Intellidex is a leading research and consulting firm that specialises in capital markets and financial services in Africa.
Intellidex is SAMRA Accredited
These research notes are for clients only and you will require a password to access them.
To inquire about research subscriptions or for other information, please email researchdistr@intellidex.co.uk.
If you are an institutional investor and use RSRCHXchange you can purchase individual reports through that platform.
Recent notes:
SA ‘wins’ COP26 already with a political declaration for USD8.5bn of climate transition funding, though the real battles lay ahead in turning this into a funding agreement. The politics and logistics of this are very interesting.
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
With the country now out of the third wave and an economic recovery under way, a question lingers as to how South African households are faring. But unemployment is at a record level and the vaccine rollout is slowing down, suggesting households remain vulnerable. In this note we unpack the state of households and assess whether they are leading or lagging the economic recovery
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
Investors have started to become concerned over possible election violence on 1st November election day. Intra-ANC violence is possible, indeed likely in the run up but less on the day. However ‘public’ violence or protest is highly unlikely in our view having tapped various party and security sources – in almost all areas. A number of flash points in do need to be watched however in KZN and Gauteng where criminal gangs have infiltrated the ANC candidates list – though we believe generally in ANC safe seats.
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
Policy Brief Series no. 9
In the nearly twelve months since its launch, the presidency’s employment stimulus plan to help the economy recover from the adverse effects of Covid-19 and systemic unemployment has quietly stalled after its first phase with no sign of re-emergence yet until there are more funds made available either on or off fiscus for its second phase. Meanwhile, public support for the introduction of a cruder social wage in the form of a basic income grant has grown significantly. The withdrawal of the Social Security Green Paper and the push back by NT on BIG could provide a renewed opportunity for the presidency to tackle both the gap left in the absence of a Covid relief grant next year as well as the country’s devastating unemployment rate through a reinvigoration of the jobs stimulus plan. As local elections draw near however, the promise of a basic income grant seems to be more alluring and will likely be ‘bigged’-up despite the improbability of its near-term execution. We will be watching in the MTBPS and budget if any further funds are specifically released rather than just promised.
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
It was a slow registration weekend for all parties according to anecdotal feedback with news coverage highlighting wider spread disaffection with the ANC but also we think replicated more widely with incumbents. The result is a marked shift in demographics of the electorate into November’s poll.
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
An increasing lack of funds in the ANC together with a potential further shrinking of seats (to a greater or lesser degree depending on the outcome of the ConCourt challenges) will keep contestation within the ANC high and with it levels of violence that are ongoing but only get coverage into elections. As part of the assessment of levels of underlying and ongoing violence in KZN that need to be contextualised especially post the July unrest, we have undertaken with investors a particular focus on the issue of intra-ANC violence that oscillates with the political cycle. Next year’s ANC elective conference will also be in focus not just for the national events but also contestation to lower branch, district and province meetings and elections that will be ongoing too.
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
Eskom results were marginally better than initial guidance thanks to further containment of primary energy costs growth (positive) and employee expenses (positive) as well as slower investments (negative). Yet this all feels like swings and roundabouts with frustration from investors that there is no further (public) clarity on reaching sustainability of the balance sheet. So with risk-on we charge into the next period till the interim results (which will look somewhat better on the usual seasonals) and then through to year end with a large step up in (market) debt issuance for the year absorbed most likely rather successfully (given guarantees of course, plus the bailout backstop).
Yet this is clearly not sustainable, we don’t mean in the financial sense, but given that Eskom needs to massively lever up a-fresh for the Just Energy Transition (good – a total at its core of ZAR36bn in the coming years though the end number will be significantly higher towards ZAR200bn), transmission investment (which should be ZAR10bn per year for its plan not less than ZAR1bn per year now), and its own renewables new build plan (which is around ZAR106bn, unnecessary in reality though within the political economy a must for AdR) all of which can only be partially covered by tariff increases. A large debt deleveraging operation is coming and will be forced on Eskom when NT comes to the table and realises the realities that these future plans are being hobbled – we are not there yet though. As such previous views of a ZAR200bn odd de-leveraging operation must be shifted back well into 2022/23. Investors will have to be patient till then. Market interest in a smooth progress on unbundling is likely to be somewhat frustrated with the whole process still phrased in terms of dependencies – Eskom has now broadly done as much as it can.
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
Tito Mboweni has been forced out by SACP and COSATU as Finance Minister with the President’s nod, and did not in fact resign, we believe. Enoch Godongwana his replacement is a complex character not easily summarised – we see a strategic player but ultimately our wider forecast of fiscal underperformance in the medium run remains. Markets have a complex view of Godongwana too – the simplistic ‘investor friendly’ view is not quite accurate. He was the best choice available who half-wanted the job. The broader reshuffle is largely a moving of deck chairs, a serious opportunity missed on the removal of Gwede Mantashe in particular, whilst the wider economic cluster shifts are broadly neutral and do not improve things. Sticking Ndabeni-Abrahams at small business will keep it underperforming whilst putting Dlodlo at Public Administration is problematic for future wage bills. The Security Cluster shifts are somewhat positive, Cele could not be moved unfortunately and will mean a police service stuck in the mud, though bringing SSA into the Presidency is positive though odd that corruption accused Kodwa has been kept in the political role there, whilst placing Modise at Defence is a firm improvement.
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
The market is in quite the tizz over possible (eventually likely) changes to the SARB MPC inflation target, but it is missing the context and background of how and why this is happening (and when). We see the target eventually move lower over the coming 20 years towards 2-3% (or thereabouts) in step wise moves. The first step, though, is unlikely to come until after the ANC elective conference at end-2022 and is more likely to be after the 2024 elections. Specific steps towards this point will start to emerge in the next year, however. The SARB would be well suited to put the issue into better context for markets rather than stoking the beast.
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
We present a detailed timeline of the government’s stated infrastructure project pipeline, including related infrastructure policy enabled projects, to present a “known” pipeline, linking this to pressure points on growth and the recovery out to 2050. However, these account only for a small share of expected growth and investments during the years ahead – with delay risk added on top. Still, this gives us some shape of the policy impulse to come.
Nxalati Baloyi
Senior Researcher
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
The suspension of Magashule is certainly welcome and shows the NEC has finally crossed the (rightly high-) bar on corruption that it failed to do since NASREC in 2017. Ramaphosa has till now had a poor grip over Luthuli House which was only partly as a result of having Magashule in position as Secretary General. His replacement as SG (Jessie Duarte) however we find deeply suspect and far from a ‘reformist’ of any kind, but likely – if he pushes – enables Ramaphosa to have a greater control over the Luthuli House operation though provincial and branch level problems and splits will prevent deeper change fast. The ANC will remain in faction flux within the Ramaphosa broad camp. There will be a huge amount of noise – indeed some already this evening with a letter (most likely) from Magashule to Ramaphosa suspending the ANC President that is designed to create noise and will (most likely) be brushed aside. Yet noise is likely to continue for the coming weeks.
There is once again (already) breathless coverage on the chances of economic reforms and we maintain this is entirely the wrong view. Politics is not policy and real removal of blockages such as the urgent firing of Minister Mantashe is the bar. A much bigger test is what Ramaphosa does with energy related corruption.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
In this update we focus on the progress made over the past six months, particularly with the Presidential Climate Change Coordinating Commission (PCCC) established to oversee a just transition to a low- carbon economy. In the coming year, Cabinet will attempt to finalise the nationally determined contributions to be announced at this year’s COP 26, as well as the Climate Change Bill that will provide a road map for the actions the country will need to take. At the heart of these policies is the much anticipated and long overdue zero emissions target that will govern the country’s climate action and ensure that we reach the emissions target as agreed in the UNFCCC Paris agreement. Delays and political risk are high however. Interim NDC targets to 2030 may not be biting. The whole carbon envelop however is increasingly important as investors and companies inspect the path SA is on vs peers. Risks arise in a whole host of areas, including new power procurement onwards into tariff payers.
