Nomura’s Peter Montalto: Was concerned ahead of SA research visit – left gloomier

peter attartd montaltoFor most of the past decade, Cambridge educated Peter Attard Montalto has provided an independent external view of South Africa deeply valued by domestic and foreign investors. A London-based executive director of Japanese giant Nomura, Montalto acts as a link between SA policy makers and bankers, and offshore groups with in the country. He spent the past week in Johannesburg, Pretoria and Cape Town seeing many banks, various think-tanks and unions, political parties across the spectrum, corporates, asset managers and some policy makers (in particular the outgoing and incoming SARB Governors) from numerous different institutions. In this shortened version of the comprehensive report compiled yesterday, Montalto offers his trademark direct, independent conclusions. They make for some sober reading. – AH

By Peter Attard Montalto

For many years our potential growth estimates have been way below those we have met in South Africa. However, a wide range of locals’ estimates of potential growth seem to have meaningfully shifted downward. We think the local consensus of medium-run potential is now only 2.5%.

We went on our trip moderately optimistic on the relative conservatism in the MTBPS the week before. We came away more sceptical. First, we sense that not all of the government is convinced by the MTBPS path. It is very easy to get the cabinet’s agreement on the MTBPS’s broad brush strokes (it only requires approval from a cabinet subcommittee) and as such the amount of ANC approval required is small. A budget by contrast has to have full cabinet approval and much ANC involvement. Hence we came away with the view that the post-MTBPS warm glow may well be as good as it gets.

The key focus for most of those that we met (in addition to what we mentioned about the SARB above) was the public sector wage round. With a mixture of long-standing under-spend, procurement changes netting significant savings and capacity constraints allowing NT to easily keep non-compensation current expenditure down, the real focus is on the compensation bill.

Our meetings with the unions and others suggest that central government employment level freezes may very well be possible, but that significant ‘stuffing’ of posts is expected into the 2016 local elections at the municipal and provincial levels, in addition to continued use of public works employment programmes (an expanded form of unemployment benefit) into the same elections. As such there could be growth of 1-2% rather than the currently budgeted minimal growth.

Many of those we met in business seem to lament on the lack of new thinking on economic policy from the government and DTI, but are resigned to its immobile state – dragging back growth. Shifts in BEE policy, employment equity, land reform etc all are weighing significantly on business sentiment.

We continue to be upset that there is a lack of private sector corporates standing up to government and challenging them to improve micro policy. The private sector seems to want to praise President Zuma and his government for doing much outreach and consultation with business, but at the same time criticise the lack of policy shift or shift in government (and ANC) attitude to the private sector. Indeed from business and policy makers we got the sense that President Zuma’s interactions with business have not been useful with little leadership and follow-up after to make them worthwhile.

We got the impression that the government and ANC are increasingly leaving out the private sector from its political discourse with voters, focusing on what the government has, is and will achieve for individuals. The private sector is ignored politically as the only real source of wealth creation and sustainable employment growth. This was typified in the election, when the ANC ignored what black individuals have accomplished since 1994 – to live ordinary, free, everyday lives without the help for government. This strikes us as strange that the ANC would not try and gain credit for such private successes.

The NDP in all this remains shows no progress. Policy makers seem to be paying lip service to and basically view it as a road map. As such half of the government will probably ignore it and the other half may only mention it in the broadest terms or be implementing policies (like in Health, DPE or NT) that it would be doing under its more centre-left leadership anyway.

While many people have expressed strong, negative feelings about President Zuma in private, we were surprised at how such feelings were openly expressed increasingly bluntly and how much criticism there was. However, we were surprised to find a new consensus that neither Cyril Ramaphosa nor Nkosazana Dlamini-Zuma as possible successors would be any antidote to the current problems in society or the economy given the position of the ANC and lack of capacity of the state.

While there is a lack of clarity around Jacob Zuma’s health and how the scandals he is involved with might affect him, many people think that he will try to see out a full second term through to 2019. Locals seem resigned to the fact now that any scandal bounces off him.

Representatives of the ANC’s head office reiterated that within the organisation there seems to be an inability to speak out against Mr Zuma certainly in public by key office holders, but also in private. Fear over jobs is also key, and Mr Zuma seems to retain his hold on the party structure from the very top to the very bottom. [Which, as an aside, is leading a lot of locals to become more sceptical on the ability of Pravin Gordhan to make any meaningful difference in his job as Minister of Local Government.]

Our baseline therefore remains that Jacob Zuma remains in office.

We can only conclude that potential growth will remain exceptionally low and inadequate for some time to come until there is an accumulation of real crises that affect people’s lives, such as police brutality, water quality, much more severe electricity issues and open corruption.

 * Peter Attard Montalto is a London-based executive director and emerging markets economist at Japanese investment bank Nomura, responsible for South Africa and Emerging Europe. He studied Economics at Cambridge University.



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