PETER ATTARD MONTALTO: Fed tightening will magnify SA’s shortcomings

Am I bullish or bearish?

This year is more idiosyncratic than usual due to the small matter of an ANC elective conference, the looming threat of politically instigated violence, a Reserve Bank hiking cycle and Eskom dramas in a year of load-shedding and its balance sheet issues. Yet all this can be blown out of the water by US Federal Reserve moves.

My fellow columnist Mamokete Lijane has often written in these pages about how the ebb and flow of global risk sentiment and central bank action can be misinterpreted in SA — in particular when the offshore risk dynamic is supportive and overflatters the actions of onshore policymakers.

The reverse is now true as the global liquidity tide goes out and is a far stronger force than most people can remember. The Fed’s tapering in 2017 was a different kettle of fish — inflation was still low and the labour market recovery, while positive, was slower. There were also no real global supply chain issues. Now all these factors prompt a far faster and more co-ordinated move by developed market central banks.

SA is going into this period in probably the best shape it could. Fiscal policy has seen steady (though insufficient) consolidation,  the wage bill has been contained more than expected, Eskom’s unbundling is progressing (though its debt solution is not), energy reforms have leapt forward, the fiscal and current accounts have been supported strongly by a terms of trade boon that is ebbing but not disappearing.

Growth this year, although flattered by positive base effects from last year’s violence, could be a decent 2.1%. Moreover, it is more widely appreciated now than before that the private sector has shown remarkable resilience after two years of Covid-19.

Risk overhangs

At times like this endless rankings of emerging-market countries are produced. SA this time is not in a “fragile five” group as was first identified in 2012. Such rankings are simplistic and too often based on backward-looking data on current accounts and reserves.

Still, SA flashes reddish-amber for many investors given a justified scepticism over debt stabilising  (reinforced now by ratchet-style social income support policy chatter), worries about state-owned enterprise (SOE) risk overhangs, the slow pace of other positive reforms and the conflicting agenda of economic interventionism from the department of trade, industry & competition.

As the Fed starts hiking, so SA’s negatives, justified or not, will be magnified. This is partly why the risks of jumping headfirst off the fiscal cliff — which  was the focus of debate in 2021 — will be so interesting to contemplate in 2022.

All this puts the busy political year into sharp focus. The positives outlined above will be put to the test of whether they can sustain the current levels of foreigner participation in the local bond market, which is now more hot-money centric, with longer-term investors having reduced exposure after the downgrades of recent years.

This is normal in terms of the long-term to-ing and fro-ing in emerging markets. The new flavour is politically instigated violence, which wraps in inequality and its connection to future fiscal risk. SA has not been in this position before of having social stability risks on top of all the usual macroeconomic ones at this point of the global liquidity cycle. This is why ratings agencies and investors are paying so much attention to it.

Inflation contained

Investors are picking up on the dichotomy of a strong private sector over the past two years coupled with a sharp rise in unemployment and lower wage growth. Inequality will continue to rise and it will be coupled with the lack of consequence management of last year’s violence.

The bullish part of me thinks there is a path through this year. SA is less bad than some peers, markets ignore much of the political noise and keep eyes on a likely re-election of Cyril Ramaphosa, while local inflation remains contained and the currency sells off slowly and in an orderly fashion, meaning the Bank can hike less modestly.

There is just enough reform to keep markets at bay, and fiscal slippage is small enough that with slightly higher bond yields the whole thing stays stuck together with sticky tape. The equity market does OK and the private sector has a decent year focused on energy investments. Yet inequality will still be rising and unemployment not falling and something of an under-the-carpet-sweeping exercise will be going on. This year could well be the calm before the storm.

The bearish part of me sees how unsustainable this potent mix of inequality and unemployment can be, with the inevitable ratchet effect of fiscal slippage for social spending relief and the madness and noise of the political year reflecting it, and a hamstrung second term of more two-steps-forward-two-steps back for Ramaphosa (his silence over Lindiwe Sisulu being just a small preview).

Layer on top the dark underbelly of the Zondo report — calling out the sorry state of inaction at the National Prosecuting Authority (NPA) — and a sense of being trapped in a place without consequences. Such a world ends up with July 2021 and the burning down of parliament on a periodic repeat loop.

We must be careful as the Fed hikes and emerging markets become a contest of who has their swimwear on below the waterline — so we may well seem to be on the bearish track much of the time, even if we end up in a more bullish place by year’s end. The question will still be how long a more positive outcome can last and how sustainable it really is looking below the surface.

Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day