It’s a standard trope of columnists to give SA exceptionalism a good kicking. So, bear with me …
Having spent the past two weeks — as I do at the end of every quarter — talking to investors in detail about their interests and concerns, it became apparent that doing things differently can only get one so far.
That the Reserve Bank is hiking rates at all seems to draw convulsions and outrage in the media (and among Sandton-bubble-based analysts), but for most investors the shock is that the Bank’s monetary policy committee (MPC) is increasing rates slower and more steadily than peers in emerging markets, or developed markets for that matter. And there is a soft guidance that future moves can (bar surprises) remain steady and gradual.
Investors wonder how this can be possible when the Federal Reserve is hiking by 75 basis points (bps) a meeting and the Bank only 50 bps.
There seems to be something of a tyranny of the “front-end spread” — the gap between interest rates at the shortest dates on the yield curve. This ignores the spreads on the back end of the yield curve, the fact that fewer foreigners are investing in SA’s bond markets anyway, and “positioning” (the amount of money put to work) is probably the lowest yet. Not to mention that inflation in the US is about two percentage points higher than in SA and, if anything, the gap is expected to widen. Add to this the lack of options for investing in emerging markets given their many problems and Russia being uninvestable.
SA is in a very different position now to the past 20 years — with a current account surplus and fiscal policy appearing “OK”. If ever it was possible for the Bank to strain at the lead of emerging market “norms” (that is, after the lead of the Fed and more), now is the time.
Yet investors are either stress-testing this a lot or are looking at downside risks. The current account is at risk of being smaller than expected and the fiscal risks that could crystallise would mean things are worse than expected and consolidation stalls or reverses, though I sense these are tail risks more than baselines. Still, it keeps people on edge and the currency weaker (even versus some peers).
The MPC can stay its course if indeed the effect of a weaker currency on inflation is still muted. Perhaps we can get some new-style exceptionalism then?
The wider problem though is that the risks of “cute”, constructive baselines that can be constructed are heavily skewed to the downside. Investors are probing blackout risk, December’s ANC conference and 2024 risks — especially now in light of the noise around the president and the slew of media speculation on the “what-ifs”. The same is true of Eskom’s CEO, despite there being no evidence that anyone else could have done a better job given the constraints the company is under.
While some exceptionalism in the baseline outlook is possible, the fat risk probabilities have fattened and become unacceptably likely, even if still of very low probability.
This affects not just portfolio investors but foreign direct investment and local corporate investors too.
The old style of exceptionalism seems to rear its head elsewhere. In the car industry there is a growing realisation that the policy environment is not coming to help with the complex transition from the internal combustion engine to electric vehicles. Somehow there seems to be a view in Pretoria that the industry will just magically be able to twist and contort to the vagaries of policymaking timetables.
Car manufacturing is a global industry and companies will pull out of SA if the right environment is not in place at specific dates when planning decisions have to be made for new cars.
This would finally expose the fallacy of SA’s car industry: it is unsustainable; a house of cards propped up by industrial policy interventions. That’s fine during the status quo as everyone, including supply chains, can close their eyes and continue like nothing is going to go wrong. But it is not adaptable.
The car industry has been in the media precisely because it fears that there is insufficient understanding that about 15% of the manufacturing sector is at risk.
Policymakers seem to want to create a market for domestically produced electric vehicles, but they aren’t being produced yet and hence there isn’t any demand. Localisation is impossible without domestic demand.
This is exactly the same problem with local renewables, which now have low levels of local content. Once again, increasing local content is impossible without there being more domestic demand.
That’s why there is a growing chorus — from banks, the National Planning Commission (NPC), business and others — for the removal of all localisation requirements around energy procurement for a short period of, say, two years. The call is to ensure there is more space for demand to emerge to make future localisation more likely.
SA can’t sidestep these forces and put the cart before the horse.
As we move forward and try to solve SA’s problems (be they inflation, just energy transition or even industry transformation) sensible views that are clear on the causal direction of matters will be essential — as will choosing where SA can and can’t break the mould.