Investors are struggling to define the SA narrative and vision that the government is trying to sell.
This column was first published in Business Day.
Having listened to more budget vote speeches than is probably healthy in the past two weeks, we seem to have run into the classic government problem.
It was like being in a pick-and-mix sweet shop, though one wonders if there was any central control of the messaging. You could take what you wanted. The bullish bond investor — the line from the Treasury on a sacrosanct fiscal framework; the bullish infrastructure funders — the big numbers flying around (and work on water especially); the bearish equity investor — the referenced blockages to spectrum auctions; the perplexed offshore international financial institution — the madness of minister Gwede Mantashe’s call to be an oil and gas superpower.
As ever, minister Ebrahim Patel was frenetically on the case with a beautifully timed simultaneous launch of an electric-vehicle white paper as his speech. It might have been better if there was a sense of how you might charge the things, with perhaps the announcement of a battery beneficiation plan from the department of mineral resources & energy and a new Integrated Resource Plan (IRP) that would take into account the new demand.
The broad takeaway, however, was how “samey” it all was. Arguably, three months later with a third wave of Covid upon us and a slow pace of vaccinations, some rejigging would not go amiss.
Investors are struggling to define the SA narrative here, though this is not a new problem. Many a perplexed foreign direct investor has asked me at investment conferences: “What is the government actually selling us as a vision?” The phrase “if you are explaining, you are losing” comes to mind.
This frustration may be tested shortly as the infrastructure & investment office in the presidency looks at “co-ordinating” private sector investment rather than enabling it. Hydrogen, cannabis and electric vehicles will all be part of the strategy. Each could naturally emerge with the right enabling environment for mining production, mining beneficiation, electricity generation and trade competitiveness being found — rather than being shoehorned with localisation targets, for instance. Equally, it would be competing if there was an announcement, for example, of better capacitating the department of trade, industry & competition to actually understand what the capacity of local industry is. The lack of such capacity has now led to a farce of post-fact exemptions for the risk mitigation procurement around photovoltaic units.
The president and many of his supporters in business appear to be hoping that cleaning up the ANC is a kick-starter narrative to investment. The machinations in the party are certainly positive and important in their own right, but such a view forgets that there is a nest of limiting factors. While pure politics can pique some interest, there is also eye rolling when a report comes out about how bad our ports are or that the energy minister uses non-existent evidence to play stuck in the mud on an issue while a public consultation is still open.
Investors know what shifts the risk-reward balance of investment plans, and it is not Ace Magashule.
Bond investors are having the same problem of defining a narrative. SA comes out well at the moment, but more through what it is not than what it is. SA is not Turkey with its central bank plundering and politics, SA is not Brazil with its Covid denialism, SA is not Colombia with its protests in recent weeks, and SA does not have an inflation problem, unlike others. Investors have seen that the Reserve Bank nationalisation debate has been put on ice, for now at least.
They are seeing that even though vaccinations are late and throttled, there is at least no denialism, and while there are long-term concerns over the fact that inequality in SA must surely at some point spill over into a shock, it is not on the horizon for now. Most investors accept we are seeing reflation, not second-round effects.
One adds on top a positive terms of trade narrative as the basket of mining goods we produce has risen in price by over 30% on the year, driven by much larger price increases for platinum group metals. But investors are questioning if this will lead to higher growth — and deciding probably not. Mining companies are mostly paying dividends more than investing in expanding volumes.
The Treasury will not be using the extra R57bn of revenue I am projecting for this year to fund a splurge on ministerial cars, social grants or infrastructure spending. Instead, the Treasury will be paying down debt faster, so no growth impulse there. Banks are hunting for bankable infrastructure projects to fund and, with the exception of the limited energy procurement rounds, are finding slim pickings elsewhere. What’s more, low sentiment in the economy means weak credit demand overall.
This is not 2004 to the start of 2008. Back then productivity gains and rising wages with low impairments for banks meant commodity gains could be recycled through the economy as a fiscal surplus, and an inverted yield curve prompted banks to open the credit taps. Reforms and decent sentiment were the added kicker. Having a debate on allocating “surpluses” in 2007 to National Health Insurance or a basic income grant would have had a very different feel to now.
Now reforms are patchy, there are no productivity gains, the yield curve is steep and a large deficit is being run while banks are coming out of the Covid crisis with large impairments but doing better than many expected.
Combining this with the positive terms of trade shock, we get a stronger currency, buoyant equity markets (but few initial public offerings) and bonds on the front foot but the yield curve not flattening significantly, while growth recovers moderately quickly but to low potential.
Some oomph is required to break out of this torpor. Signs of different thinking. A reshuffle to cut out the energy blockages and communications mess. But I know I am like a stuck record on a reshuffle and one won’t happen until after next year’s ANC elective conference.
What then in the interim? More plans and speeches that co-ordinate little private sector battalions on a big map of the country in which the department of trade, industry & competition reinforces weak sentiment and leads to exceptions that prove the rule only?
A shock from the president overriding his minister of mineral resources & energy on the issue of embedded generation? Now that would get some eyebrows raised and some fat cheque-books opening; that would be enabling rather than co-ordinating. It would also show the success of the Operation Vulindlela programme not just on technocratic issues but as an institutional mechanism to shift the politics of reform. That would be oomph.
Peter Attard Montalto is head capital markets at Intellidex.