holds. Markets, after all, are only trying to price the present value of future cash flows — they are not here to bludgeon investors for mishaps of the past.
SA can change nothing and yet still be the beneficiary of international flows if competing markets suddenly look worse. For much of this year, that has worked in SA’s favour. The Ukraine war wrote Russia off the investment map, Brazil under Jair Bolsonaro was looking overheated and volatile, Turkey was caught up in the Ukraine situation, China was facing severe regulatory uncertainty. SA is relatively unaffected by the global energy price crisis given its negligible reliance on gas, and has had good crop output limiting food inflation.
In that scenario, SA has been a relative safe haven and benefited as a result.
The question to ask is whether the outlook is better than currently priced? And of course this must be seen in the global context, recognising what can be said of the other markets competing for the same investment.
On this, again, SA has a compelling case. It was the only notable market in the world that ended the Covid crisis in a better fiscal position than when it started. After a decade of government overspending and reckless debt accumulation under Jacob Zuma, the National Treasury has been rebuilding credibility for fiscal rectitude. It has had some luck — a Covid-related commodity price spike helped fill up the national coffers. But in a global context of weak and worsening national balance sheets, SA is an outlier for trending in the opposite direction.
Then there is the local outlook. Of course, energy insecurity is a huge challenge. Crumbling infrastructure, from water to sewerage, is also negative. The question is whether these issues can be addressed.
On energy, those watching carefully about the future are seeing reason for optimism. Regulatory changes, Eskom restructuring, and global political efforts to support transition in SA mean that significant investment is on the way to build new, renewable energy producers. Large companies now can and are building their own renewable energy plants that will give them more stable and lower-cost electricity than Eskom.
There is also some optimism on other infrastructure: Transnet is being shunted into concessioning parts of port and rail to private operators who can be expected to improve volumes and reliability. That can ease chokeholds on exports of both primary and manufactured goods.
Foreign investors also recognise that SA’s state is struggling to deliver basic services, particularly at municipal level. But there is also recognition that unlike other markets with similar problems, SA is a constitutional democracy with inbuilt political mechanisms to achieve change. It may be slow in coming, but a government that can’t deliver will eventually lose political support, a reality the ANC is seeing happening before its eyes. Investors take that to mean that service delivery failures eventually will be addressed.
The global picture continues to offer relative support. Brazil, after the narrow election of Luiz Inacio Lula da Silva, has rallied and will be a darling in the short run. But China, in particular, is going the other way, with President Xi Jinping having consolidated power and changed term limits, giving foreign investors serious concerns.
SA is also still looking relatively resilient against global inflation and interest-rate trends. The long-term outlook is also supported by an underlying structural trend supporting commodity prices, particularly metals needed for the green revolution, of which SA is a major supplier.
So local investors should pause. Ask whether your expectations of the earnings of SA companies, many of whom earn money abroad, really are going to be worse or better in the future. And then think about how your answers stack up against peers in the rest of the emerging markets.
The answers may not be nearly as gloomy as you think.
•Theobald is the chairman at Intellidex, a SA research-led consulting company.This article first appeared in Business Day.
Intellidex is a leading research and consulting firm that specialises in capital markets and financial services in Africa.
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