Peter Attard Montalto
Head of Capital Markets Research
Tlangi Ngwenya
Policy Analyst
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
The reshuffle is on pause (but not dead) as President Ramaphosa tries to get ducks in a row first. However, one must question if the pause will be ‘forever’ as risk aversion is the order of the day. Ramaphosa is slowly rearranging deck chairs, including reconstituting the Army Council, yet we fear he is increasingly at risk of alienating his own loyal support base on one side whilst trying to hold together less loyal elements on the other. Such a strategy seems a poor substitute for some actual leadership and deployment of political capital and we sense (as do an increasing number of his own supporters) that he is being far too risk-averse against a small yet vocal minority. On the Zuma issue, we see no constitutional crisis yet, such a crisis will only emerge if the policy do not act to execute a ConCourt order. Things are about to come to a head through month-end. The test is if the NEC can stick together as at the last meeting. The moment of market reckoning that the RET is a lot of hot air may be close at hand.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
In this update we focus on the progress made over the past six months, particularly with the Presidential Climate Change Coordinating Commission (PCCC) established to oversee a just transition to a low- carbon economy. In the coming year, Cabinet will attempt to finalise the nationally determined contributions to be announced at this year’s COP 26, as well as the Climate Change Bill that will provide a road map for the actions the country will need to take. At the heart of these policies is the much anticipated and long overdue zero emissions target that will govern the country’s climate action and ensure that we reach the emissions target as agreed in the UNFCCC Paris agreement. Delays and political risk are high however. Interim NDC targets to 2030 may not be biting. The whole carbon envelop however is increasingly important as investors and companies inspect the path SA is on vs peers. Risks arise in a whole host of areas, including new power procurement onwards into tariff payers.
Peter Attard Montalto
Head of Capital Markets Research
Tlangi Ngwenya
Policy Analyst
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
Just as SA’s fiscal picture is looking marginally better, another more fundamental threat is coming down the tracks at speed – South African government bonds are standing out like a sore thumb in the context of international peers. This means a growing segment of offshore investors are having challenging conversations with end investors and regulators – repeating a trend seen with Eskom debt in recent years. Forthcoming EU rules on the carbon intensity of portfolio disclosures will now be accelerating and strengthening the trend. SA needs to move much quicker to establish a larger, more liquid green bond segment which will happen only with a mixture of net-zero targets, faster more credible REIPPP pipeline and a liberated ERA s2 to create a corporate green bond market. Sovereign green bonds and Eskom transition bonds are also going to be key to keep a growing segment of carbon-averse offshore investors engaged in SA risk.
Peter Attard Montalto
Head of Capital Markets Research
Xalati Baloyi
Senior Research Assistant
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
In President Ramaphosa’s SONA last month, South Africa’s looming water crisis was noted with a call to establish a regulatory body to deal with bulk water tariffs and a new Water Resources Infrastructure Agency. The agency is not a new idea – the bill to establish the body was introduced to parliament in 2008 but lapsed after no action. The president also announced the issue of water use licences and promised movement in the next three months. These are key focus issues of Operation Vulindlela.
The Water Masterplan published in 2018 outlines a comprehensive plan to deal with the water security needs of the country. Yet very little has been accomplished from the plan so far despite such need. Water remains a hard area for investors to deploy capital.
The country recently experienced high rainfall levels, with many dams such as the Vaal reaching capacity for the first time in four years. While this should be a cause for comfort, the increased rains have placed additional pressure on the country’s ageing and failing water infrastructure, with raw sewage entering the main water supply. The national defence force has been deployed to deal with the Vaal dam crisis and we anticipate further deployments to deal with emergency management.
Peter Attard Montalto
Head of Capital Markets Research
Tlangi Ngwenya
Policy Analyst
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
This positive but risky budget surprised but in some quite complex ways. Whilst we expected the -9.3%GDP budget deficit next year and the gross financing requirement was only marginally lower – there was more consolidation baked in from underlying expenditure cuts in future years, better NT revenue forecasts than expected and only a more gradual rise in debt service costs over time. Overall NT sees debt stabilise at 88.9%GDP in 2025/26, around 6.4ppGDP lower than seen before. All this meant that tax hikes weren’t needed and above inflation bracket creep was possible.
Substantially more cash is used in the coming year than expected to replace the need for more t-bill issuance and perhaps no regular FRN issued. Overall, we see weekly issuance fall next fiscal year from ZAR6.6bn/week to around ZAR5.3-5.4bn/week with some residual conservatism on non-comp. It seems reading between the lines that NT will restart USD3bn/year SOAF issuance next fiscal year. There was nothing on Eskom debt deleveraging in the budget. There was no additional SOE spending outside the ZAR7bn expected for Land Bank.
There are substantial risks from the need for more grant spending, SOE spending and higher settlements on public sector wages. Yet this budget unusually is factoring in more buffer than normal. As such we see debt rising above NT’s projections but slowly and in a less dramatic way than we saw post MTBPS.
A pledge to reform the PPP framework to boost investment was welcome but we wait to see quite how much follow through on this there is. We had hoped there would be more firm action since the MTBPS revealed on positive financial sector reforms but it seems some of that will come later this week. There were no firm additional details on the Loan Guarantee Scheme as expected but leaves a gap. We were disappointed, though unsurprised on the broader infrastructure front that spending had been cut – the political priorities are not translating into reality there.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
National Treasury is sitting on Pandora’s box – trying to hold the status quo. Much larger cash surpluses than expected complicate matters politically but, given the inertia of the budget process, we think this causes more problems for MTBPS 2021 rather than now. As such we see a mark to market on better nominal growth, little change in real growth forecasts, marginally better revenue projections in the coming year (but treating the Terms of Trade boon as largely a one off) and only a smattering of adjustments on expenditure. All this, will partly be ‘extend and pretend’, especially by keeping the compensation assumptions unchanged at zero nominal.
Projected SAGB auctions could fall to as low as ZAR4.8bn/week in our model but we think NT will remain over cautious and the number might only fall to around ZAR5.5bn from ZAR6.6bn currently. This will be offset by a possible new floater, a fudge on what international borrowing will be (we think not SOAF) and only partial cash draw down in the coming year. All this implies that most of the cash pile is saved till redemptions later in the MTEF.
We expect a range of important announcements on the exchange control reform front as well as regulation 28 as hinted at in the MTBPS – positioning SA as a financial centre for the Africa Continental Free Trade Agreement. Broadly we see this budget as ‘ok’ but the calm before the storm against a decent nominal growth backdrop in the short term – though this has been (till recently) priced to a fair degree now by the market.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
The SONA was broadly as expected – and yes exceeded a low bar. There was an unfortunate element of excessive hype on (non-energy) infrastructure and a repeat of the ZAR500bn stimulus fantasy. Yet cutting through this there were a number of meaningful commitments on the key-skills list, a water regulator and then important markers creating a slipstream on energy reforms later if not sooner. The speech may ultimately fall short and be easily forgotten, however, on over-promising of what is happening currently vs reality, more than the problem last year of promising things that can’t be delivered. The bar remains delivery and can be judged sooner rather than later.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
The balance of payments is in focus given the accumulated build-up of USD liquidity sitting in the system. Yet waiting for this to naturally unwind as the current account ‘normalises’ back to a deficit may well be some time in the waiting. Indeed, we now (again) see a larger surplus for longer through this year – in turn keeping FX implied rates elevated for longer (bar any major shift in policy from the SARB on this front which we are sceptical will occur). We also highlight the likely large inflows in foreign capital to fund the just energy transition. It also reinforces a view of a more resilient ZAR for longer.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
The government’s procurement strategy is moving but remains quite uncertain despite some of the rhetoric. While the first vaccine doses have arrived, there is an upcoming supply gap emerging and ‘bulk’ supply and rollout looks likely only in late Q2. We see vulnerable groups being covered by mid to late Q3 with a full dose course (or by mid-year with a first dose) – but that’s only if supply is not constrained (which would we think lead to delay of around 13 weeks). The pace, however, appears likely too slow and with supply constraints from delivery schedules and so frequent stoppages are possible. Reaching the target herd immunity of 40-million might fall back from early-Q2-22. The slower pace of supply is possibly going to be offset by more deliveries around mid-year but if this does not occur then we risk experiencing a fourth wave without herd immunity which is currently not in the macro-baseline (only a third wave around May is).
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
2021 will see a slower recovery than previously expected given a second and third Covid wave and a vaccine rollout pace that is likely to be slow vs wave timing. South Africa is set to still only reform at a moderate pace in 2021. Corruption will slowly be stymied but that will not lead to growth while structural reforms will be ‘2 steps forwards, 1.5 steps back’ and not lead to potential growth breaking above 1.5% in the medium run. Hence, we see South Africa requiring an IMF programme (a reform straitjacket) in the coming three years. We have revised 2021 growth down to 3.2% from 4.3%.
Peter Attard Montalto
Head of Capital Markets Research
Tlangi Ngwenya
Policy Analyst
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
The presidential employment stimulus announced in October 2020 as part of the Economic Reconstruction and Recovery Plan (ERRP) promised to create 800,000 job opportunities in a year. We first wrote about it in October just before its launch here. This brief looks at the strides made in its implementation so far and the likely challenges to be faced – chief among them being where the money to fund will come from given the constraints faced in the fiscus and the impending debt crisis.
