PETER ATTARD MONTALTO: This is the time to apportion blame, correctly



The government will attribute slow growth and recovery to the coronavirus and low global demand.

This column was first published in Business Day.

SA won’t be surprised by the Moody’s Investors Service downgrade — such has been the boredom in having to continually discuss it for three years.

It is tempting maybe to think in this coming week that everything is “fine”, because the impact will get lost in wider coronavirus volatility in markets and was surely priced in anyway.

Yet these views are wrong. The downgrade still has real impacts. There are cliff-edge events that occur with a downgrade — especially in how both the government and companies deal with offshore creditors, the pricing and terms of borrowing in junk. Equally a non-linear event like this can never truly be priced in and there is still an expected R5bn of outflow to occur in two segments — this week, and then at the end of April when SA actually falls out of the World Government Bond Index.

However, all this misses the point — there is blame and it needs to be apportioned.

This may well sound unnecessary in the current times of turbulence and lockdown. Yet if anything it is doubly important for blame to be processed in the proper way so the correct lessons are learnt.

The coronavirus crisis exposes the underlying economic vulnerability. Removing these vulnerabilities and shifting the cost-benefit of doing business in SA in the post-crisis period is going to be crucial. The ideas are not new — indeed they are the same and we end up sounding like stuck records — structural reform, the Tito Paper and so on. It’s all there already. The National Treasury and finance minister Tito Mboweni have worked tirelessly to try to push reform yet been rebuffed.

To shift the risk reward for business to drive the recovery means a fundamental mindset change is required. Some ministers are going to have to be fired for being deliberate blockages to reforms.

The government has a habit of wrapping itself back in on its own spin. Recent utterances from the top down have placed the blame for low growth on the 2009 global financial crisis for instance. We are likely to hear now that low growth and a slow recovery is blamed on the coronavirus and lower global demand.

This misses the whole point. SA has performed so poorly in recent years, and will perform so poorly during the next recovery phase precisely because the government has chosen — yes actively — not to take the necessary reform steps to have a more dynamic and flexible economy that grows faster and creates more jobs instead of being more concerned with vested interests and political balancing.

Moody’s did not downgrade because the economy was left at the end of the Zuma administration in a weak place. It downgraded because it has failed to make enough progress in the two years since when the space was available to turn the trajectory. Interestingly and importantly Moody’s laid out the lack of reform that has occurred but also specifically mentioned energy policy.

Energy policy is where the solutions have been laid out continually and publicly by experts who have been dismissed as technology evangelists. Energy is also where speed has been completely lacking, no real sense of crisis seen as a kicker to action and the risks of corruption being introduced has (rightly) kept civil servants risk averse. The recent scheduling of a new Schedule 2 to the Electricity Regulation Act is not even close to the liberalisation that was promised in the state of nation address and is a distraction.

The risk now is that the government will only be able to think sequentially and the coronavirus outbreak implies all reforms will be pushed back by at least six months. That will raise the risks of a likely second downgrade by Moody’s in the next year, as well as other agencies also cutting sooner.

The strong leadership on the coronavirus by the president provides the perfect platform for pivoting into sweeping reforms. Yet with the coronavirus all social partners are facing in the same direction. That isn’t the case on structural reforms. Hence we remain deeply sceptical that the reform will progress. It would require cutting loose traditional partners and comrades. It would require an end to social compacting — the doom tool that is partly responsible for bringing us to this point.

The alternative has been played out after previous shocks to the economy. A permanent loss of output (maybe about R300bn in 2020 prices will be permanently lost) and a permanent loss of jobs is likely to happen — up to 1-million jobs could be lost. Such shocks would create societal problems.

The Treasury and the SA Reserve Bank are likely to have to take additional, previously unthinkable, steps in the coming weeks to keep the show on the road. An emergency budget, large-scale guaranteeing of new bank lending to stimulate the economy and “real quantitative easing” are all likely to come eventually. But we should not forget that what happens in the short term will largely play out regardless.

The choice really comes about the style of recovery SA wants — at the moment it is still looking like one hand will be tied behind the economy’s back.

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