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Election Review: The path to the next five years

South Africa 16 May 2019

In Brief:

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%.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Election Preview: What
comes after is key

South Africa 3 May 2019

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Market Election Poll Results

South Africa 2 May 2019

In Brief:

• 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%.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Election countdown –Update IV

South Africa 26 April 2019

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Election countdown –Update III

South Africa 12 April 2019

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Election countdown – Update II

South Africa 5 April 2019

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Election countdown – Update 1

South Africa 29 March 2019

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Budget ’19 – poke the beast

South Africa 20 February 2019

In Brief:

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]

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Budget 2019 preview

South Africa 14 February 2019

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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2019, Trip note – glass half what?

South Africa 12 February 2019

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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2019, a recovery to where?

South Africa 23 January 2019

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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2019’s interwoven threads

South Africa 8 January 2019

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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SSA and debt stress in 2019

Sub-Sahara Africa 4 January 2019

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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By-election monitor

South Africa 11 December 2018

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Eskom in Crisis

South Africa 7 December 2018

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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No economic shock yet?

Zambia 27 November 2018

In Brief:

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

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Why is the curve so steep?

South Africa 19 November 2018

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Run up to the elections

Nigeria 12 November 2018

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Land distraction

South Africa 7 November 2018

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Running out of fiscal runway

South Africa 24 October 2018

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Well backstopped?

Sub-Saharan Africa 23 October 2018

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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‘Steady’ MTBPS

South Africa 16 October 2018

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Its Tito Time

South Africa 9 October 2018

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Nene-gate-II

South Africa 8 October 2018

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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Why such a weak consumer?

South Africa 5 October 2018

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics

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A (very) slow recovery

South Africa 2 October 2018

In Brief:

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.

ANALYST

Peter Attard Montalto
Head of Capital Markets Research

TOPICS

Economics
Politics

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