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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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