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JIMMY MOYAHA: You’re tuned into the SAfm Market Update with Moneyweb. I’m your host for the evening, Jimmy Moyaha. We’re chatting to chief economist at Rand Merchant Bank, Isaah Mhlanga. Good evening, Isaah. Thanks so much for taking the time.
I guess there are a couple of things that we want to be looking at, but let’s start with the article that you put out around the capital outflows we’ve seen of late. We know that these capital outflows have varied in terms of being reported – anywhere from asset managers confirming client outflows to capital outflows going back to international investors.
A lot of this has been put out in the media to say that there’s a huge capital flight out of South Africa, there is no need to invest in South Africa and all of that – but is this really the case?
ISAAH MHLANGA: Thanks for having me. I think there are two strands of the debate. The one relates to non-resident investors who have been apparently disinvesting from South Africa and other emerging markets. And the other one is on the domestic institutional investors that are choosing to invest offshore because of the lifting of Regulation 28 to 45% allowable investments offshore, as a proportion of assets under management. So those are the two aspects.
As far as the non-resident investments in emerging markets that have been declining, the narrative seems to have been overblown.
That’s the main point that we find in the data that we look at. If you look at the JSE data, it really overstates the extent of the outflows, perhaps because of how the data is captured.
The possible reason is the discrepancy in how the purchases of bonds are registered. Essentially reverse reports are captured as actual transactions, which do not necessarily translate to a change in cash. That overestimates the outflows that we currently see.
If you look at the IIF [Institute of International Finance] that collects data across many countries in a consistent manner, it actually shows that South Africa had net inflows of about $2 billion year to date, up to the end of September, and net outflows on the equity side of just about $1 billion, which is far less [than] what the JSE data implies. So on a net basis, yes, there have been outflows on the equity side, but there have been inflows on the bond market side.
JIMMY MOYAHA: Isaah, let’s look at some of that inflow and some of what that data actually represents because, as you said, it is one thing to acknowledge that there will naturally be these outflows, and markets have their ebbs and flows where investors may want a bit of a risk-off sentiment, or some of the other conditions that you alluded to. But let’s look at the net inflows. Those clearly still point to the fact that, regardless of the greylisting South Africa finds itself on, regardless of the volatile economic conditions as a result of load shedding, regardless of all the other factors that we have to contend with, there is still a lot of strength and a lot of value in, one, South African companies, but, two, in South African markets as a whole.
ISAAH MHLANGA: Yes, absolutely. If you look specifically on the bond market side, if you look at, let’s say a 10-year bond yield, it gives you 10%, 11% inflation of just over 5%, which means you get in real terms a 4% return.
That’s a significantly attractive return for any global investor that would want to invest in major markets. That’s why [there are] inflows into bond markets.
In this respect South Africa is not unique. It is right in the middle of the pack.
You have some countries that have managed to attract significant inflows within the emerging market world – the likes of Korea and Romania with over $13 billion of inflows. And then you also had countries that experienced outflows. China is the biggest one with $76 billion of outflows in its bond market.
But we also had the likes of Brazil, Mexico, and Chile that experienced outflows from their bond markets. So there are a number of reasons why we are seeing these.
But to your point, South Africa still has value in its bond markets. But even on liquidity side, where we saw marginal outflows, it depends on which segment of the equity market you look at. If you look at small caps and mid caps, they have actually performed and continue to offer good value for domestic and international investors who look at South African markets.
JIMMY MOYAHA: Let’s stick with the local picture, Isaah, for a second, because there are a couple of other data points that have come out, and a couple of thoughts that I want to get from you while we have you.
The private sector credit data came out of the South African Reserve Bank [Sarb] today. It points to the fact that we’re still below 5%; but importantly it’s one of the few months where we’re not consistently declining. As far back as May of this year we were above 7%. Now we’re at 4.6%. What does that mean in terms of the overall South African picture, and how it all fits into the economy?
ISAAH MHLANGA: Look, I think one data point or one month’s data point doesn’t give you a trend. I think we have to look at a couple of months to try and get a better trend on the direction of the economy. And if you look to the months that we have referenced – let’s say we take the last three to six months – it’s quite clear that the consumer is under strain.
The increase in interest rates that we have seen so far, the high inflation rates that we saw into the run up of this year, yes, inflation has moderated but we come from a very high inflation-rate environment. Food price inflation that has been quite onerous for many consumers means that the consumer is under strain.
And then if you look from a job-creation perspective, we have not generated enough jobs, which implies that from an income perspective consumers still remain under strain. If you just look, for instance, at people who would have taken out a bond during 2020, when interest rates were at their all-time low, and you look now at how much they’re paying, they’re paying on average R4 000 to R6 000 more into their bonds, which implies that’s money that’s no longer available for spending; that is being shifted away from discretionary spending into servicing debt.
So the consumer is under strain, and this is going to reflect in credit extension. Financial institutions are looking at the same data, also analysing the health of the consumer and saying perhaps we need to reduce credit extension to limit the potential non-performing loans in future. That’s going to be reflected in credit extension data as the months go by.
JIMMY MOYAHA: Some economists and some analysts around the country have said that [with] the current economic condition that we find ourselves in, the need for economic growth, there is merit for the argument that we should be, as an economy, able to spend our way back to economic growth, obviously with support from National Treasury and the fiscus. Do you think that this is something that’s realistic, given that we’re heading into that Medium-Term Budget Policy Statement – the MTBPS, on Wednesda, which I’ll get your thoughts on before I let you go – do you think that the narrative of spending our way back to a more stable economic position still holds at the current point that we’re in?
ISAAH MHLANGA: Look, we’ve had this debate of spending our way out of recessions for very long time. But without fixing the productive capacity of the economy, that cannot be a sustained approach to fix the economic growth malaise that we have.
