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In London, the opposite of love is indifference
A visit to London revealed indifference to South Africa, neither interesting enough to buy debt nor problematic enough to offload. “Meh.” was the overall view. Better than a few years ago but not good
A whirlwind visit to London (mainly to work on the new Krutham brand and strategy – more details coming) gave me an opportunity to catch up with a number of pension funds, hedge funds and other people interested in South Africa. It was my first major London trip post Covid.
I could not help comparing it to a famous trip in 2015 with the Standing Committee on Finance where we also saw a similar range of people. I travelled with Floyd Shivambu, and investors were keen to meet him. That uitstappie was somewhat disrupted by Nhlanhla Nene being fired. I scurried back to South Africa. On my flight back, Desmond van Rooyen was replaced by Pravin Gordhan and the rest is history. Yes, that weekend.
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The growing levels of alarm amongst investors were patently obvious on that trip. Many seemed to know that the firing was coming.
This trip was completely the opposite. The general view on South Africa seems to be “meh”. Indifference. There is no impending fiscal collapse, or even anything like a Ghana or Kenya write down. Also, there is no upside. Investors like Operation Vulindlela, but boy is it slow.
And, as one hedge fund manager put it, South Africa falls into nowhere land. Indifference. And the opposite of love is indifference.
That said, the following things came up a lot.
First, r – g. In fiscal economics, when the borrowing cost on debt, r, is above the economic growth rate, g, then you are in trouble. This is because debt will grow faster than revenues. You have to make sure you run a primary surplus - i.e., you have to revenue has to be more than non-interest spending . (I simplify a lot, but you get the idea). In South Africa, r > g. This is not good. It means we need to either magically raise revenue or keep a tight tight lid on spending, otherwise debt will explode.
It was striking how many money managers asked about the r – g framework as a quick and dirty test of where a country is fiscally. It is, of course, a great and intuitively useful intellectual framework. In 2022, macro guru Hylton Hollander and I extended the Stellenbosch DSGE model (with a full fiscal block and a monetary policy block, including a game theoretic approach to monetary-fiscal coordination) to look at the various economic scenarios around r – g (Paper is here). We ran simulations of various monetary and fiscal outcomes. I recently updated the analysis for clients using newer fiscal data (available here) although without all the clever modelling.
Whichever way you do the sums, the answer is the same. Treasury has to run a primary surplus for a long long time. This is possible but it means (as Michael Sachs so eloquently highlights here) that service delivery suffers. And this is precisely what Treasury will do, budget after budget, MTBPS after MTBPS. Of course, it only we could get structural reforms to move slightly slower than Godot, that problem would lift and rising revenues could create a virtuous cycle of growth enhancing spending. Oh well, we will get there. One day.
Figure 1 r and g forecast
Second, related, was whether or not there was market appetite to absorb a step-up in issuance. Generally, we share the market view that there will have to be a step up in issuance at some point. There is concern that the holdings of South African paper have shifted over the past number of years toward South Africans, with foreign appetite stagnant in ZAR terms and falling in USD terms. While domestic players can absorb additional issuance at higher rates, this will come at the cost of credit extension (for banks), equities (for institutional investors) and other debt. Classic crowding out.
Figure 2 Share of holdings of government debt
Source: National Treasury
Third, Eskom. I hold a somewhat contrarian view that the Stages Of Loadshedding, much like the Stages of Grief, are an increasingly meaningless concept. They were originally designed to give a sense of how much energy the country was short. So stage 1 means 1GW of demand that is unmet, Stage 2 is 2GW etc. Of course, demand is increasingly and increasingly met by private supply.
This has important implications for growth – loadshedding is less and less of a problem for many companies as they are rapidly going off grid. It seemed to me some offshore investors don’t quite realise how quickly this is happening. The energy constraint is slowly lifting
Figure 3 Loadshedding forecast
Fourth, Russia. I was struck by the fact that our clients understand the difficult situation South Africa (and many other BRICS) finds itself in, but (correctly) have little sympathy for how badly South Africa has communicated. The old saying: when the elephants fight it is the grass that suffers springs to mind – many offshore investors understand that that the geopolitical tension between the US and China leaves many emerging markets in a bind. Of course, South Africa has managed to annoy both the US and potentially also Russia with recent insistence on some grain deal, whereas India has managed to stay friends with both sides. Some interesting perspectives on this from Foreign Affairs magazine on the US hypocrisy issue here, which comes up a lot in South Africa; and some other perspectives here.
And finally… the 2024 elections. Our views on the elections were probably of most interest. Overall, our view (which was shared by most) is that the elections are probably unfortunately a little bit of a non-event. Our baseline is still that the ANC will get around 46 or 47% and cobble together a working coalition. The dynamics inside the party will likely not change, and the only hope is that Operation Vulindlela continues, even at a very slow pace.
Our election scenarios are below – we don’t see a major risk event. I spent many meetings explaining the French style runoff system for the President. Although it is a proportional representation system, members of the house pick the President in a run-off. This means that a confidence and supply minority government is possible (and is quite likely), but it will be messy and hard work.
Figure 4 Election scenarios
Overall, an interesting trip but with no surprises. The highlight was that Curator, one of the AB Badenhorst wines, is sold in a little can at the Tate Modern for just on GBP 7, or ZAR 140. This highlights how creative and innovative Adi has become and how many interesting high value add export opportunities exist … if the ports could function better.
Figure 5 Export opportunities?
This research report was issued by Krutham South Africa (Pty) Ltd.
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