PETER ATTARD MONTALTO: SA tumbles in a slow-motion crash

Posted in: Economics, i-Blog, Politics on July 29, 2019

Strong leadership is needed to sweep aside ideological cobwebs to drive reforms but government has shown we cannot expect this

This column was first published in Business Day

SA has never had macro-level austerity in any real sense in recent years. Expenditure has continued to grow even in real terms in ever year bar a small dip in 2016/2017. Indeed, expenditure this fiscal year will grow about 11.6% including the special appropriations bill.

This was the fallacy of the Pravin Gordhan years of fiscal “prudence”, which were driven off a noncredible view of long-term potential growth, backed up by analysts blindly accepting the paradigm.

Ratings agencies, such as Fitch Ratings last Friday, will now drive the reality home: growth in per-capita terms is at best around zero (that is, headline growth around 1.7%) in the coming years.

Gains from improved collection by new management at the SA Revenue Service will be offset by emigration and lower growth than forecast. There are no gains to be had from higher taxes — they will simply reduce buoyancy more. Debt service costs will climb faster with higher debt.

All these populist pressures will be dressed up as ‘Thuma Mina’ and social compacting, but the reality is that the issues here are no-one else’s to solve but the government’s.

Eskom has eaten up all the space for doing anything interesting with expenditure to support growth. Instead, raising more debt for this will crowd out private sector investments the government so sorely needs to turn sentiment. The government is on the one hand asking the private sector to invest more in the economy while on the other asking for more money into government bonds. It cannot do both.

The result is that the abstract concept of “misallocation of capital” is now, for the banking sector and asset management industry, becoming the reality, hence low growth and low productivity growth get entrenched.

National Treasury will always be trusted to utilise to the maximum extent possible the political space it has to ensure fiscal sustainability. However, there are no easy options left. The result will be that status quo at state-owned enterprises and public sector wage increases are protected for ideological reasons stuck in the 1960s, but programmes are cut. The government will become more grossly inefficient and unproductive as a result.

The Treasury has started this process with its current negotiations into the October medium-term budget policy statement, laying down scenarios for discussions of reductions versus budget of 5%-7% in expenditure. This is huge in logistical, growth impact and political terms. It would shave off R47bn and R50bn in the coming two fiscal year.

Such cuts will limit the ability to implement reforms and limit the optionality for the government going forward, but there is no option. It is too late. They will be required not so much for just Eskom’s bailout but to offset the underlying weakness in the fiscus.

While it is uncertain if these scenario-based cuts will survive the budget process through cabinet, it shows the real intent of the Treasury to drive home the realities. They could be blocked but they will have tried to keep the show on the road.

This has blowback for the Cyril Ramaphosa faction into the 2022 elective conference (and the 2020 national general council). The question will not be “did you keep the show on the road”, but “what did you do to the rent pie?”

This will drive a desperate hunt for more populist routes, including more pressure for rate cuts and QE (quantitative easing) from the SA Reserve Bank, more lending from state development banks, more pressure on local banks and asset management, and with it prescribed assets chatter will reach fever pitch. These factors will achieve little or set back growth by damaging credibility and sentiment further.

The Bank is not here to do the heavy lifting the government is meant to do. Even if it did cut rates sharply there would be a one-off growth spurt that would then quickly die back to a lower growth rate than now as credibility was lost.

All these populist pressures will be dressed up as “Thuma Mina” and social compacting, but the reality is that the issues here are no-one else’s to solve but the government’s.

This is not just about things such as visas and industrial policy not making progress, but also “fallout risk” of making the situation worse. The best example of this in the coming weeks will be an unfundable, unworkable, unconstitutional National Health Insurance (NHI), which can only work by restricting private property rights and private access to health care into a centralised system that will be a fertiliser bed for future state capture while driving medical professionals overseas.

The turnaround at Eskom, however, is the most acute example of the strong message that nothing is happening. No political capital is being deployed and problems have been kicked down the road to a chief restructuring officer that should hopefully be appointed this week. Investors now realise that ideological blocking forces in the government are preventing reforms proposed by the task team to keep the status quo. That coal will crowd out renewables and unbundling may be in name only. Private participation may well eventually happen, but with no minority shareholder rights if some in the government get their way.

Downgrades will further limit political options and ability to implement and reform with such a politically risk averse leadership, and indeed will increase calls for populism. Once you are over the “scary” hump of downgrade calls for fiscal restraint, it will be easier to brush aside.

For me, it is these psychological impacts of a downgrade that are far more important than the short-run market and economic impact themselves.

What is needed is fiscally zero-cost reforms that allow the private sector to step in and drive growth, job creation and development. The only way to do that is strong and immediate leadership to sweep aside blockages and ideological cobwebs. The past two months have shown, however, that this should not be expected.

• Attard Montalto is head of capital markets research at Intellidex.

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