Peter Attard Montalto
Head of Capital Markets Research
Tlangi Ngwenya
Policy Analyst
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
It’s time to call out the folly of charging down a blind alley on an Eskom debt-for-equity swap. While it won’t end up happening in our view, it shows a dangerous propensity to grab hold of ideas without appropriately absorbing expert advice which would alert to the risk of selective default. This simply adds to delay of reaching an eventual more sensible deleveraging plan – which we see coming eventually. Ultimately, linking deleveraging with just energy transition (JET) financing is desirable but likely to be unworkable initially given the vast range of conditionality required for the latter (though this certainly doesn’t mean JET financing shouldn’t be pursued). Ultimately, simplicity is key.
Peter Attard Montalto
Head of Capital Markets Research
Tlangi Ngwenya
Policy Analyst
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
In the president’s Economic Reconstruction and Recovery Plan (ERRP), one of the key drivers to expedite growth and create an inclusive economy is visa reform. Visa reform is often included in any list of three main reforms that are expected to have a substantial impact on growth. We have previously written about the others – spectrum here and energy related climate policy here. Since the publishing of the White Paper on Immigration in 2017, many promises on an updated skills visa list, as well as a streamlined e-visa system to promote tourism, have been made but with little tangible outcome. These were repeated in recent state of the nation addresses. Last week, the latest “occupations in high demand” list was published by the Department of Higher Education and Training. This list, published every two years, will be used to inform Home Affairs’ critical skills work visa (CSWV) list, which is the crucial next step. However, the entire process itself needs reform to accelerate the granting of visas and enable skills to be imported to support the economy. We anticipate further delays because of the need for co-ordination between several departments and a change in mindset
Peter Attard Montalto
Head of Capital Markets Research
Tlangi Ngwenya
Policy Analyst
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
The debt deleveraging issue is live – rejigging here we come (in nine months maybe at earliest) after Pravin Gordhan’s declaration that an “extraordinary fix” was forthcoming. We look at the next steps in more detail in this paper. Other issues see movement but with slow, uncertain steps, such as meaningfully shifting municipal arrears, actually getting higher tariffs into the reality of higher revenue and being able to crowd in cheaper climate financing.
Eskom’s results recently were (given the headlines already telegraphed in parliament in mid-year) not really surprising but there was a lot to glean on strategy and the financial outlook. Broadly, Eskom remains the “undead” financially with a bailout backstop that will adjust as required. The energy constraint on the recovery is real, however, and cutting through the spin seems concerning within Eskom too.
Andre de Ruyter’s first year was broadly a success, albeit with a moderately low bar given the Covid crisis. The next year will have to see promises turned into delivery and some political live wires touched.
Peter Attard Montalto
Head of Capital Markets Research
Tlangi Ngwenya
Policy Analyst
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
The active scenario was abandoned, debt stabilises two years later at a higher level and then falls slower. Compensation spending is mostly what matters now. There is underlying SA-style austerity here though much of it is pushed down as expected to lower levels of government – however, it really is a very aggressive cut of ZAR199bn in compensation in the coming two fiscal years vs last year’s MTBPS and by ZAR79bn from the February Budget that is carrying most of the weight here. This is to offset the sharp increase of ZAR40bn in debt service costs (DSC) in the coming two years as debt levels accelerate.
We are pessimistic on the implementation of the cuts in the compensation budget, based on zero nominal wage increases and only small allowances increases. Yet government does have a degree of optionality – at the most extreme just imposing a solution. FinMin Mboweni must have had political sign off to publish this wage path, but implementing it would be another matter, and we have never heard the President back anything like this publicly – things are also unlikely to be clearer in February, but court case appeals ongoing and the possibly only just started wage negotiations. Political agreement with unions may not be possible. Expected Tito-xit will complicate things.
This was one of the oddest MTBPSs in memory, it seemed to lack strategic focus and wasn’t really about expenditure at all on the surface of the documentation due to the lack of any real expenditure reviews or ZBB (which will be rolled out only over a few years). Yet digging into it the problem is more the huge complexity that comes from a large number of changes made at the last minute and a ratcheting up of cuts not fully delineated in February and June. NT was dealt a poor hand by a poorly formed ERRP but stuck to credible growth forecasts. Revenue assumptions on buoyancy look too optimistic, however.
Overall, on a simplistic level, this is more credible as it is a weaker profile, yet equally the political blowback is going to be hard, and all the risks are still to the downside at this weaker profile. Increased issuance in future years draws SA closer to the fiscal cliff edge whilst there were hints that the World Bank loan is likely dead but substituted with a USD1bn NDB loan with less awkward questions asked there. Our baseline remains that an IMF programme will likely be needed if this doesn’t work – at the start of 2023.
There were positive moves on financial sector reforms including to exchange controls (we have a detailed section on this at the back of this publication). There was some further details on Operation Vulindlela but nothing really enough yet to get ones teeth into on timelines. A lack of detail on PPP, PFMA and MFMA reforms needed to unlock investment was disappointing.
Peter Attard Montalto
Head of Capital Markets Research
with
Stuart Theobald
Tlangi Ngwenya
Jana van Deventer and team
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
The fiscal position won’t consolidate enough in the medium run with growth not recovering fast enough in our view. The path to an IMF programme is therefore clear in our baseline – but what comes in the MTBPS may be more benign with some stretched assumptions on spending cuts (from compensation especially) leading to broadly the same debt trajectory as at the emergency budget but the primary surplus target in 2023/24 will be hard to credibly pencil in.
This MTBPS then, optically at least, may well be “ok” but only in terms of a low bar. This tension between optics and reality means things will rotate ultimately on credibility. The market thinks much is priced in and with a short-term trade outlook window and funding this year ‘adding up’, it will likely similarly see it as “ok”. However, the market is tiring of National Treasury’s stance of a “must line” – ie, what must happen, not will happen. We see no real zero-based budgeting having occurred with only cursory expenditure reviews. We expect no new news on Eskom, which is all ongoing outside of NT’s grasp.
We expect some ZAR15bn of slippage in revenue this year and a slightly flatter revenue path in the medium run on nominal GDP downgrades. We see the main budget deficit print around -15.0% in the MTBPS vs ZAR-14.7% in the emergency budget but the real outturn might be slightly weaker still. The expenditure for the current year will be roughly as expected (SOE expenses including SAA offsetting underspend) and future years will come in roughly as expected too thanks to unrealistically low compensation assumptions shaving some ZAR58bn off vs the February budget, which will stretch credibility. Overall, however, future fiscal risk is about underperformance on both fronts – tax take and cuts to delivery. But not yet. As such we find ourselves in this moderately constructive position in the short term.
We don’t see NT shifting the issuance pattern meaningfully though with some over-issuance occurring in SAGBs, any shift in issuance won’t get announced at the MTBPS but only afterwards.
This could be the last hurrah before Tito-xit and so we expect NT to try and push through a lot of smaller things outside fiscal within its regulatory remit, which it hinted at in February. Further details on Operation Vulindlela – the operationalisation of the Tito Paper – should be watched for and how it is being capacitated and moved possibly to the Presidency.
Tlangi Ngwenya
Policy Analyst
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
Tomorrow, the president will announce the government’s economic recovery plan after a convoluted process of agreement inside the ANC and with the social partners. As South Africa looks towards a post-Covid economic recovery, the country has a job’s crisis that, while two decades in the making, was exacerbated by the pandemic. In the past six months, emergency measures have been taken to avert a further humanitarian crisis, including an emergency Covid relief grant. In recognising the need for continued social protection as the country pursues economic recovery, the president’s plan at its heart proposes a mass employment strategy that aims to provide a wider social safety net in return for community based activities being undertaken.
We view the plan as positive and a better alternative to a “raw” basic income grant. This said, the constrained fiscus and an inefficient state, especially at a municipal level that will be doing most of the “hiring”, is a huge concern and means we expect only a very slow roll out with partial coverage. The original aim was for 4-million social and public jobs over the coming three years at a cost of R76.4bn a year, though these numbers are likely to be lower in the final plan and lower still in reality.
Tlangi Ngwenya
Policy Analyst
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
Last week, ICASA provided details of the licensing process and upcoming invitation to apply (ITA) for the long-awaited large spectrum auction. This is a key reform which has taken on far more meaning than its direct impact given the technocratic ease to undertake (yet continual delay) as well as the politics mixed in. We may finally, almost be there. Whilst there will be some short run infrastructure and network investment we are sceptical on the uplift to potential growth.
