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Cape Town - Investors are still interested in South Africa, but there is no question of any love affair, according to Nomura emerging markets economist Peter Attard Montalto.
There has been a shift in the market focus on South Africa, says Montalto, who lists eight factors at play in this equation.
1. Fiscal policy
There is no meaningful new fiscal policy news until the National Budget in February. Markets, however, are now much more focused on the issue, for the first time since 2007 (or maybe in a smaller way since the last wobble in fiscal year 2012/13), says Montalto.
He reckons next year will be busy, "with NHI (National Health Insurance) funding proposals published mid-year, the nuclear power issue, a contingent liabilities deep dive and a long-term fiscal risks driver report, all at a time of low growth and no (easy) fat left to trim in the budget".
"As a result, attention turns to wider issues with budget impact like National Health Insurance (and) parastatals' impact on the fiscal and the growth backdrop. The market may look at the monthly revenue and expenditure numbers more than before (until now they are largely ignored)."
2. Student protests
Although they have fizzled out after the government promised to freeze fees and universities have made concessions on labour outsourcing, the fiscal implications remain uncertain.
In the long run, this is an unsustainable solution, says Montalto, who expects problems will likely resurface.
3. Eskom: energy security
Although the embattled power utility is claiming victory on the load shedding front, figures suggest that things may not be quite so rosy.
Once again, says Montalto, Eskom has been “saved” by a mixture of luck and the fact that electricity demand is significantly lower than the last two years. At the same time, baseload factor availability (i.e. Eskom’s ability and efficiency at producing electricity) has fallen back considerably through mid-year.
This does show that Eskom’s high-risk strategy of increasing winter maintenance has paid off so far – but it also shows the vulnerability of the system is still there in the future. Nomura still advises that January-April next year will be the key time to watch for a return of acute load shedding risk, though further downside surprises to growth (and mining sector restructuring and strikes, etc) may avoid this.
According to Montalto, the market never fully appreciated the load shedding story – "the risk wasn’t continual load shedding because demand is greater than supply continually, but that Eskom runs a 0% safety margin and so bad luck, weather and other factors push it over the edge".
He says long-run energy security issues remain, with Eskom’s new build programme timeline being pushed yet further back (as expected). "Medupi’s next unit now looks unlikely to be fully contributing to the grid until Q1 2018 and the first unit of Kusile not until Q3 2018, meaning 2017 now looks more like being a load shedding risk year."
4. Eskom: finances and tariffs
The Eskom story has moved from load shedding to being more about tariffs, financial strength and contingent liabilities, says Montalto.
"The recent announcement of R22.8bn of Regulatory Clearing Account claims submitted to national energy regulator Nersa would take next year’s tariff increase up to around 16%. We assume a 14% increase and it seems unlikely it would all be accepted."
According to Montalto, Eskom’s balance sheet remains exceptionally weak, at a time when it is talking about taking on more with nuclear (which he sees as unfeasible), and the prospect of paying up for international bond issuance.
5. South African Airways
The embattled national carrier is increasingly a concern, says Montalto. "Weak management and a lack of corporate governance from the board means there have now been seven CEOs since 2012, continually making a loss, and now the CFO has just left."
City Press reported over the weekend that Musa Zwane, appointed as SAA’s acting chief executive just last week, could soon give up his position because the “process to find a new permanent CEO has been completed”.
Zwane replaced the airline’s human resources director, Thuli Mpshe, who had acted as SAA boss over the past four months.
For Montalto, it seems National Treasury, which took over as shareholder from the Department of Public Enterprise at the end of last year, has "lost control of the company, given the politics of cadre deployment and President Jacob Zuma’s backing of the board".
This, says Montalto, shows a strong correlation with the fiscal theme, with SAA now requesting yet another state guarantee, one of R4bn to R5bn. He considers the airline a more immediate concern in terms of contagion from a state-owned enterprise into the fiscal than Eskom.
6. Ratings
Montalto expects ratings by Fitch and Standard & Poor's, due on December 4, to be unchanged. On S&P, Motalto says "the hurdle for a shift towards sub-investment grade (even an outlook change) for S&P is simply too great and wider than fiscal".
As far as Fitch is concerned, "a downgrade (it is on negative watch) from BBB to BBB- is possible on low growth and fiscal worries but less likely".
7. The rand
The problem ultimately lies in answering the classic question whether the rand can get over the level of R15 to the dollar, says Montalto. In current market conditions, this comes down to liquidity. "The simple answer then is yes, we can reach over these levels on a confluence of headlines, Fed and liquidity drying up."
Montalto mentions the risk of a significant outflow shock, which may come in the new year after the Fed commences interest rate hikes.
8. Politics and Zuma comments
With the government, it is very much business as usual with very little sense that there is any real understanding of the current low growth environment and no structural reform proposals in recent months, says Montalto.
"Instead, the minimum wage, NHI and nuclear power are all on the agenda... For investors looking for a glimmer of hope to shift growth expectations risk even to the upside, there is still none."
While there is increasing local controversy over Zuma's remarks placing the ANC above the country and the constitution, many in the ANC have already expressed this view, says Montalto. "They do, however, continue to feed the nagging fear in investors’ minds that the ANC will not let go of power quickly or peacefully if it loses an election."
These issues may not have crossed investors’ minds that much in the past, but with greater fears around fiscal and ratings risk, as well as parastatal risk, they seem to weigh on investors’ minds more, says Montalto.
