PETER ATTARD MONTALTO: Q&A with Ramaphosa gives reason for hope, capped by lack of reform

Partial success of proposed Treasury cuts will help to keep an IMF bailout a distant prospect 

This column was first published in Business Day 

I almost fell off my chair the other day when a client in SA told me: “You are sounding rather bullish aren’t you.”

Oh? The issue of being somewhat of a structural bear (at root because I don’t see unemployment dropping, debt stabilising or inequality reducing in any meaningful timeframe) is that at some point in the cycle people will end up being far more bearish than you.

Many locals are now too bearish, particularly on timing.

I laid out here two weeks ago why an IMF bailout is a distant prospect, with many countermeasures possible (both good and bad for growth in themselves). Some partial success of the proposed the Treasury cuts will now be part of that stalling of the path towards the IMF. The IMF is obviously a theoretical prospect for any country that doesn’t adjust. The same is true of SA, but the prospect of that is low in any reasonable medium-term timeframe.

We also need to differentiate clearly between “stuff happening”, and what is pro-growth. It is positive that the state is being cleaned up and SOE corruption is being cleared, but only in the sense that it provides a floor under the economy and sentiment but does not fundamentally turn it around.

Equally, the removal of negatives such as the previous administration and some of its more egregious personalities has led to a reduction in policy uncertainty, but certainly not its removal.

This led to the bounceback in foreign direct investment (FDI) of the past year, but we should consider not how much it bounced back but where it should be for an economy such as that of SA. SA recorded R70.6bn in FDI inflow, but a large part of the pickup from the previous year’s R26.8bn was thanks to a technical turnaround in banking sector flows. Nonbanking private-sector FDI  picked up from R48.7bn to R67.6bn.

Channelling investments

This turn in FDI is positive, but it must be seen in the context of negative per capita income growth for an economy that should be easily achieving a rate of 3x-4x more to be comparable with peers.

It is the same with the Investment Summit and Public-Private Growth Initiative (PPGI). These processes are channelling investments and can get growth growing from the 0.6% expected in 2019. Yet the numbers coming from both are still only consistent in our modelling with growth of 1.5% in 2020 as the Reserve Bank forecast. .

The point here is a “postbox” outlook, in which there is support from the lower side and reasons not to be excessively bearish, but equally with caps on the upside with a lack of reforms that move the needle enough, and some uncertainty inducing “negative reforms”.

This was the takeaway from last week’s Q&A by the president. A government needs to run fast even for growth to stand still until you get game-changer reforms such as to education, visas and the immigration regime. Hence growth forecasts are not lifted, and if anything we are wondering about the impact of such weak sentiment into downside risks to growth in 2020; it could just as easily come in at 1.0%.

Much rhetoric but lack of dial-moving action are  leading to frustration among business. The foremost example of this has been the reaction of the telecoms industry to spectrum after the Q&A last week. Business is now starting to shelve spectrum investment plans after the recent publication of the policy paper that advocated a wide-open area network. This was not the certainty that the sector or investors needed and showed the influence of vested interests and statist ideology.

Step to the Left

The frustration however (added to the despair I wrote about two weeks ago), can only be shifted with a mindset change, a change of tone. The reaction to the president’s words last week will reinforce the frustration.

It appeared that in response to increasing pressure to do something, the rhetoric took a large step to the Left — the “government would lead the private sector”, the uncertain language around prescribed assets, and the more frequent mentions of the developmental state.

There will be shock when it is realised that this rhetoric makes things worse. A nominal GDP shock is occurring (with such low inflation and low fiscal revenue) that is bigger than the Eskom bailout, and hence the need for cuts to come. There is also the load-shedding risk that makes us nervous, having a growth view much above 1.0% in 2020 with the system still only slowly turning operationally.

All these factors mean it is not a straight line from here. A recovery will occur if allowed to, but at low levels of growth. Growth is held here in a narrow band of possibilities. A mindset change is needed to promote the right reforms that leapfrog growth to positive per capita levels — to break out to somewhere new.

Through all this, a rigorous focus is needed on differentiating between “stuff happening” that in itself might be positive — from actual actions that shift the risk-adjusted returns of business and so achieve proper levels of local and foreign investment. Not turning inequality and unemployment around is enough to be bearish about, without seeing fiscal cliffs and the IMF tomorrow.

• Attard Montalto is head of Capital Markets Research at Intellidex.