Business Day TV unpacks the effectiveness of monetary policy in South Africa with Peter Attard Montalto, Managing Director at Intellidex and Dawie Roodt of Efficient Group.

Managing Director at Intellidex Peter Attard Montalto comments on how SA’s relationship with Russia is affecting the rand.

Politicians have never liked financial markets, especially falling ones. Finance minister Trevor Manuel famously described them as “amorphous” shortly after his appointment in the 1990s, smarting as he was from a 9% fall in the rand in the month after he took the job.

It was hardly a giant slur, but it was enough to upset foreign investors who were appraising SA’s first black finance minister. The rand fell further.

As the rand continues to hit new lows, touching R19.80/$ last week, what are markets saying about the country now? And what political change could they spark?

Manuel’s frustration was understandable. A collapsing rand has long been taken as a harsh judgment of the government, and by extension the ANC. And it can have a real impact, from the reversal of the appointment of Des van Rooyen as finance minister in 2015 to the fall of Jacob Zuma, which was smoothed by market condemnation.

The appraisal of financial markets is sought and vilified. A credit ratings upgrade is a “resounding vote of confidence in our economy”, but a downgrade “could not have come at a worse time”, as the National Treasury put it in press releases almost a decade apart.

Markets are indeed amorphous, arising from millions of agents all acting on their own individual beliefs. But they are also specific; they reflect the aggregate beliefs of investors about future cash flows, relative to other opportunities. That’s it. They shouldn’t give a damn about who is in government or who isn’t, who runs Eskom or doesn’t, whether South Africans have national health insurance or don’t. They care only about how profitable companies are, and how likely it is that borrowers (of which the biggest is the government) are going to pay their debts. And these are all relative. One instrument must be compared with those across the available trading universe.

The last two weeks have seen intense belief updating. Bond markets have weakened significantly, with long bond yields spiking to their highest levels in recent memory (bar a brief spike at the start of Covid-19). In the past three weeks the rand lost about 8%. The JSE’s all share index struggled to benefit as it usually does from the weak currency, given that much of it reflects dollar revenues and some degree of rand costs. This really is a harsh judgment that the prospects for our economy are dark indeed.

But unlike in the case of Nenegate, there is no single cause. The market turning point coincided with the debacle of American concern about a sanctioned Russian ship collecting arms in Simon’s Town, and were further spooked by hawkish comments when the Reserve Bank raised interest rates last week. These have marked an inflection point, with investors fundamentally shifting their outlook for the economy downwards. It is a painful settling in of reality. Asset prices are now adjusting to what economists have long been saying: that SA’s growth outlook is a mess. Indeed, as economist Daan Steenkamp at Codera showed in a graph last week, SA is the only big country that the IMF predicts will continue to see falling GDP per capita over the next five years.

What consequences will there be? Companies’ profitability is falling as one after the next they reveal load-shedding and input costs are decimating their bottom lines. If companies are less profitable, they are less likely to invest. They won’t expand and therefore won’t hire more people. Lower profits also mean less tax. Over at the bond market, the bleak outlook for economic growth means the government will struggle to meet revenue targets and struggle to keep debt under control. All these factors are making SA assets unattractive.

But the impact on the government and the ANC will come from consequences. Issuing more debt has become much more expensive for the government in the past two weeks. At the same time, the prospects for revenue look bleaker. So, all that the government can do, unless it wants to spook markets into a tailspin, is cut back on expenditure. And that must happen with a year to go to a general election. The ANC will find that deeply uncomfortable. It may well provide space for a political inflection point too.

Investors seem to have concluded that President Cyril Ramaphosa is too timid to make the big decisions needed to course correct. But financial markets have in the past forced timidity into boldness. While I cannot see a scenario in which the ANC is able to fundamentally change the performance of the government in a way investors will take seriously in the short run, it has few options but to try. Let us see if those amorphous markets will once again force dramatic change.

Stuart Theobald is chair of Intellidex. This article first appeared in Business Day.

Has anyone in Pretoria or Luthuli house noticed that the rand is at 19.50 vs the dollar?

It is amazing how things suddenly shift the zeitgeist. Suddenly everyone is outraged by SA foreign policy and shocked by stage 8 load-shedding to come in the winter peak. But none of this is new foreign policy and the winter peak was forecastable at least a year out.

Instead, the implications of pathways we are on become apparent, and so markets shift, as do investor and business sentiment. This is all leading to a new low in gloom — who knew it could get worse?

Poor communications do not help certainly. A (rather large) investor last week practically screamed at me, “Where is the president?” as markets were slumping.