We need the reforms that are going to put people into jobs so that they can earn their own income and contribute into the tech space that we have.
If we were to spend our way, and we say treasury must go on a stimulus package of some sort, that in itself would mean that we have to borrow more in order to spend, because the economy is not growing as much to generate tax revenue collections. And if we borrow more, it just means we’re going to pay a lot more in debt-service costs.
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If you look at our debt-service costs, it’s the fastest-growing expenditure line item in the budget and gone are the days where that was a balancing item; we simply just go and borrow because we can access markets. Now we have to think much harder, because the access to markets is no longer as free.
Yes, foreign investors or even domestic investors can borrow the government money, but they do so at significantly higher interest rates, which actually makes it difficult for government to continue to just spend.
We need the economic reforms on the supply side, and that talks to fixing our energy, talks to fixing our transport – particularly rail – to make sure that the mining companies’ commodities can be exported to offshore markets. It talks to roads to make sure that they are efficient. A public transport system is less costly for consumers, which means consumers can actually save on transport to use that money to spend on other things.
Those are the things that we actually require, not necessarily spending our way out of the low growth that we have. It can assist, but it’s a short-term measure. We have used it before and it no longer works.
JIMMY MOYAHA: So then Isaah, what do we want to see on Wednesday, because I know it’s going to be a crazy day for you and for me, listening to the minister’s speech. What should we be looking out for in terms of the realistic expectations, and just your thoughts around whether we’re going to get an announcement on Vat, just what you think is going to come out of Wednesday’s speech, but also what we should be expecting, what we would like to have, a nice-to-have that you and I know we might not realistically get – but if we got it, it would be a very good thing for the economy.
ISAAH MHLANGA: I think the first thing is a reassessment of where the economy finds itself.
National Treasury looks at the same data we look at, and the economy is much weaker than they pencilled-in in February. So the first thing Treasury will say is: ‘Macro conditions have changed; the tax revenue collections that we thought we were going to get for this year are not coming through, which means there is going to be a shortfall of tax revenue collections.’
But on the spending side where government has control, they have failed to control their spending; they’ve overspent on salaries and wages for the public sector – a 7.5% increase relative to the just over 3% they had budgeted for.
That needs to be obtained from somewhere. And then we look at state-owned companies.
Transnet is now reported to be asking for a bailout as well. Over the next couple of years they would need some R60 billion in capital and interest repayments, which they would need from government. We will be expecting Treasury to say something as far as that is concerned – whether they will be able to provide that bailout or they’re not going to do that.
And then we also expect the social relief of distress grant to be extended indefinitely. It’s a matter of whether it’s going to remain constant at R350 per month per individual or it’s going to be indexed to inflation as the labour unions have argued for – which would mean more money that the Treasury would have to go and raise from the bond market, essentially meaning increasing our borrowings.
That is another aspect that would matter a lot for markets or for investors who invest in government bonds to say, how much more issuance of debt is the government going to do? And that’s going to determine or influence the level of interest cost that the government would have to pay in future. So it’s a number of things that relate to just this year alone.
But beyond the current fiscal year, what is more important is a credible growth story that is underpinned by a credible economic reform agenda – on the items that I mentioned earlier, on transport electricity, and then you can put in water and skills, safety and security, that would underpin recovering business confidence in fixed investments into the future.
Absent a credible growth story, the medium-term debt sustainability will always be under question.
JIMMY MOYAHA: You mentioned, Isaah, the fact that the government has to find the money from somewhere – whether it’s issuance of debt or however they do it. And there have been soft rumours circulating around that the government could dip into what’s known as the ‘gold and foreign exchange contingency reserve account’, which is something that hasn’t been done in the past. And two, if it is to be done, it has got serious ramifications that we have to look at.
There have been unconfirmed reports that this account has north of R450 billion in reserve funds. But obviously a portion of that is unrealised gains, and so we can’t exactly compute the final amount. But just quickly, if we were to look at this as a potential funding method, obviously this is music to the ears of the likes of Transnet, which is looking for that R130 billion bailout. But for the economy that’s not necessarily a good thing to look into, is it?
ISAAH MHLANGA: Look, I think it’s quite complex. It’s not as easy as we commonly understand it, because actually dipping into it can result in the movement of currency, which reduces the reported amounts that are accumulated in it.
So it would come with negative consequences if we were to do that. But even the mechanism through which it can be done is not yet understood well. We don’t have any established mechanism between the Sarb and the National Treasury, but I think this is a very short-term measure that would be used, if at all, [if] National Treasury and the Sarb should agree, which I hope they don’t. And we don’t expect them to announce anything related to that now.
Perhaps in the February budget next year, that’s where they’re likely to announce having done some work to say what the right approach is that is going to minimise the potential negative implications. What we need are long-term solutions, and long-term solutions will not be nice to [adopt], but that’s the medicine that we require and they lie outside of the factors that you alluded to.
JIMMY MOYAHA: Long-term solutions to fix our problems are not a shortsighted approach.
Thanks so much, Isaah Mhlanga, who’s the chief economist at Rand Merchant Bank, giving us his thoughts on some of the outflows we’ve seen in South Africa as the economic conditions that South Africans are having to contend with, as well as the overall sentiment around what we could see come Wednesday’s Mid-Term Budget Policy Statement.
Remember that statement will be coming out on Wednesday around two o’clock. We’ll be doing a full show coverage from our side as the SAfm team on the budget statement. We’ll be speaking to a couple of analysts, a couple of guests and economists, and just getting everyone’s thoughts and reactions around that statement and breaking down what it all means for South Africans, you and me – what comes out of National Treasury on Wednesday.