The Competition Commission’s inquiry into data costs released late last year revealed that South Africans had been paying very high prices for data compared with global pricing. This calling out of telecommunications companies brought about a fierce rebuttal, chiefly that high-demand spectrum scarcity was the largest contributor to the high data costs. The licensing of high-demand spectrum is seen as a remedy for such data price issues in the country but has seen several delays, due in part to government’s introduction of the state-issued wholesale open access network (WOAN) and the vested interests clustered in that process.
Tlangi Ngwenya
Policy Analyst
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
Since signing the Paris Agreement on Climate Change in April 2016, the South African government has fiddled around the edges of climate change reform but has failed to make a concrete commitment to a target of zero net emissions. As such, little else falls into place yet – a lack of drive on the just energy transition and it leaves Eskom still slightly in the dark. This brief looks at the challenges the country faces in the reform process and the next steps required to reach future emissions targets.
We see South Africa ultimately being forced along the inevitable path by a mixture of private sector shareholder activism, a stepwise tightening of credit availability, NGO legal and campaign activity and offshore trade and tax pressures. Various Presidential and government panels on the topic should be watched in 2021 as well as the Climate Bill and Carbon tax next steps.
Tlangi Ngwenya
Policy Analyst
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
Neither debt scenario presented by NT was credible in the medium run. The path will be somewhere between the active and the passive scenarios. Cutting through the presentational tangle, however, we can see that this is a budget more about what “must” happen rather than what “will” happen. There are commitments from cabinet for consolidation, sure, but that holds little currency without the difficult decisions needed to make consolidation happen. This said the emergency budget met the funding bar for the current year and indeed off of a more negative revenue assumption than expected – a ZAR304bn hole vs the February Budget forecast. Greater cash usage and t-bill issuance than expected keeps SAGB issuance under control temporarily next year but is based off a too optimistic scenario and provides little comfort.
All eyes turn to delineating theZAR230bn of cuts offered (on top of what was in the last budget and MTBPS, and on top of wage savings) in the MTBPS, and then ZAR40bn of tax hikes in the budget next year. No new
money for SAA still leaves ZAR3bn of non-debt guarantees to service but means that bar a strategic equity partner, SAA could be dead by 15 July. The ZAR3bn for the Land Bank was broadly expected. SOE risk remains in the
MTBPS. There were no new details on structural reforms as NT waits for the rest of government to get into gear.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
What happens if there isn’t a ‘right answer’?
NT could risk trying to stabilise debt%GDP too fast next week, which would make it seem non-credible but would buy at least a short-term reprieve from the market on the funding side – on the one hand. On the other hand, a longer period to stabilise debt%GDP would be more credible but risks market ire on a funding programme that would end up breaking the market. We think NT is edging towards the former, hoping that short-term
“risk on” combined with a peppering of “not-QE” can keep things in check
for a short time.
That said, nothing will divert us from the path we are fundamentally on – an unsustainable debt path into the medium run with a very low probability that nominal growth ends up rescuing things. As such an eventual IM conditionality programme is still a high probability for us. We worry that the media will overplay NT statements on structural reform while things on that front are very far from settled yet.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
SOE risk was rising meaningfully pre-Covid as balance sheet positions deteriorated and financial conditions tightened. The crisis has reinforced and accelerated this trend while fiscal space for backstopping has tightened. Meanwhile, the fact National Treasury (NT) dropped the ball on Land Bank is concerning and raises the prospect of accidents happening. We see NT seeking the slimming down of SOEs (in terms of assets but also their guarantee exposure).
We begin here a more regular systematised look at SOE risk from a creditor and macroeconomic perspective.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
We have to push our fiscal framework model to – if not possibly beyond – what is feasible to get it to add up this year and next. But all scenarios still see gaps in 2022/23 (given the R2023s redemption which will be hard to switch). The problem here is if this funding plan were to just collapse under its own weight. We worry about indigestion through fiscal year-end and the next fiscal year, even if things are ‘okay’ in the short run. A refusal to consider a fiscal rule reinforces the risk that funding falls away and is why we still push (in vain) for one. Additional significant downside risks exist from SOEs, grant and other support payments as well as tax holidays becoming permanent.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
A huge ZAR500bn stimulus has been announced this evening by President Ramaphosa, which is long overdue and very welcome. It consists of ZAR200bn of a guaranteed loan support programme from banks and then ZAR300bn of mostly on balance sheet stimulus. This is clearly a bazooka but there are questions over how implementable large parts of it are. It would also be a mistake to consider it as simply sitting on top of the existing lockdown until end-April followed by recovery because on Thursday, government will announce the next steps of the lockdown to run until September. This will be highly bureaucratic and likely result in district and metro lockdowns, particularly towards September. As such, while positive, this package is chasing a growing hole.
An IMF rapid financing instrument (RFI) has been applied for today (USD4.2bn) while we assume there will be another USD6.5bn of other money from NDB, AFDB and WB. The UIF will contribute money. There is still a significant funding gap, however (ZAR64.8bn/USD3.4bn), that needs to be filled after scraping the barrel, while revenue underperformance must also be considered even though it was announced that there would be ZAR130bn of spending reprioritisation (an exceedingly high number to deal with). While an emergency budget update is coming soon (maybe in the next few weeks), we think an urgent explanation to markets is needed both of how the numbers add up and of the funding mix (including what will happen to SAGBs) to keep the market onside.
There is also a serious issue of how we will exit this. A fiscal rule is needed urgently given the many potential risks such as new unemployment support becoming permanent and, as we have seen over history, nominal GDP growth does NOT come to the rescue and nor do structural reforms. Thinking on the growth impact, this evening’s package will mainly see the ZAR200bn going into working capital, not investment capital, which is less growth positive, while the reprioritisation itself lowers growth. In reality we think, given that a longer but lighter lockdown announcement to come will be negative for growth, we should not change our forecast yet and stick with -9.7% for growth for now. We see the deficit at -17.5%GDP now. However, this is subject to some clarification from NT first.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
Asking how much more local currency issuance the market can take is almost the wrong question, instead there are a range of both issuance optimisation (not 3y), backstopping and credibility measures (such as an emergency budget and showing new pools of capital to tap including those with conditionality) can create more room for issuance. Without these steps there will be no space for additional issuance.
The key is that NT needs a new mindset that ties all these elements together and anchor the future with a fiscal rule in an emergency budget (though one occurring is still uncertain). In other words, fiscal policy itself can alter the distance to the fiscal cliff. SARB ‘real-QE’ can then act as a backstop. The view still stands however that offshore non-market borrowing is needed both to help plug the funding gap, reduce domestic local currency risk – both directly through lower supply but also the credibility of tapping such sources.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
This budget is exceptionally hard to judge. It is a surprisingly strong statement of intent on the public sector wage bill which will cause a huge political backlash, but it can strategically realign the political landscape. However, the ZAR160bn of wage bill cuts is unlikely to be successfully executed, especially in the coming fiscal year, and hence a credibility problem emerges over time – not just between NT and the market but also National Treasury (NT) and the Presidency (who’s backing they are relying on here). Add in a too optimistic path on growth (where NT appears to be signing up to full reform agenda success despite the downside risks) and the fact that even with its baseline, the debt profile is labelled as “unsustainable”, and so we can see that for all the strategic successes, there is still a cavernous hole.
There was nothing on Eskom debt restructuring at all (as expected), while the distractions of a sovereign wealth fund (SWF) and state bank were both pushed, unfortunately, though the little detail supplied implies a holding pattern on both. There were very positive steps taken on exchange control liberalisation that have not received attention but will aid fintech and financial intermediation.
