PETER ATTARD MONTALTO: Reshaping the economy’s fundamental nature

Posted in: i-Blog on April 27, 2020


This column was first published in Business Day.

Discussion of the next steps of lockdown has seemingly been divorced from reality.

Some time has supposedly been bought with this first stage of lockdown, but it is hard to say with certainty to what extent given the epidemiological models have not been released.

Herein is our problem: President Cyril Ramaphosa is being praised for leadership but what exactly does that mean if we don’t have the evidence? How can we differentiate a cool-headed decision to do the right thing from the knee-jerk reaction of the securocrats and economic micromanagers who have jumped at the opportunity at the same time?

Separation of these issues is crucial for what happens next to the economy.

We can praise decisiveness on the health front where the government and ideological views were broadly aligned, but what about the lack of decisiveness on the economic response for four weeks? If SA was acting so far ahead of the health curve would it not have made sense to wait two weeks, say, on the health lockdown front to get its ducks in a row on a synchronised economic stimulus? Something like the bank lending guarantee programme could easily have been wheeled out earlier with the right political leadership to make it happen and so it could have cushioned the blow at the appropriate moment.

I do know that mulling this type of question has seemingly been banned. Yet asking such questions is also crucial thinking about the next stages of the path to the peak of the outbreak and then beyond.

Does the state have the dexterous capacity to implement a multistage up and down, micromanaged sectorally and geographically differentiated strategy now?

Probably not but it can certainly given the impression it does, which is dangerous.

Again, like during the first phase, the issue was not (with limited information) “is lockdown right or not?”. It was or should have been “is this conception of lockdown right or not?” No-one is disagreeing that exit strategies are needed;  the point is if this complex one is the right choice, and indeed there were quite a number of alternative and easier to implement options on the table in recent weeks.

Equally the question is not “is the stimulus the right thing to do”, but more likely it should be “is this the best way to put a floor under the economy and the right way to accelerate a recovery out of this crisis?”

In these pages two weeks ago, I said that investors would not give any benefit of the doubt on structural reform promises to come. Yet the government announced last Tuesday that structural reforms would be a key part of the third leg of their economic response plan.

An economic and fiscal policy response needs to be based around the fact this trust is missing and that at the fiscal cliff edge credibility is everything.

As such Treasury should be totally open and transparent as possible with investors in its communications — especially on institutional funding institutions (IFI) funding. Being transparent on the fiscal issues up front and showing your readiness for as much (at the moment) no conditionality funding as is available in crucial then to crowd in greater volumes of market issues of bonds and bills.

More deeply, if there isn’t trust the government needs to realise we need to see prior actions to win it back. There is no point in moaning about being viewed a certain way. Seek to address it.

In this regard, and cognisant of the time it takes to turn the structural reform ship and the challenge of capacity, early indicators should be sent on the seriousness which with future reform is going to be taken by the government and the president in particular.

This is not easy but not impossible.

Starting out by declaring that restaurants should only employ South Africans is not a great starting signal to business that is desperate in the post-crisis world for more skilled foreigner immigration.

To make a shift, the government could indicate that the new bank guarantee programme could only be used for non-carbon intensive loans when deployed in the energy sector. Equally the government could undertake an accelerated change to schedule 2 of the Electricity Regulation Act through the powers under the Disasters Emergency Act and rapidly liberalise the self-, embedded- and distributed-generation for companies leading to a huge jobs intensive boom through the recovery phrase.

The government could also commit to finally killing off the dodo that is SAA and ensure that Mango is saved rather than wait out the clock for the inevitable. That would be a strong signal. It could also commit to not bailing out Sasol in its current form as one of the most carbon intensive private sector entities in the world.

At this time, the country will need all the funding it can get and while the fiscus straps itself to the requirement of no-loan conditionality — there is plenty of money starting to wash around globally that can be directed to particular causes with conditionality. Green finance is a messy term but there is plenty of it around and it will be back in vogue more than ever internally after this crisis.

Indeed, combining government and private-sector debt with targeted wrappers towards helping the transition of the coal economy to a green economy can unlock international concessionary finance, which is just what SA needs now.

What other task ahead for SA is so jobs intensive, so easily fundable and solves an energy crisis and boosts growth with cheaper energy?

The problem, of course, is ideology, and this is exactly why these early reform signals are needed right now to show that ideology will be cut through. The upside can be realised. The benefit of the doubt can be given. Nominal growth can result and with it SA will not be dragged down by the fiscal burden it is rightly deploying right now.

With the fiscus and SA Reserve Bank both opening the taps, the seeds of an almighty bun fight over the future of the economy are being sown. The president needs to get ahead of this in making clear his own vision and bringing investors and business along with him.

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

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