PETER ATTARD MONTALTO: Investors waiting for Godot

Posted in: Economics, i-Blog on October 21, 2019

This column was first published in Business Day 

Spending the week in the US — first talking to investors in New York and then at the IMF/World Bank annual meetings — has been enlightening.

The annual circus around Washington throws emerging-market countries in sharp relief with one another for investors and becomes a kind of beauty parade.

The unfortunate timing of the medium-term budget policy statement (MTBPS) and the rest of a busy October kept all senior National Treasury officials and the minister away. Given the blackout around the policy statement and the fact that we are still waiting for many events on Eskom, there was little anyone could do to go into bat for SA. It certainly wasn’t the Reserve Bank’s job to do so on fiscal, though they did on their monetary policy framework.

Still, the comparisons were made between countries, and the longing for a “Brazil moment” — where a particular turning-point reform is undertaken — became apparent. The ability for Brazil to pass its long-awaited and politically challenging pension reform has signalled a key decline in risk for investors. Now investors are on the hunt for who is next and wondering if they will be disappointed if they place chips down on SA.

Portfolio investors are happy to sit with about 4.5% real carry in the long end of the SA yield curve to some degree, given the loosened conditions from developed-market central banks. But still there is a deep dissatisfaction with this simplistic “spreadsheet” investing. People want a positive narrative to latch onto and can see that in quite a number of other emerging markets.

Lack of delivery

There is also boredom with the lack of delivery and spin from the government. Investors are fed up with delays in reform, endlessly pushed-out papers and decisions, and disappointment with fiscal matters and growth.

None of these stances from foreign portfolio investors is overly different from local business sentiment, which is rock bottom. The difference is that local business reacts through a lack of domestic private investment growth. Fixed-income investors, however, don’t stop investing. True, they might not invest as much as they otherwise will, but real interest rates (with inflation low and stable) are just too attractive. Equity investors, by contrast, have been selling and moving out.

Consider too the never-ending benefit of the doubt that Moody’s Investors Service inexplicably gives SA despite the continuing reduction in absolute credit quality.

None of this means the Treasury can’t produce an “okay” policy statement, or that an Eskom white paper can’t be “okay”, or that the “Tito Paper” has managed to change the debate through weight of evidence. What it does mean is that the shift from public relations to policy is broken when it comes to implementation.

Business and foreign investors (portfolio and corporate) will now not budge to a faster investment path without actual implementation. There will be no upfront kicker of animal spirits into private-sector investments.

This doesn’t mean small things such as water-use licences, as interesting and important as that issue is. It means the big stuff that can move the potential growth dial, such as skills visas and Eskom.

Ultimately for portfolio investors the need for lower-risk premia that drives a lower yield curve and in turn lower Reserve Bank rates means stabilising and falling debt to GDP and better fiscal revenue growth from higher potential growth. Zero per capita income growth in the medium run (1.7% real growth) is just not going to cut it.

This is about positive narratives and not about spin, such as cutting home affairs’s visa turnaround time when that is in fact just one step in a long process.

SA needs its Brazilian pension moment, but it is far from clear it is coming. SA policymakers need to realise that, yes, it can mean a downgrade is avoided (at least in the short term), but this really has little effect.

Having a lower, flatter yield curve that saves the government on debt service costs, that could be better spent on health and education, would be a better option. Equally, the removal of risk premia, allowing the central bank to cut rates by 100 basis points over the long term, is another win that would help boost private-sector investment and consumption. These are the wins available that would have a real effect. Yield curves can have real signalling value even to foreign direct investment capital about risk.

This is what I think the Left fundamentally don’t get in the debate over reform. The macro is seen as some magic wand that can be used to conjure growth without doing the hard work on the micro. Instead, the hard work on the micro reforms can create the space to allow the macro to come to the party, and with it higher growth — ultimately driven by companies.

The misconception is that growth is driven by levers at the macro level. No. It is ultimately generated through the micro decisions made by individual companies and investors, and this is where shifting the reward/risk balance of investment decisions makes a difference, and undertaking the challenging implementation (not spin) is the first step to achieving that. To suggest otherwise seems totally counter to how the smallest township to the largest conglomerate actually functions in the economy.

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

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