Overall, a clear line in the sand has been drawn on the public sector wage bill and this is the beginning of a rapidly escalating war with public sector unions, given that cuts are envisioned from April and must be negotiated. We see a large-scale public-sector strike as inevitable but positive – a sign of necessary pain. We see little in the way of cuts for the next fiscal year possible and maybe half or so for subsequent years. The move can stave off a rating downgrade in March as wage talk outcomes are awaited but makes a downgrade in November even more likely.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
The SONA over-egged the reform that is being implemented but shows a renewed political push from the Presidency. Infrastructure and energy will be the areas to watch but have deep political and capacity blockages. Movement on a variety of fronts is occurring but we are not reaching the escape velocity needed for sentiment and then growth to be freed.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here
The bar is being set low for the budget which means that, notionally, expectations can be met. But the market is confused about what is a good outcome and what is not. We can consolidate back to the MTBPS endpoint through a lack of bracket creep and clawing back underspend, but consolidating further (to a primary balance) is exceedingly hard. We should remember that the MTBPS fiscal path was already exceptionally weak. We see nothing coming on the public sector wage bill in the numbers, but various scenarios will be laid out in the appendix and there is a risk of some bombast in the speech on this point. We are deeply sceptical that political signoff will be provided for a VAT hike in the coming year but do think NT can try and force one in 2021/22 by pencilling in ‘anonymous revenue’ on this front now. SAGB issuance doesn’t have to change much. We see Moody’s triggered to implement a downgrade in March, but it is a close call vs November. We see NT focusing more positivity on other areas of policy it can control. Overall, we see a deficit profile of -6.3/6.9/6.4/6.2 %GDP for this and the coming three fiscal years.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/p
New Eskom CEO Andre de Ruyter (AdR) had discussed in the media the pausing or slowing of the unbundling process last but today seemed to suggest they wanted to accelerate it after advice is sought. Whilst a pause is in itself not necessarily a problem if it is to take on advice externally, the key is motivation for this occurring and it highlights the shaky ground this issue is on – with implications for debt relief and so creditors. We cannot see how the new factor of tax implications is a substantive issue to pause. Investors must keep in mind that unbundling of a (I)TSMO is a crucial component to solving the energy crisis.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Following our recent slashing of GDP forecasts, we update our fiscal projections. We now see the deficit peak at -7.1%GDP in the next fiscal year, driven mainly by revenue underperformance, before declining slowly to 6.4%GDP (-1.5% primary) at the end of the forecast period. This makes the assumption of minimal changes possible in the Budget on 26th February vs the MTBPS given a lack of political space. We look at a simple wage bill cut scenario.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Eskom has a confusing plethora of upcoming court cases against NERSA over its tariff (the first of which is next week) – we try and unpick them here, though calling which way this goes is exceptionally difficult despite discussions with regulatory experts we have had. Overall, we continue to stress the upside risk to tariffs in the long term, but this issue may well drag for a significant period. We also see a strong likelihood that NT would claw back bailouts on higher tariff awards to only amounts minimal to closing funding gaps.
Mmamoletji Thosago
Policy Analyst
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
2020 is set in some ways to be both a crucial inflection year for South Africa – either to better or worse – but also relatively light on the big-ticket calendar events. Key themes will instead dominate. All focus is on Eskom and the public sector wage bill into the February budget then onwards into Moody’s expected to cut mid-March and then the MTBPS year end – though we actually see the budget being a disappointment and so its more likely to be mid-year that key narratives gain momentum. Growth will slowly recover but 1.1% is still inadequate to stabilise unemployment and is easily derailed by more loadshedding. Fiscal consolidation will be minimal and theoretical room to cut by the SARB not taken at the start of the year at least. South Africa can’t ‘bumble along’ for another year, the right decisions may well be made but only after the cliff edge – reform will be minimal beforehand.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
A lack of a large enough team of effective implementers or communicators around the President is meaning that what slow positive change is occurring is getting rapidly lost. Similarly, negative reforms and delays continue to glue business sentiment to the ground. Loadshedding is similarly obscuring the slow progress (indeed offsetting it) whilst questions over the future of SOEs and the crisis around both SAA and Eskom and fiscal worries are similarly dampening the mood as attention focuses on the downgrade to come next year if progress continues to fall short.
Overall it seems not only is Ramaphoria dead (it was never alive) but the long arc of reform potential is being lost in the discourse. It is for precisely this reason that we have always argued reforms needed to be much faster. All this is causing business to increasingly give government and the President short shrift on social compacting navel gazing.
This paper includes the December update of our Reform Tracker. We recently revised our growth forecast to 0.4% this year, 1.1% next year then 1.5% for 2021 and 1.9% for 2021 with strong downside risks from Eskom demand ‘capping’. There is not enough surprise in progress and particularly implementation of reforms to up these numbers yet in the long term. Indeed, overall it is clear there is not enough of a shock to the system to shift the administration onto a different track and waiting till after the 2022 elective conference will be too late.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
The MTBPS was certainly honest, with tones of the 2017 MTBPS. There was no hiding and NT did not try to. However, the real focus on the MTBPS must be that NT attempted to make significant cuts and then ran into a brick wall in the last month, we believe. We are sceptical of this changing by February and as such, even though some small tweaks will be offered at that point which marginally shifts the fiscal profile, we will largely be stuck here.
The growth and revenue numbers were credible, even a little too conservative perhaps, on nominal GDP. What were serious misses on the credibility front, however, were the lack of expenditure cuts of any great size (only ZAR50bn in the coming two years vs ZAR90bn expected) and the lack of any debt solution offered on Eskom. Eskom now risks falling between the gaps of NT waiting for roadmap implementation and DPE needing deleveraging support for recovery.
The focus will now shift to how this situation can improve for the February budget and though some tax hikes and some expenditure trimming can be possible, fundamentally we are stuck at roughly this deficit and debt profile, which is alarming.
The risks around Moody’s now meaningfully increase but still we have deep trouble actually pencilling anything in on Friday or to year-end. In the first instance given the timing with Friday so close but also given the fact Moody’s will travel to SA soon, that they will look for resolution at the budget and see this as setting out of what needs to be delivered.
Overall, we and the market overestimated the space for cuts both politically and practically and the question is now the reality of whether that can change – probably not significantly.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
There is a meaningful underlying, ex-SOE, fiscal deterioration taking place which NT will address through a range of expenditure cuts. However, add in current and likely future SOE funding needs and the picture becomes much stickier. We see credible macro assumptions in the 3y forecast window but expect NT to stretch things to get debt to GDP to stabilise. We see nothing particularly occurring in terms of new taxes given SA is over the peak of the Laffer curve. On expenditure we see around 2.5% in cuts vs budget pencilled in levels – anything less than this would not be credible, but anything more than this also would not be credible given its impact on the wage bill. As such we see the deficit peal at -6.1%GDP this year before being consolidated back to -4.6%GDP in the outer year. Debt will breach 60% in 2021/22.
The speech will be closely watched for an update on the second iteration of the ‘Tito paper’ but MTBPS’s are always erroneously bigged up as larger policy things than they are. Discussion here can (and has) shifted the mood and debate but should not be confused with implementation.
We see an appendix laying out a solution for Eskom deleveraging – however the form the appendix takes, given serious contestation around government, may well be in doubt.
Broadly we think the MTBPS will hit the market’s moderate expectations bar but will be too optimistic on long debt to GDP. Markets always frustratingly look to spin rather than reality on the day – as such we see markets warm to the MTBPS initially but for that to then to fade. We see little chance of Moody’s reacting either way.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
… but the implementation needle less so. Pressure on President Cyril Ramaphosa to make decisions has been rising rapidly, not only from business but from vested interests as well. This is leading to some small movement on the policy front but less so on the implementation front. The system is locked in stasis and will have to break at some point. Be careful of mislabelling pantomime villains however – the dynamic around the ANC and cabinet is not so simple.
The baseline remains broadly the same, we are just progressing along it – there is progress on the clean-up (if slow) and some one-step-forward-onestep-back on reform policy with slow and limited implementation. What we need to add is that there can clearly be decent PR in the interim as the first step, though this we think makes little difference to sentiment for business which is focused so much on implementation. We look in this paper at Eskom progress (the debt outcome is shifting towards the SPV but it remains a difficult call of how cabinet will have the confidence to make this decision) as well as the issues on spectrum and prescribed assets.
This paper includes the October update of our Reform Tracker. We still see growth at 0.6% this year, 1.5% next year then 1.7%. There is not enough surprise in progress and particularly implementation to up these numbers yet.
Peter Attard Montalto
Head of Capital Markets Research
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Following our recent trip and policymaker meets we provide another update to our reform tracker. There have not been any significant new steps forward taken but quite a bit of detail changing on the outstanding reforms. As such we see no immediate risk of sentiment turning any time soon – and keep our existing 0.6% (balanced risk) / 1.5% (downside risk) / 1.7% (balanced risk) growth forecast for 2019/2020/2021 for now.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Whilst the reform agenda has been laid out, progress has been painfully slow, at least on the surface. Some small wins have been achieved below the surface but not well publicised and offset by disappointments elsewhere. As such we see no immediate risk of sentiment turning any time soon – and so keep our existing 0.6% (downside risk) / 1.5% (downside risk) / 1.7% (balanced risk) growth forecast for 2019/2020/2021 for now.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
We found a surprisingly bearish set of corporate leaders in South Africa – Ramaphoria is truly dead. Some low hanging fruit reforms are ongoing but at a snail’s pace and will do little to improve sentiment. As such, for now we are happy with our GDP forecast of a slow pace of recovery (0.6/1.5/1.7%). Eskom has been kicked down the road with a surprising loss of confidence
of policy makers thanks to conflicts between political principals. We look at Eskom in depth in this piece.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
While the 8 May elections are the most contested yet in South Africa, we see it as less important for what comes next than most believe. Put simply we believe the linkage between the vote result and the post-election reform and political environment is very weak. The internal dynamics of the ANC are set from the 2017 NASREC elective conference, as are the egos and personalities and the long-term career plans of its leaders. As such while we expect the ANC to do ‘ok’, given the lack of growth, disastrous levels of inequality and unemployment, we still see the internal fightback against President Ramaphosa to continue regardless after the election. Reforms will remain at best one-step-forward-one-step-back and so potential growth will not rise.
