News: Eight risky events to watch in SA - 2016

Cape Town – The year 2016 in South Africa is primed for economic factors that will drag growth lower still, with rate hikes and raised political risks, according to emerging markets economist Peter Attard Montalto of Nomura.

He pointed to eight risky events that economists will watch out for:

1. Eskom

“The 2016 Eskom story is likely to be a lot more about finance sustainability than load shedding in view of our expectations of low growth,” said Montalto.

“We await the outcome of the latest RCA (regulatory clearing account) application sometime in January, which will confirm if Eskom’s expected total 2016 tariff increase is 16% (as applied for) or lower (we assume 14%; the Sarb assumes 13%).

“We will then have the substantial MYPD-IV application, which will be for tariffs over 10 years from 2019,” he said. “The outcome of that process should be around start 2017. At the same time an additional RCA will be made that should be ruled on in the second half of 2016 and may bring the total 2017 tariff increase to around 15%.

“Rates markets will likely continue to view tariff events as interesting and relevant for the Sarb and monetary policy,” he said.

2. Nuclear

“With cabinet approval to move forward, formal requests for tender should be made early in the new year, with a deadline maybe around early in the second quarter, pushing back the original deadline of the end of March, said Montalto.

“This will proceed, even without the National Treasury signoff on affordability,” he said. “The announcement of a preferred bidder is expected sometime well into the second half of the year. We then expect the start of a very, very long parliamentary and legal obstacle course to begin to try and derail it moving to build.

“Markets are still very confused by the issue of nuclear,” he said. “It is important to remember that it will be, assuming vendor financing, off balance sheet, but with the key negative rating implications of massive state-to-state guarantees for repayment of feed-in tariffs – around 25-30% of GDP. Rent extraction through the whole process remains a key concern.”

3. Drought

Rain levels remain at exceptionally low levels and the South African Weather Service has warned that the first quarter will now be much drier than previously thought, as the El Nino system’s impact becomes more apparent, said Montalto.

“The longer the drought goes on for, the more upside risks to food prices and the greater the fiscal pressure from farmer support. A dry first quarter would be particularly worrying, because it is normally one of the wettest seasons in most provinces and a lack of rain into the second quarter would increase the risk of drought and higher food prices will likely last much longer into 2017.”

4. Mining sector restructuring

Economists will keep a close eye on the general restructuring plans of the sector (gold, platinum and iron ore especially).

It will also look at the Anglo American asset disposal for the twin themes of major job losses and economic nationalism, and the attempts to create local black-owned mining champions.

“In line with these wage rounds starting into year-end … we watch for strike action and Amcu (the Association of Mineworkers and Construction Union)/Num (the National Union of Mineworkers) tensions again, though the bulk of these will probably fall in 2017,” he said.

5. Wages and strikes

A larger manufacturer wage round after Easter 2016 will involve the National Union of Metalworkers of SA, but also new Cosatu unions attempting to regain lost ground, said Montalto.

“While strike action is possible, manufacturers seeking to avoid conflict may settle early at high real growth rates,” he said.

“The wage round in 2016 will be unfortunate, occurring at such a time of likely rapidly rising inflation – something the Sarb is watching very closely.”

6. Barclays/Absa

A possible divestment of Absa by Barclays will be used by government to try and push the policy of economic nationalism, said Montalto.

“This would mean that any private sector buyers would be in competition with a local consortium of PIC (Public sector Investment Company), local development banks and BEE investment funds,” he said.

“This would be a substitute for ‘real’ nationalisation, for which there simply is no money within the state,” he said.

“State-backed retail banking has long been a goal of the ANC, but unachievable within the available resources. This route would allow them to reach the same end goals.”

7. National minimum wage

Montalto is particularly worried about the impact an accelerated process of minimum wage implementation would have on the lowest skilled and lowest paid.

“The political dynamic of implementation around the local elections means legislation with specific levels is likely to come in the first half of the year, but jumping the gun versus independent institutions to set such a level dispassionately.

“A range from R2 100 to R4 500 per month seems to have been established by the ongoing debate, but we are concerned it will come at the upper end and so have a more dramatic effect.

“While outright job losses are less likely, curbs to non-wage benefits and hours may well be the first reaction before lower job creation and more capital-intensive investment is seen,” he said.

8. AB InBev/SABMiller

The AB InBev takeover of SABMiller will remain interesting for a number of reasons, said Montalto.

“Its relevance to the rand is limited, even if net inflows are some $5bn to $6bn,” he said. “The Sarb will absorb this.”

“Nevertheless, the market may well get overexcited,” he said. “Next, the Competition Commission should be watched closely. The Competition Commission will review the deal under its public interest clause and will likely recommend a number of ‘developmental state conditionalities’.

“These will likely include guarantees on BEE, investment programme targets and job security plans.

“The implications for the equity market remain complex, with InBev (old-co) listing in the first quarter and yet the deal with SABMiller not closing until towards year-end.”



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