PETER ATTARD MONTALTO: The risks of being naked in the jaws of the hippo

Posted in: Economics, i-Blog on July 5, 2020


Declaring that a cabinet subcommittee has agreed to reach a primary balance means nothing without the decisions to get there.

This column was first published in Business Day. 

Now what?

We’ve had the emergency budget, we’ve had the infrastructure symposium, but we haven’t had a sense of a cohesive, accepted plan.

The budget was, therefore, left quite naked.

It wasn’t meant to be this way. I am sure the government would have rather had a loose “phase 3″ recovery framework to announce before the emergency budget, but instead all eyes are being focused on the medium-term budget policy statement in October.

This is an awfully long time to wait. Indeed, it will seem even further away as we see in the third quarter of the year furloughed workers turned to unemployed workers, shuttered businesses turn to liquidated businesses — and then the prospect of temporary grants stopping in the fourth quarter.

Anchoring around this point panders to the lack of oomph seen on busting through political blockages and the urgency that should come from a joint humanitarian crisis feeding off an economic crisis. This is of course what we saw with the late announcement of the “phase 2″ stimulus plan at the end of April.

The problem is that in sticking one’s head in the jaws of the hungry hippo that’s standing on the fiscal cliff edge, delays and nakedness take on a different and more immediate role.

A new growth recovery plan that showed strong leadership, positive panic, the deployment of political capital, seriousness and speed could have added credibility to the Treasury’s active scenario. Left naked, however, it lacks credibility with investors.

The issue is more pressing because we are yet to go through the peak period of daily Covid deaths, which will change the political economy and balance around the Treasury. This is why saying a cabinet subcommittee has agreed to reach a primary balance by 2023/2024 means nothing without the decisions to get there.

There is no point in saying what “must” happen; bond market investors only care about what “will” happen. Investors know the Treasury has the right growth reform ideas. This isn’t the point. I “must” buy a huge villa with an infinity pool in Camps Bay, but that doesn’t mean it’s going to happen any time soon.

The “passive” Treasury scenario also isn’t credible because it is defined as a “soft” debt crisis when there is never such a thing. Debt crises are sudden stops that happen uncontrollably, and debt wouldn’t keep going up after a sudden stop but would be forced lower by (real) austerity and an IMF conditionality-based borrowing programme.

When the fiscal cliff edge is about strategic communication as much as anything else, the Treasury runs a risk with its presentational choices. The Treasury risks losing investors by trying to speak on behalf of the whole of the government, as it did on a number of investor calls about reforms after the emergency budget.

The Tito paper may well be accepted by the ANC national executive committee and the cabinet de jure, but it is not accepted de facto, which is clearly evident from actually what is (or rather is not) happening in terms of reform.

The mood of investors after these recent calls was more than glum but increasingly fractious. This has been a troubling move for the Treasury, compared with the more predictable outcry against the budget from the Left (who do, actually, make some decent conclusions even if one disagrees with their reasoning).

SA Reserve Bank bond buying (to compress the bid-offer spread in the bond market) prevents some signals from investors being transmitted back to the government. The Reserve Bank is treading a fine line between preventing a financial stability shock and not providing a free lunch to the government. They will be severely tested through the rest of the fiscal year with higher issuance week after week. If they are serious about not giving the government a free lunch, they will have to at some point allow the bond market to break and then come in and pick up the pieces.

Many in the Treasury know the risks here — indeed, one risks being too harsh on them because there is in some sense little else they can do here. But equally the fantasy of two scenarios will abruptly come to an end at the end of July after the disbursal of the IMF’s rapid financing instrument of $4.2bn to the Treasury.

At that point the IMF will have to publish a staff report with a credible debt-to-GDP baseline. The IMF cannot give scenarios of what must happen, it must present what will happen. It is likely to show debt stabilising much more slowly at a much higher level than the Treasury does — and even this will have question marks over it. The IMF has been there too many times before with lists of necessary reforms in its periodic Article IV reports that are then not implemented.

The rest of the government should be cautious about what happens when an increasing majority of investors see a proper crisis a few years out as a baseline forecast. Things can become inevitable. We need to see positive panic — a favourite of these columns; some hands-in-the-air-style screaming.

That might scare the hippo off.

Attard Montalto is head of capital markets research at Intellidex.

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