The leaderless SA narrative has now taken hold in markets and among investors. It is a useful meme but is not especially insightful, nor would it be accurate to say that anything new is (not) happening now that was (not) happening before.

All this is painfully obvious when the reforms that are successfully proceeding — for electricity, visas, and soon logistics — all have such long payoff timelines to implementation. There is simply nothing that can be done in the interim.

The electricity minister (still powerless) is damaging the credibility of ongoing energy reforms with his PR shots and unfortunate PR forays. The important, successful work that the national energy crisis committee is undertaking is mixed up in photo -ops and endless rhetoric.

Markets spooked

We are increasingly hearing from various parts of the government and the ANC odd lines about load-shedding not being uniquely South African and occurring elsewhere. I am still unclear about the conclusions I am meant to draw from this as an investor. Should I appreciate the higher quality of load-shedding? Should I just ignore it? This just adds to the surreal feeling at the moment.

Similarly, markets were spooked last week by finance minister Enoch Godongwana stating bluntly that there had been “significant deterioration” in the fiscal position exactly as the bond market was not only selling off, but liquidity was also becoming ropy. It was a useful message for him to send into parliament and to colleagues as the next round of expenditure negotiations starts — but the market didn’t get this nuance.

The foreign policy optics and communications have been a similar car crash. Again — none of this is especially new — but Russia is clearly playing a “bearhug” strategy with SA with its statements and informing the press an SA general was in Moscow, to (just as the US did) test SA’s stance.

The department of international relations & co-operation similarly does not seem to get it that no-one believes the claim to nonaligned status any more and the pretence is exhausting. You might well not be “pro”-Russia and only neutral, but the love of the foreign policy ecosystem to give the West a good kicking at every opportunity means at least in relative terms Russia is favoured over the West. This optics dynamic is creating further problems.

My highlight of last week was reading the speech of basic education minister Angie Motshekga. The Progress in International Reading Literacy Study (Pirls) educational attainment rankings had just come out the day before. Budget votes are meant to outline forward-looking plans for the current year with the money that a budget vote unlocks.

I had to read the speech repeatedly, but am still unsure what it is meant to be saying on what the government is doing to address the crisis — that is reading attainment in SA vs peers in absolute standards of reading and relative in the past cycle through Covid-19 vs peers.

Similar losses

My conclusion is the government has no plan at all to address the reading crisis.

The speech refers to similar losses in learning ability in other countries, which is simply not what the data shows. It also highlights existing policy plans pre-Covid for reading — then, like with the load-shedding comments of others — seems to rest on the fact that learning deteriorated worldwide largely over the Covid period. It furthermore bizarrely reads that the longer learners are learning the better their reading is (that is not the issue here), and finally promises further research and “report back and engagements sessions with our critical stakeholders”.

As with foreign policy, there is a complete lack of comprehension of the scale of the crisis, the importance of communications and the easy solutions. After all the minister should be well aware of the huge, rich research and advice available from the likes of Nic Spaull and the three books on education interventions published recently, as well as the huge volume of research already on the department’s own website — more than 100 papers saying exactly what does and does not work.

National government seems content to move in circles consulting and not acting to what should have been obvious since the moment lockdowns of education started — that serious catch-up would be required. There has been three years to plan this! The planning should not happen after Pirls — it already knows what to do.

The Western Cape had already started implementing remedial action since the production of its 2021 systemic results for basic education a year ago and has scaled it up with dedicated funding since the start of this year with the emergence of its 2022 systemic results. The department of basic education, by contrast, had buried a gazette only this month about shifting timetables to offer more lessons with no campaign, support or funding required. The Western Cape appears to have read the departement’s own research on its website and listened to the education experts. A total 20,000 young learners are now receiving dedicated catch-up.

Education doesn’t get enough airtime in markets and among investors (nor the media) and for all our energy and logistics crises, it is basic education reform — particularly recovering from Covid-19’s impacts now all too apparent — that will lead to properly higher productivity and potential growth in the long term.

I am often asked why with structural economic reforms I can’t see growth getting much above 2.5%. It is due to education.

Equally I am often asked what keeps me awake at night — it is not the national energy crisis committee doing this or that or not, it is education.

This is a much more important issue to shout about: where is the national leadership?

• Peter Attard Montalto leads on political economy, markets and the just energy transition at Intellidex. This article first appeared in Business Day.

Diplomacy, any West Wing watcher will tell you, is never what it seems on the surface. The pageantry of the US ambassador telling a local media outlet (News24) that SA provided weapons to Russia would have been well rehearsed.

