PETER ATTARD MONTALTO: Action, reform, decisiveness needed, but pragmatism in short supply

Posted in: Economics, i-Blog, South Africa on November 4, 2019


Moody’s has been very clear that it is up to government now to consolidate expenditure and undertake growth boosting reform before February or … or what?

This column was first published in Business Day 

I have often mused here about what will create change and allow for reform. The opportunity from Moody’s outlook change on Friday is now a key opportunity to test how sticky the status quo is.

Moody’s has been very clear that it is up to government now to consolidate expenditure and undertake growth boosting reform before February or … or what?

What happens next is very much down to the government and ruling party’s perceptions of fear about what a downgrade means. That in turn will rotate on how the market reacts in coming weeks.

We are more worried about the effect of a downgrade on corporate sentiment than on markets.

Since the last bout of Moody’s downgrade panic in 2017, reams and reams of research have been produced about the impacts of a downgrade: the slower growth, the higher interest rates and so on. Yet if a downgrade occurs after the budget it will be happening in a global environment that is more supportive than 2017.

Equally, the amount of exposure in true-passive World Government Bond Index (WGBI) trackers has probably fallen by about two-thirds to about R5bn-R7bn by our estimates.

Forced outflows are therefore large but more manageable. With the addition of lousy local equity market performance and local funds looking to buy bonds in spikes in yields (such as would occur when there are forced outflows), markets can weaken, but any more dramatic dislocation seems unlikely.

We are more worried about the effect of a downgrade on corporate sentiment than on markets. The issue has become such a focus and cliff-edge issue for business. Yet the effect on growth may well be to derail a recovery in 2020 more than a serious leg lower in growth from these levels.

Put simply, a downgrade and the market reaction and growth reaction may simply not be enough to cross the threshold of the government and ruling party being jumped into reform.

We should also not forget Moody’s fatigue in policymaking circles.

This parallels fiscal consolidation fatigue from policymakers and also simple limits being reached on what is cuttable without actually disrupting service delivery. Using Moody’s to jump consolidation and reform on the right track may therefore not be obvious, even if at the margin it can have some effect.

There are simply too many other things at stake.

On Eskom, the interplay of territorial battles, egos, vested interests and fear of the scale and complexity of the issue is going to be hard to budge. The pragmatic paper released by the department of public enterprises last week had several positive shocks in it, especially the rhetoric on competition and a strong sense of the status quo simply having failed. Though one can quibble with some of the detail presented (or left out) from what was more vision paper than a policy paper, it shifted the dial certainly with its show of pragmatic force.

The lack of detail on the Eskom debt restructuring by contrast missed the mark, given prior specific guidance from government through the year that something would be forthcoming even if markets had downgraded expectations of the specificity that would be produced in the medium-term budget policy statement (MTBPS). We are now left with the messy prospect of “discussions” with creditors which is not how such things should be operated. You can’t thuma mina a debt restructuring.

Similarly, on the public-sector wage bill. Why will a Moody’s threat shake that? The root issue there with the forthcoming negotiations is the bigger battle over ideological levers. The Treasury conception is that to get growth going you need microeconomic policy reforms. However, the Left (in unions and within the ANC) believe you need macroeconomic policy stimulus which includes both fiscal and monetary and are deaf to the demands for microeconomic policy action.

How can you persuade people who want more spending that there should be less and specifically on their wages? There seems little (without shifting costs) prospect of a grand bargain without larger resolution on this macro- vs micro- policy fight. Unions will, rightly, turn around and say why should Moody’s affect us when the reason we are in this predicament is the lack of growth and state capture?

An early sign of any shift could be on the new Eskom CEO; the ideal, global best in class candidate is available to be appointed.

Equally integrated resource plan on its own is meaningless without ministerial determinations to actually procure Renewable Energy Independent Power Producer Procurement round five  power for instance. Is there movement there now or is the department of mineral resources & energy and energy still stuck in the mud?

Finally, can easy-to-solve but problematic issues like immigration control for child tourists be solved? This issue was rammed home in the past week to me with many problems of friends trying to bring children into the country and having problems at the airport despite continual supposed shifts in policy. The impression was very much “your hard currency spending isn’t welcome here”.

A reminder that actually moving the machine of government is hard even if decisions are taken at the top, and ultimately comes down to application of a certain mindset from those on the ground.

It is kind of now or never over this next period to February. Spin, public relations, hope, rhetoric, thuma mina and hand-holding won’t cut it. Action, reform, decisiveness, leadership and an understanding of what is at stake, mixed with some valuable pragmatism, will.

• Attard Montalto is head of Capital Markets Research at Intellidex.

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