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Investment views

MTBPS preview: 3 reasons to be cheerful

22 October 2018
Author: Nazmeera MoolaHead of SA Investments

Nazmeera Moola looks ahead to the mid-term budget, set to be delivered by the newly appointed South African Finance Minister, Tito Mboweni, on the 24th of October.


Lindsay Williams: The US mid-terms are nearly upon us but, from a South African perspective, the only mid-term that really matters at the moment is the Mid-Term Budget Policy Statement (the MTBPS), which is a window I think into the finances of the country and how they might be dealt with, which is more important, of course.

With me is Nazmeera Moola, Deputy Managing Director of Investec Asset Management in Cape Town. Nazmeera, in the last few years, every time I look at the MTBPS (often with you) or, indeed, the full budget (often with you), my interviews start with something like “this is probably the most difficult speech for years”, etc. Is it going to be different this time?

Nazmeera Moola: I think it is not going to be the most difficult. I don’t think it is an easy speech to give for various reasons – (1) because South Africa’s overall finances remain under strain; and (2) because the Finance Minister was appointed only last week Friday to deliver an MTBPS next week Wednesday. So, barring those difficulties, I think the room for downside surprise is much lower this time around than we have seen in the past so that helps him out a little bit.

Lindsay Williams: Okay, that is sort of an optimistic/pessimistic view. The room for downside is limited is what you are saying, probably because we are bouncing along the bottom and the cynics would say well, it can’t get any worse so therefore it must get a little bit better.

If you go back to the 1970’s, Nazmeera, there was a song by a chap called Ian Dury, the late Ian Dury, and it was called Reasons to be Cheerful, Part 3 and it did very well in the United Kingdom. Now, when I look at the report that you kindly sent me, your MTBPS preview, you have reasons to be cheerful and there are three parts of that. Number 1 is forcing the government to address the growth deficit head-on; in other words, the parlour state of the South African economy. You see that as a cheerful note.

Nazmeera Moola: I definitely see that as a cheerful note. The solution to South Africa’s issues, whether it is the unemployment problem, which is massive, or whether it is the government’s fiscal problems, is ultimately higher growth and the only way you get higher growth is by dealing with the structural problems, with restoring confidence with the business sector.

The budget review in February detailed a set of plans in order to raise the growth rate. This included an investor-friendly Mining Charter, the sale of spectrum in the telecommunications space, easing of visa issues, improved infrastructure, to name but a few. It has done nothing about that, Lindsay.

Nothing has been done to actually execute on those things and the problem was after the initial euphoria had faded, it became obvious that with in-fighting in the ANC, that it was just much easier for President Ramaphosa not to do anything difficult, to try and consolidate his power within the party and leave the difficult things for later.

What has happened is that the recession has forced them to start taking action now and we saw that with the tabling of the Mining Charter, with the fact that you have had an investor-friendly growth stimulus plan being tabled. That is why I end up seeing that as having a silver lining.

Lindsay Williams: Yes, every cloud has a silver lining. It is an ill wind that blows nobody good is another phrase. So that is number 1; that is the first of the three reasons to be cheerful. The second one you say is revenues are in line with those that were outlined in the February budget, which has surprised me. I thought we would be underperforming but clearly not.

Nazmeera Moola: It surprised me as well as I have monitored the data and I think the reason for that is that, despite the downgrades to growth we have had this year, a lot of the downgrades have come from this massively negative agricultural contraction that we have seen after bumper harvests last year.

In 2017, we saw exactly the opposite. We saw the growth number almost entirely driven by that bumper maize harvest that followed a weak harvest. Agriculture doesn’t contribute much to revenues. So the fact that now you are seeing growth being downgraded, a lot of it due to agriculture means the revenue impact has been much more muted.

Lindsay Williams: Three (of your three cheerful parts) SOE progress, state-owned enterprises, a web that has been tangled for a long time has to be unravelled and it is being unravelled. It is a slow progress but it is progress, Nazmeera.

Nazmeera Moola: It is definitely progress. The big elephant in the room though I think we all keep an eye on when we think about state-owned enterprises and the government fiscus is Eskom and what we have seen is a new board come in in January, a new CEO come in, a new management team, cutting back capital expenditure at Eskom and the stabilisation of the liquidity of Eskom as you see investors being willing to lend to the entity again.