Teams at the US state department will have done the game theoretic analysis to plot out SA’s response: an “inquiry” to kick into the long grass, much indignation, say of apologies but non-apologies. The objective, it seems to me, was to set the cat among the domestic pigeons to try to get SA’s institutions to take seriously the country’s odd dalliance with Russia’s President Vladimir Putin. There is no doubt that something strange happened when the Lady R docked at Simon’s Town.

Why on earth would the ship have turned off its transponders, violating international law in the process, if it didn’t want to disguise a quick detour to SA’s main naval harbour? According to one report, it had told Cape Town’s Maritime Rescue Coordination Centre that it was having mechanical problems. Perhaps Russian intelligence is not what it used to be, because the idea of sneaking into that port in the dead of night unnoticed is laughable.

The good burghers of Simon’s Town, set out on their stoeps overlooking the port, with nothing else to do during load-shedding but gaze out through binoculars, recorded the visit in some detail. Amateur photographs were across social media in no time. Awash with floodlights in the dark night, containers were offloaded from that ship under armed guard. By some accounts, something was put back on.

The US believes that something was weapons. Our politicians appear to know nothing. Back in December, defence minister Thandi Modise was asked about it in a press conference but said she was still waiting for “paperwork” from her officials. That paperwork must take quite some doing, because five months later we are in the dark. This ritual of ignorance gets tired.

Someone knows, obviously. Ships do not dock at Simon’s Town without somebody knowing exactly why. The game feels like a rerun of the Guptas’ Waterkloof wedding plane debacle. Eventually some sort-of-accountable-but-not-too-important chump will be found and fired. Except that this is vastly more offensive than glitterati swanning through military facilities to piss it up at Sun City.

This is about weapons of war and death. About a bloody conflict in which we have chosen the losing side. The serious consequence of this mess is that relationships with the US have been damaged.

Social media warriors enjoy pointing to the hypocrisy of the US, to the camaraderie of the Russians during apartheid, to the apparent slight of expecting SA to do things simply because powerful people tell it too. I get all these sentiments, but we must be serious about what matters. We are trying to build a sophisticated economy that provides decent work to people.

That means we need economic activity beyond the extraction of resources from the ground to send to allies in the east. I can tell you that we will not in my lifetime export vehicles to China or India, or kettles or geysers or ball bearings. But we do export them to Europe and the US.

Let’s be serious about what kind of economy we will be left with if those markets are closed to us — one in which we sell coal, platinum, iron ore, manganese and assorted other minerals and metals to China and neighbours.

One in which we do next-to-no beneficiation of those materials because the destination markets can beneficiate far more cheaply than we do. It will be one in which the vast majority of skilled professionals who now work across supply chains for manufactured goods are forced to find jobs elsewhere.

But, I suppose, we will still have our pride, or at least whatever the resulting wave of poverty leaves us with. Of course, you are reading this column on the pages of the money section. So let me be clear about the effect of this on financial markets.

We have seen the rand demolished to its weakest level against the dollar. Foreign investors, who are overwhelmingly from western shores, will be exiting, and bond markets are showing that. There will be a short-term recovery as the messiness of the situation creates room for counter-narratives, but last week has materially weakened the SA investment case. Rand weakness obviously improves the earnings of our miners given their dollar revenues and rand costs. While their shares rallied on Friday, I think the foreign selling pressure means the earnings upside wasn’t being properly priced in.

There is opportunity there. But on a longer view, the situation particularly weakens the outlook for industrials and consumer-facing companies. Ultimately, the tertiary sectors of our economy must have access to Western markets, and that is now at risk.

So, for now the wise money will flow to resource stocks, especially when indiscriminate foreign selling creates buying opportunities.

Stuart Theobald is chair of Intellidex. This article first appeared in Business Day.

Peter Attard Montalto, Managing Director at Intellidex, talks to Bruce Whitfield on The Money Show about the growing dissatisfaction with SA over Ramaphosa’s ties to Putin.

Peter Attard Montalto, Managing Director at Intellidex, spoke with eNCA’s Rofhiwa Madzena after the rand tumbled on claims that SA armed Russia.

 

Peter Attard Montalto, Managing Director at Intellidex, speaks to Bruce Whitfield on The Money Show about SA’s lack of planning around load-shedding.

It is quite something sitting in a boardroom in Sandton talking calmly about contingency planning for a blackout. People really struggle to deal with low-probability, high-impact events, but seem better at crisis planning.

