PETER ATTARD MONTALTO: From energy fixes to elections, crises keep expectations low

It’s interesting to consider that GDP growth data revisions are on average positive — indeed, quite large, with revisions up of +0.4 percentage points, as calculated by Codera. What does this do to the desire to invest?

It’s an interesting problem that reforms are occurring — albeit  slowly — yet investment levels are rising exceptionally slowly. An uptick recently in the share of investment to GDP to 14.3% was mainly down to the denominator being rather weak — SA is still only just above the all-time lows. This compares with the government’s target of 30% of GDP and peers that generally come in at about 25% of GDP.

Could it be that the economy is actually more robust than it is given credit for, while the narrative is just a bit too pessimistic? The proliferation of crises conspire, however, to keep expectations low.

There is always something to keep expectations low: if not electricity, it’s logistics; if it isn’t logistics, it’s crime, and if it isn’t crime, it’s water.

Managing expectations when unemployment is at about 42% and inequality is so wide, and you’ve just come through a serious period of social unrest, isn’t easy. Still, some honest explanations could be supportive.

Take electricity. The president’s national energy crisis committee (Necom) is making good progress even at this early stage. Yet there’s nothing they can do to avoid short-term load-shedding. Indeed, the power cuts will get much worse in the coming year before things improve. That needs repeating, given how regularly people’s expectations seem misplaced in that regard. Stage 5 will seem like a walk in the park compared with what’s likely in the next 12 months as the energy availability factor continues to fall.

Yet there is huge potential to invest now — in the energy solutions themselves and the broader just energy transition, and generally. If reform momentum can be maintained and load-shedding can be solved in the coming 36 months, the environment will be ripe for faster growth and the decisions to invest in that — if one wants to be appropriately ahead of the curve — will need to be made soon.

This is a classic emerging-market problem: clouds and rain in the short term and sunny uplands in the long term. It just seems much starker in SA, where trust is low and we struggle to look beyond the short term.

Government’s job

Probably the least we can say is that as load-shedding gets worse the push for households to buy their own batteries and rooftop PVs will accelerate faster, and the demand for embedded and wheeled generation projects by corporates will similarly leap. Indeed, as I pointed out two weeks ago, 40 more such projects are due for registration approval at the National Energy Regulator (Nersa).

While managing energy expectations may well be the government’s job, those for election outcomes are a matter for every corporate and individual.

My most recent column appeared to cause some coffee to be spat out after I suggested the ANC could feasibly get above 50% in the 2024 general elections. The point is that current polling doesn’t suggest a collapse in ANC support of the order of 15-20 percentage points that some might (want to?) see.

Ranking the outcomes for 2024, quite high on the list must be an EFF-ANC coalition, which would be even more alarming. Yet the ability of the current set of opposition parties (minus the EFF) to form workable coalitions looks even less likely. One needs to start thinking about decent, well-funded and well-structured new opposition parties where everything goes just right to start to shift the chances of a stable, broad opposition coalition.

The lesson is that one’s expectations about 2024 need to be carefully weighted between the probability among many scenarios and the effect of the outcome on the economy. Even moderate-chance, highly negative events (like the EFF in a coalition) therefore need some focus.

The same is true of the ANC’s December elective conference or the Phala Phala farmgate outcomes. The baselines may well be “all fine”, but the tail risks with low probability have the potential to be seriously negative. That is why I often describe the alternatives to the Ramaphosa baseline in December as “unacceptably high”, even if one might only put a 30% probability on them.

That, then, is the root of so many of SA’s investment problems. The same for energy — while we can map a path from things getting worse in the short term to a better tomorrow, the tail risks of this not happening and the extremely negative implications of that are unacceptably high.

It’s a tough message for the government, but this is why reforms require patience and doggedly pressing on with them even as the fruits of such change are still (for now) not seen. We will get there in the end, but it will take a lot of patience and fortitude.

We will see come December and 2024 how two different electorates treat this need for patience, or decide on potential alternatives.

• Attard Montalto is head of Capital Markets Research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.