We have done a reasonable amount of work. One of my colleagues has taken a proper look and his conclusion is that, despite the fact the EBIT number is going to look pretty dire over the next couple of years, a lot of that is going to be due to the depreciation and amortisation from the – as the Medupi unitsstart to roll on-stream because what they have been doing to date is overspending on their capex so depreciation goes up but also they have been capitalising all their interest over the last couple of years for the loans taken out to fund the [duty].

So Eskom we think starts to look better as the liquidity concerns ease and then that opens up a little bit of room for government to focus on sorting out all the other problems. The biggest there needs to be SAA.

Lindsay Williams: Yeah, there’s a lot of problems that we need to talk about now and we have to temper our enthusiasm with your three cheerful points with maybe a couple of points of caution and one of those might be the insidious influence of politics and I suppose social media and mainstream media fuels that. We don’t need to talk about the specifics but politics is intervening. It must be a nasty little sideshow for President Ramaphosa and his new appointees.

Nazmeera Moola: Yes, I think it has been a sideshow but I think the concern for me is that it has become the main show at various times. It hasn’t only remained a sideshow and we have seen that in the way land is being used as a political tool to leverage influence. Land is a hugely emotive issue in South Africa. It needs to be dealt with. It hasn’t been dealt with well enough. However, it shouldn’t just be used as a political bargaining tool by people seeking to increase their influence.

Lindsay Williams: If I had to have been having this chat with you 25 years ago, I may have said the following to you: Nazmeera (this is what I would have said), here is a paragraph from your report that you have sent me:

“The ultimate key to success and stability is growth. Growth will create jobs. Growth will boost government revenues and stabilise the fiscus. Growth will address the number 1 issue really concerning South Africans.”

That has been transposed from 25 years ago or even 35 years ago to today but it still remains the same. It is simple but the simplicity of it is almost too much for people to fathom, i.e. the people at the top.

Nazmeera Moola: I don’t know if the simplicity is to actually fathom or people get confused with how to get there. There seems to be a lot of different views on how we support growth and how we generate growth and I think the other part of it is we live in a complex society with many different issues.

Apartheid has created a number of long-term issues that need to be dealt with and, in trying to deal with them, we often make trade-offs that are negative for growth in the short term, negative for jobs in the short term but have a positive impact on social stability. It is a question of we are clearly getting some of those trade-offs wrong right now but it is never going to be a simple solution. We are not China where we can just ignore social imperatives for long periods of time simply to generate growth.

Moderator: Well-said. The National Treasury (you go on to say) has been one of the major successes of the ANC government post-1994. I have to ask you now what about Tito Mboweni, the recently appointed Finance Minister, the man that is going to be standing up at the lectern and speaking of the MTBPS? Are you confident?

Lindsay Williams: I think Tito Mboweni has many strengths and I think he is a good appointee for this point in time. I think you need somebody really strong as Minister of Finance, saying no to his fellow colleagues in cabinet when they are demanding money for their pet projects or pet issues and I also think you need a strong Finance Minister to deal with the PIC.

Having said that, one of my concerns around Tito Mboweni is he has very little history involving capacity in terms of recruiting really strong teams of people. The Reserve Bank was notoriously mediocre during his tenure as governor. He was governor during a period where policy was very well executed but the team was not great and what worries me is that, given the continued leak of high quality people we have seen from the National Treasury over the last 18 months, what we need is someone very senior to commit to rebuilding, to shore up the team and to retain the good people. I think that Minister Mboweni would be well-served to partner with someone in the department, perhaps the Deputy Minister, and allow them to take responsibility for that, given it has never been a particular forte of his.

Lindsay Williams: Nazmeera, thank you very much for your time and your insight. That is Nazmeera Moola, who is the Deputy Managing Director of Investec Asset Management in Cape Town.

Important information

Investment involves risks. Past performance figures are not indicative of future performance.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is not an invitation to make an investment and should not be construed as advice. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Investec Asset Management.In South Africa, Investec Asset Management is an authorised financial services provider. In Hong Kong, this content has not been reviewed by the SFC and is issued by Investec Asset Management Hong Kong Limited. In Singapore, this content is issued by Investec Asset Management Singapore Pte Limited (Co. Reg. No. 201220398M).

Nazmeera Moola
Nazmeera Moola Head of SA Investments

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