For the election result itself we see the ANC successfully getting out its vote in Gauteng to just hold onto the province outright though there is an even chance that it loses it and must form a coalition with small parties or possibly the EFF. We see the party nationally getting at the low end of the 55-60% range we have long had as our forecast. We see the DA treading water nationally whilst the EFF will make major inroads in absolute number and share of the vote nationally.
This outcome would represent a moderate blow to market identified levels for an asset price rally in our recent poll. The EFF forming a coalition in Gauteng would be a much more negative market outcome given the implications in the short run for the province and the long run for the ANC and country. We still see a short run bout of post-election Ramaphoria, helped by the urgent need to resolve Eskom’s financial crisis (most likely with a bailout 2.0 debt swap) however low growth and the lack of reform means
this Ramaphoria should fade.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Even adding in an Eskom bailout, debt levels do not blow out given the long-term structure of debt issuance and the fact funding costs will only rise slowly. The fiscal ratchet however continues to turn and we are sceptical that debt levels will stabilise but the fiscal cliff still seems some way off.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
While the 8 May elections are the most contested yet in South Africa, we see it as less important for what comes next than most believe. Put simply we believe the linkage between the vote result and the post-election reform and political environment is very weak. The internal dynamics of the ANC are set from the 2017 NASREC elective conference, as are the egos and personalities and the long-term career plans of its leaders. As such while we expect the ANC to do ‘ok’, given the lack of growth, disastrous levels of inequality and unemployment, we still see the internal fightback against President Ramaphosa to continue regardless after the election. Reforms will remain at best one-step-forward-one-step-back and so potential growth will not rise.
For the election result itself we see the ANC successfully getting out its vote in Gauteng to just hold onto the province outright though there is an even chance that it loses it and must form a coalition with small parties or possibly the EFF. We see the party nationally getting at the low end of the 55-60% range we have long had as our forecast. We see the DA treading water nationally whilst the EFF will make major inroads in absolute number and share of the vote nationally.
This outcome would represent a moderate blow to market identified levels for an asset price rally in our recent poll. The EFF forming a coalition in Gauteng would be a much more negative market outcome given the implications in the short run for the province and the long run for the ANC and country. We still see a short run bout of post-election Ramaphoria, helped by the urgent need to resolve Eskom’s financial crisis (most likely with a bailout 2.0 debt swap) however low growth and the lack of reform means
this Ramaphoria should fade.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Cutting through the spin, the ANC and the DA both did poorly in this
election whilst the EFF and VF+ did well. The ANC did less badly than it
would have thanks in part to vote splitting in President Ramaphosa’s favour,but now sits in a no-mans-land that will fuel factional battles. Ultimately,internal mechanics of the ANC will matter far more than any theoretical mandate as vested interests and policy contestation meet in the fractious crucible of the ANC NEC – which of course has not changed since Nasrec. The question we look at here is whether the NEC undergoes a ‘fractious splintering’ that corners Ramaphosa on policy, or whether the opportunist parts of his coalition hunker down with pragmatism to enable reforms.
We see a positive, well-sequenced series of big bang announcements and
events in the coming month that will broadly keep South African assets on
the front foot. This will include an ‘ok’ smaller cabinet with a large number ofnew names to which the market will react positively (but we would be
sceptical if the detail then holds up on bias to implementation). We also
expect Eskom bailout 2.0 (a ZAR DMTN to SAGB swap) together with a series
of other announcements including some related to the ‘clean-up’. There
will be a form of Ramaphoria though we think investors will remain scepticalabout the ability to lift potential growth until real policy action is seen.
We then see the negatives of the deteriorating ‘fiscal ratchet’, unaligned
incentives around Eskom and ‘net zero’ implementation around potential
growth-boosting measures (some positives offset by negatives). There will
also be noise (though less action) on things like SARB nationalisation and
prescribed assets. All these will be bringing us back to the status quo of a
slow recovery in growth back to potential of 2.0%.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
While the 8 May elections are the most contested yet in South Africa, we see it as less important for what comes next than most believe. Put simply we believe the linkage between the vote result and the post-election reform and political environment is very weak. The internal dynamics of the ANC are set from the 2017 NASREC elective conference, as are the egos and personalities and the long-term career plans of its leaders. As such while we expect the ANC to do ‘ok’, given the lack of growth, disastrous levels of inequality and unemployment, we still see the internal fightback against President Ramaphosa to continue regardless after the election. Reforms will remain at best one-step-forward-one-step-back and so potential growth will not rise.
For the election result itself we see the ANC successfully getting out its vote in Gauteng to just hold onto the province outright though there is an even chance that it loses it and must form a coalition with small parties or possibly the EFF. We see the party nationally getting at the low end of the 55-60% range we have long had as our forecast. We see the DA treading water nationally whilst the EFF will make major inroads in absolute number and share of the vote nationally.
This outcome would represent a moderate blow to market identified levels for an asset price rally in our recent poll. The EFF forming a coalition in Gauteng would be a much more negative market outcome given the implications in the short run for the province and the long run for the ANC and country. We still see a short run bout of post-election Ramaphoria, helped by the urgent need to resolve Eskom’s financial crisis (most likely with a bailout 2.0 debt swap) however low growth and the lack of reform means
this Ramaphoria should fade.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
• Markets believe that there is only a one-third chance of growth boosting reform after the elections and that President Cyril Ramaphosa will survive until 2022 at least.
• There is a moderately high degree of confidence that a ‘mandate threshold’ exists, though the market is split on what this is and if it will be reached. The sellside (largely institutional brokers) thinks it will be reached but the buyside (asset managers) does not.
• Equally, market participants see that asset prices could have a sustained rally at some level of ANC vote but don’t see this level being reached.
• People are roughly split down the middle on whether the ANC will keep Gauteng (as are we).
• Tito Mboweni is strongly favoured still to be finance minister at Christmas with others barely getting a look in. Pravin Gordhan is also expected to be DPE minister at Christmas though with some other views.
• Overall the market sees the national vote result at 57.4/20.7/11.5%. The latter two are in line with our range/bias views though the ANC is looking a little high versus our view that is closer to 55%.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Our fourth update in the countdown to 8th May. The first one, which contained a more foundational views of where the campaigns are at, is still available here, and the second update here, plus the third one here. This note includes a wider look at the basics of how the election works, the timetable for election (and especially result declaration which is important for the markets) and the count, plus a look at turnout bias on results as well as our usual general feedback from discussions with the campaigns. This week we hosted our first election conference call – a recording of which is available on request. We will be hosting a second conference call digesting the results on 10th May – details have been sent to subscribers. We will also be taking part in a seminar on 30th May hosted by law firm HSF – again details have been sent to subscribers. We are conducting a poll on the election, which you can complete here.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Our third update in the countdown to 8th May. The first one which contained a more foundational views of where the campaigns are at is still available here, and the second update here.The note includes feedback from a range of meetings related to the elections we had in the past week in South Africa, though these were often detail related and our fundamental views have not shifted. Will be hosting two conference calls on the elections. One just before (most likely on 24th April) and the other on 10th May. Details to follow next week.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Our second update in the countdown to 8th May. The first one which contained a more foundational views of where the campaigns are at is still available here.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
We are launching a regular series of election updates with now six weeks to go until the elections on 8th May.
These will be based on continual research around the main parties, will be ad hoc but probably at least once a week. We will be launching a full preview of the elections in April plus a number of calls with interesting people, but given the level of interest most of you have the key interest will probably be in these updates.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Reality was laid bare by Tito Mboweni, who was not afraid to poke his own side of the National Assembly as the chickens came home to roost. Hard decisions were taken and National Treasury clearly worked a strategically deft line to contain things as much as possible within exceptionally difficult circumstances.
Eskom landed with a loud bang on the fiscus, as expected. The total quantum was broadly as expected but the form not – it was shareholder support (basically equity injections to cover debt service and operational expenditure) rather than a debt transfer. Eskom asked for ZAR100bn and it ended up getting ZAR150bn (npv) over 10 years. Still, the sovereign support is there and as a result this is clearly a positive, if still a partial amount for Eskom. There is supposedly strict conditionality put in place by NT but that has not been made public (yet). However, we find it hard to see how NT could ever withhold support now – that would be an instant blow to Eskom and it’s why making such conditionality public is so important to allow markets and banks to police it.