In general, I think the risk of blackout was underestimated until about two to three months ago, and now is being overestimated by many. Eskom has a range of manual and automated emergency defence mechanisms (unused until now, and beyond normal load-shedding) which means that above stage 8 you don’t simply end up in a blackout. For a blackout to happen a lot needs to go wrong. But people still do underestimate the effect if it were to happen.

The level of thought given by business collectively and many individually is woeful — worse still is the level of planning between the government and business. Sure, there has been the odd conversation, the odd round table, but this does not count for real crisis planning. The inability for the diesel supply network to cope with sustained stage 6 and beyond and effect of a communications breakdown need much more serious thought. The lack of planning is one of the few things that keep me awake at night.

Ultimately a blackout would be a credibility-destroying event for the government regardless of who should be blamed and what happened in the 1990s and so on. This makes the poor state of planning all the more surprising.

Yet this winter (with its peak risk point for a blackout at high stages of load-shedding as we peak at stage 8 and possibly higher) is likely the worse point in the energy crisis. If energy intensity of GDP can continue to fall — aided now by a resurgence in interest in demand-side management as well as continued (now motivated) investment in embedded household and business generation — then a recovery in aggregate demand (slowly, capped by the silent Transnet crisis) should mean load-shedding will decrease in 2024.

This split between talking about extreme tail risks on the downside and then a path out of a crisis, leaves people seasick.

Of course, this assumes many things go right. People are struggling to keep an interest in the National Energy Crisis Committee (NECOM) precisely because it is so much in the weeds with a forthcoming omnibus bill and the Electricity Regulation Amendment Bill about to be tabled in parliament and various work behind the scenes on wheeling and net billing — this is not the sexy stuff of cutting ribbons on wind farms. Yet the trade data shows a sharp shift is going on and will continue. All interest here seems off the table until we can ride the post-winter peak wave to lower load-shedding. Markets may then regain interest.

In this seasick state, people are getting confused. Indeed, our dear (still) powerless electricity minister is still confusing the difference between 10-year life extensions of a plant vs running a plant for an extra year or two until it falls over. It is amazing how mystical money trees appear to be available for such things, yet the crisis (yes, I use the word deliberately) in the lack of any real transmission investment seems to languish, awaiting a solution and a magic money tree of its own (hint, one exists that is viable using public-private partnerships vs the impossibility of coal plan financing).

The seasick feeling is intensified now with foreign policy and political succession too, not to mention the missteps on communications in the past two weeks. These issues have been much commented on in these pages recently.

What I have seen, however, is that people care little for such drama — and this is not a good thing. It shows a degree of boredom and eye-rolling, especially from foreign corporate and portfolio investors.

Serious harm

Investors don’t believe a word of SA’s foreign policy utterances, while the US and others become alarmed with SA’s Russia stance and even more so with its seeming indifference to its money-laundering and terrorist-financing conduit status.

Serious harm is being done that the government is wilfully ignoring, with so little upside being gained outside the narrow confines of the ANC. SA has chosen its side and — for now rightly — bets that the West will be too afraid to pull the trigger on relationships for fear of pushing SA into the arms of Russia and China. The wake-up call for all sides is that this won’t make the slightest bit of difference to the economy or the West’s strategic interests.

There is, however, still a degree of calm it seems before we see some fed- up reactions from Western capitals when SA steps on a live wire.

The other issue on which investors are remarkably calm is the succession after Ramaphosa as early as after the election in 2024. Again, this has been much commented on in these pages — and I think the likelihood of Ramaphosa stepping down is quite high. But what is more interesting is how in people’s calmness a projection on deputy president Paul Mashatile starts to happen.

Mashatile is an interesting character certainly and has a long career in provincial and ANC positions. One can read some things into how he might become president, but so many business leaders and commentators appear to be willing to project all manner of fantasies onto him which are as yet unproven as he has not held senior national government policymaking leadership positions.

There is clearly a desperation at the subconscious level for someone deeply decisive. All this of course might well be true (and he is springing into action to start to prove it certainly) but how it manifests in people’s expectations is the main thing.

Our gliding so calmly from the “cannot live without Ramaphosa” to “meh, the other guy can be decisive” has been dramatic to watch.

Perhaps this is where the calmness comes from in the face of such uncertainties and as new previously discounted possibilities open up through the fog. It’s all very Zen. Indeed, perhaps it’s an optimal strategy as long as people are ready to jump to action to take advantage of the opportunities that open up or act to protect against the downside risks that materialise.

• Attard Montalto leads on political economy, markets and the just energy transition at Intellidex. This article first appeared in Business Day.