The surprise, a positive one, was that as a result of the form of the bailout, and indeed the panic we perceive within Cabinet on Eskom, NT managed to force through major underlying cuts in expenditure to the tune of ZAR50bn over the MTEF (or 0.5ppGDP per year), half of which is from the public sector wage bill. Given other issues such as higher debt service costs, weaker revenue and pencilling in a contingency reserve for other SOE bailouts, this ZAR50bn only partially covered the Eskom bailout, meaning it wasn’t overall deficit neutral and additional debt will be raised and cash drawn down. It also meant the expenditure ceiling had to be broken, a negative (though it can regain some credibility if still stuck to going forwards). SAGB net issuance levels for the coming year moved up by 1.9%
vs the MTBPS.
Going forwards the problem is that there is virtually nothing ‘easy’ left in the revenue policy cupboard but also now in the expenditure cupboard to aid further consolidation. Add in further expenditure pressures on NHI and higher education (both of which saw no mention). The bailout of Eskom is also a ‘minimum’ per year payment in our view whilst growth forecasts are still too high. Put simply the risks are still skewed to the negative side – even if the Budget showed that a crisis can generate political space for NT to occupy. From here things will be more challenging given there is no real flexibility left – only Narnia is left at the back of the fiscal cupboard.
As such, we view this as negative overall for the sovereign though this is hardly a fiscal crisis but instead an acceleration down the existing negative path. We see Moody’s on course to cut the outlook in March but this is far from a certainty. Markets do price this in to some degree but certainly not totally.
[For specifics on Eskom see page 9]
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Core (ex-SOE) fiscal will be largely ‘boring’ with little going on at the macro-level vs the MTBPS (around ZAR10bn of revenue underperformance offset by underspend), though beneath the surface there will be a huge flurry of small election-related baubles. We expect no major tax changes.We think the market is overestimating the room for optimism with this budget. The broad outlook (ex-SOEs) is expected to be a flat deficit profile at around -4.0% or just below. The key to the Budget however will be the Eskom bailout. Whilst our baseline is to see a ZAR-value announced and pencilled in to the fiscus framework (most likely as a debt transfer plus equity injections, though the form is difficult to call) there is significant risk of underwhelming the market. Having no policy white paper on Eskom laying out details of a turnaround strategy makes for a huge credibility problem for National Treasury to deal with the in budget (not of their making). This will effectively be a blank cheque at this stage. We cannot see how a bailout can be deficit neutral and so see the headline deficit move out towards around -4.4%GDP in 2020/21. We expect core fiscal to be viewed as marginally negative by Moody’s but the key will be a (likely) negative view on the Eskom bailout given the above credibility point. That said, we still expect Moody’s end-March update to result in a negative outlook but the risks are that it continues to bizarrely give out more benefit of the doubt.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
South Africa is always very much “glass half full” on trips, even at the worst of times. However, we found this was not the case on a recent trip with serious concerns over Eskom and policy implementation potential from business leadership and others we met. Our trip highlighted the complex interwoven nature of growth constraints but also the fact that implementation is a complex logistical mechanism from government’s perspective that will take time to lubricate. Much of the focus was on Eskom, on which we will publish separately. We remove our March MPC hike forecast and reinforce downside risks to 2019 growth from our 1.5% number. We are no more certain on Moody’s after the trip but we are a little more confident that the market is overoptimistic on core (ex-SOE) fiscal.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Part-II of our 2019 outlook. The economy is recovering and will grow, by our forecast, at 1.5% this year compared with 0.8% in 2018. But what does this actually mean? We see unemployment higher and inequality rising too while fiscal metrics flat-line in the primary deficit and the current account will marginally worsen. We still think GDP per capita is the key metric to look at – where we see it showing no growth this year. The underlying key issue is that there isn’t an obvious driver of growth at all and so all we are seeing is an “autopilot” return to low levels of potential growth. Reforms are likely to be “one step forward one step back” in nature, credit growth will hover just above zero in real terms despite new entrants to the lending market, employment growth and household income will remain weak and both FDI and domestic investment will be the marginal but muted drivers of the recovery. A bout of mid-year Ramaphoria post-election provides some upside risks combined with the support from low inflation to real incomes but those factors are offset by the downside risks to regional and global growth.
The economy is still trapped between low potential growth on the upside and a robust private sector and demographics on the downside – 2019 is simply moving from one side of that range to the other. We present detailed scenario analysis rotating around the elections in this publication.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Part-I. The year ahead will be one of the most exciting and important for South Africa as a web of themes in politics and economics comes together. It will also be extremely complex with different large-scale,detailed narratives occurring simultaneously. In this year-ahead outlook we attempt to look at all these different threads and how they fit together – but equally we try to give some idea of their importance and impact. Our high-level 2019 outlook is that the “clean-up” will continue slowly but successfully through the year but the recovery in growth, while continuing, will be very slow. Political space for more meaningful reform will not exist – as much because of the ideological forces within the Ramaphosa faction as with other factions. We see the ANC getting between 55% and 60% in the elections but expect the factionalism to intensify and NEC fissures to remain unchanged afterwards – so hemming in reform, as the clean up cuts closer to the bone. Indeed, the election is less important for the medium-run outlook than many make out, we believe. We see ZAR weaker on ratings, the SARB fiddling with only one hike and Eskom being kicked down the road before the elections until a social compact is found afterwards. Other SOEs will remain stressed. The hardest to call is Moody’s given it is so off-piste –
we pencil in an outlook cut in March and a cut to junk in November but with close probabilities. We see growth at 1.5% this year with downside risks from 0.8% (consensus has come down to our view), CPI at 4.6% (vs consensus at 5.3%), flat on last year. With an external backdrop that is at the least minimally supportive and a domestic picture where downside risks on politics are capped, we see the currency trading on the stronger side before ratings and credit narratives dominate and force it weaker.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
The year to come is going to be a test of a tighter global backdrop and limited inflows to the asset class yet it is a more exciting one for SSA than the start of 2018 was. Back then, tight and converging credits moving in one direction proved challenging to tease out. Now a more differentiated narrative around debt stress related to rollover risk, debt service costs and commitment to reform and fiscal consolidation can play out in a more meaningful way – together with a host of elections to watch. With a debt stress narrative overarching (paralleled by related themes on China as a backstop and economic nationalism) we see several of the largest focuses in 2019 being: 1) Kenya and Ghana’s risk exposure to shocks given very different fiscal positions but neither having a backstop for much of the year; 2) Ethiopia as a success case and the stickiness of its domestic political situation (and to a lesser degree the follow through of the reform narrative in Angola); 3) The emergence of a shock in Zambia as it pushes further in its conflict over resource nationalism and is pushed to the edge by a ‘stick’ from China before the IMF-related carrot to come after. We present some debt shock scenario modelling to look at the issue of debt stress in SSA.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
We launch the first of a variety of big-data analytic projects in the run up to the elections – a detailed demographic by-election monitor. We look at the 182 by-elections since the 2016 municipal elections and the swing in party support indicated while also parsing individual wards through a large-scale database of a variety of demographic indicators. We find that ANC support has oscillated sharply in the last year and is now broadly flat with where it was in 2016. The DA has steadily been losing support in recent months and while an EFF pick up in recent months is fading, it is only doing so slowly. Parsing this into 2019 scenarios is challenging but some rough scenarios do confirm our underlying views: the DA will drop back sharply towards 20%, the EFF will be able to leapfrog just over 10% and (given we think this model underestimates the ANC and Ramaphosa effect) the ANC will come in between 55% and 60%. This model also shows that Gauteng is very much in play, the DA will drop back in Western Cape and the Northern Cape needs to be watched.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Eskom is increasingly being viewed as an emergency situation locally and political pieces are shifting but deployment of political capital may fail at first sign of a union backlash. Never the less a plan is forming but would be positive for Eskom at expense of sovereign and would be a challenge for National Treasury to sign off.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Zambia USD bonds have sold off significantly this year from (weighted average) tights of 388bp in Q1 to a peak of 1,383bp at the end
of October. Prices fell from trading above par through most of h2 to below par, bottoming out at around 67c in recent months. The marked shift out–the key underperformer in the SSA market – was justified by uncertainty over debt levels (and hidden debt) as well as the impact on the economy of politics and pressure on the mining sector. What now? We think a turnaround in policy is unlikely without meaningful market pressure and a domestic demand shock. Bank funding of the government is adequate for now but could dry up on a USD liquidity shock. As such, seeing some kind of backstop activation is unlikely in the coming six months at least and is more likely in mid- to end-2019. We expect an eventual Chinese-led restructuring of state debt and strict terms with an IMF package to ensure credibility. An IMF programme, however, wouldn’t necessarily be overly onerous in terms of growth but would be politically challenging. As such, there seems little in the short term (bar external dynamics) to promote the USD bonds
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
At around 280bp, the 2s10s bond curve spread is the highest it has been since h2 2014 – and in a danger zone of around 265-280bp that has only been seen generally in crisis periods. Yet whilst there are significant fiscal and ratings risks SA is hardly in a crisis. We perform some econometric analysis to attempt to find out why its so steep, and find that swap auctions and higher issuance contribute but are dominated by relative policy rates as a factor and there is also a significant residual of around 90bp that may be a combination of front-end liquidity policy and back end downgraderisk being priced.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Nigeria’s 16th February 2019 election is hugely important, yet drilling down it is far from clear how potential growth rises under any outcome. The event in our mind will be an FX/oil play on a PDP win or not, where notions of FX fair-value and expected currency policy normalisation come into play. However, it currently looks like the election is President Buhari’s to lose with a relatively contained fallout from the recent round of personalities switching party – though much is in play in South West around Lagos and how firmly the North Central holds for him. Fiscal policy remains an odd combination of underspending with even greater under-performance in revenue collection. As such the deficit will surprise to the upside and, with it, the yield curve remains steep, especially with the process of lengthening issuance duration. It is difficult to see the CBN adjusting rates in either direction, certainly before the elections.The is the first of several papers on land reform in South Africa.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Two orthogonal and non-intersecting debates are occurring on land reform – one learned and calm, the other visceral and raw and involving vested interests. Politics will ultimately trump policy in our view and so we think investors need to pay equal attention to both parts of the debate. Land reform in its totality is a strong long-term positive for South Africa if it can be executed through a capable, capacitated and clean state – conditions that do not exist and are unlikely to do so in the foreseeable future. Expropriation without compensation (EWC) does have a role in this ‘ideal’ policy world but is a dangerous, potentially growth dampening, distraction in the interim given the form of the debate. It deflects from other more positive areas of policy. The debate, overall, lacks any sense of a ‘macro-strategic-policy-framework’ – ie, what new policy should look like and what legislation / institutions / budget is needed to make land reform work. Instead it has got lost in politics, vested interests, short term strategic plays and PR. We think investors are underestimating the noise that can be forced on the EWC issue in Q1 and the potential damage this can do in the interim to investment sentiment from headline risk – even if overall the issue gets knocked from ‘pillar to post’ with a state that lacks capacity to implement.
The is the first of several papers on land reform in South Africa.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
The MTBPS did not offer any headline macro-fiscal consolidation – indeed it deteriorated to the surprise of ourselves and the market with a sharp selloff of bonds and ZAR. We think, like last year, National Treasury will have attempted deeper cuts including on the wage bill and proposed other reforms but were rebuffed by cabinet. Importantly it also markedly underperformed Moody’s qualitative expectations and the chances of an outlook cut are now higher though an actual cut in the rating is still hard to implement before the election in our view. Revenue and growth estimates, are broadly credible in the short term but we still think, along with debt service cost estimates, too optimistic in the medium run. As such we find it difficult to see debt stabilise. The expenditure ceiling remains intact as expected but is not itself a positive. Public sector wage hikes are forced down to departments which is positive but adding in the bailouts for SAA, SA Express, SAPO and SANRAL as well as reprioritisation, there is now virtually no future wiggle room here. We think it is challenging to see that there will be no space for any tax hikes or expenditure cuts in February with wage increase-induced austerity, the upcoming election and the political fallout from no stimulus offered in the MTBPS. But the same is also true after the election given political capital deployment will still be challenging. There were no growth-positive policy changes announced beyond what was already announced in the jobs summit and the president’s stimulus package. This MTBPS fallout confirms our view of a November rate hike from the MPC and that the bond curve will remain steep from a marked 21% step up in net SAGB issuance pencilled in.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
The SSA region is slowly recovering albeit with oil economies doing so at a much lower pace of per capita income growth than non-oil economies. There is still some severe debt exposure: while not immediately a risk given few redemptions in the coming year, tighter external monetary conditions that feed into local banking systems and withdrawals from EM funds lead to the need to inspect backstops more closely.We find Angola well backstopped by China but Zambia could fall between the gaps between China and the IMF. Others like Kenya, Mozambique and possibly Ghana could also find themselves in a dance with the IMF they don’t want and lead to delays rather than pre-emption. Other countries are either well backstopped by either China or the IMF (like Cote d’Ivoire or Cameroon) or don’t need such backstops (like Ethiopia or Senegal).In terms of actual debt distress, Ghana stands out strongly for high debt service costs though it is reforming in the right direction. Zambia by contrast is seeing rapidly escalating debt service costs within its budget.
We look at some of the country specific narratives in brief.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
The MTBPS will be calm on the surface but hide some furious ‘kicking’ below the surface to hold the line against revenue under performance and the political pressures for a ‘real’ stimulus. New Minister Mboweni will have had virtually no input to this MTBPS but his style will be seen in the speech.The expenditure ceiling will survive while there will be virtually no room to credibly pencil in any additional taxes (beyond the usual suspects of drag and sin taxes) before the elections. Underspend, the contingency reserve and unspent allocations (such as part of the drought provisions) will allow the ZAR50bn ‘stimulus’ reallocation of spending to higher growth multiplier areas already announced to occur under the expenditure ceiling. We watch what occurs around petrol as a key politically sensitive area. We do not expect primary balance being reached still and see debt-toGDP still deteriorating over time, though as ever National Treasury will present an MTBPS that shows debt-to-GDP stabilising in the outer year. There is still some pretty hefty uncertainty about what will occur at the MTBPS on SOEs – SAA and Denel especially. National Treasury will likely try and kick the problems to the February Budget rather than having to find a huge amount of cash now.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Tito Mboweni will be a fascinating Finance Minister. A strong personality will help re-establish National Treasury in its place at the heart of macro-policy making and spending oversight in government but could come at the risk of political complications and upset. He meets our key test of someone who will enable and defend National Treasury staff and its core conservatism. However, we should not lose sight of the fact that this is a ‘win’ for the EFF. The Zondo Commission is amounting to a trial of the ANC and is going to throw up more political headaches. The lack of ability to undertake a wider cabinet reshuffle today to remove those far more deeply implicated in State Capture than Nene is telling.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
There is a very high risk that Finance Minister Nhlanhla Nene will resign this week or, slightly less likely, after the MTBPS – rather than being fired per se. Calling this is exceptionally difficult given the challenge of a lack of an ‘obvious’ candidate to follow and the delicate political balance within the ANC and the ‘win’ it would give the EFF. We would watch for the risk of further revelations about Nene however in the run up or actually at the MTBPS if he does remain in post, which could ultimately force things to a conclusion. We look here at the array of possible successors.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
We find that stressed household balance sheets and weak sentiment seem to be the most significant drivers of the underperformance in consumption in h2 – neither of which shows significant turnaround as we enter Q4.
A recovery in real credit growth and real income growth will take some time to develop. That means that income will be diverted to a mixture of deleveraging and only a slow recovery in consumption. This will be the consumer picture through the election period – becoming a focus for the campaign.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
South Africa is undergoing a very slow and volatile recovery to low potential growth of around 2.0% against offshore and onshore headwinds – the recently announced “stimulus” package will ensure we get there but does not lift potential growth in our view. Political contestation within the ANC (between left and right ideological camps as well as corrupt vs non-corrupt elements) will worsen after the elections (though we do not see President Cyril Ramaphosa being removed), limiting the space for structural reform. SOEs are funded through till after the election when politically difficult decisions will be forced on government.
Ratings risk is skewed to the downside but Moody’s may take over a year to downgrade. We see ZAR as largely a “least bad” EM currency with weakness to come but more from external than domestic factors. We see a broadly “okay” MTBPS but for a very challenging Q1 for markets, with a pre-election acceleration of the land issue and increased populism including on the budget. We see a SARB hike in November and then Q1 2019 but with a low risk of anything more aggressive – CPI pass through is exceptionally weak.
Peter Attard Montalto
Head of Capital Markets Research
TOPICS
Economics
Politics
Download the full analysis by inputting the password below. [passster password=”HymanMinsky”]Download the full report by clicking here[/passster]
Intellidex is a leading research and consulting firm that specialises in capital markets and financial services in Africa.
Intellidex is SAMRA Accredited
