Insights

PETER ATTARD MONTALTO: Foreign policy joins the list of investor concerns

June 19, 2023
Insights

Markets have rallied back broadly to where we were before the infamous “Brigety moment” at the start of May.

This creates an interesting problem for valuations. At the peak of May’s sell-off, markets were quite mad, the Sandton Consensus was in a tizz about sovereign sanctions including on SA government bonds, which were just so completely counter historical precedent as to be mad.

SA markets are not used to foreign policy being a component in risk premia and clearly have struggled, and will for a bit longer, to price in issues.

Yet the bemusing farce of last week’s “peace” mission, which exposed SA to comparison with the rest of the world with its actions and rhetoric while in Kyiv and St Petersburg, has now reinforced a growing sense of anger among many investors that SA is seriously out of its depth regarding the path it is taking and the consequences it will generate.

It is now a struggle to find a serious Western SA watcher in the public or private sector who believes the country is really non-aligned. The actions of various EU states in recent days has reinforced this, albeit with the convenient excuse of the wrong paperwork.

The problem is that nothing is being done to shift perceptions, perhaps because nothing can be done.

Indeed international relations & co-operation minister Naledi Pandor doubled down last week. The glee with which the West seems to be given a kicking at every turn reinforces the view instead — whether that be Pandor’s lecturing or the presidential spokesperson’s bizarre outburst about missiles, which then crumbled as he was exposed to real interrogation by foreign media in Kyiv. His outburst was instructive because of its tone that somehow SA had a stance that was superior to everyone else’s. This is SA’s exceptionalism foreign policy style.

Some parts of the markets are hunting for the off-ramp for SA and assume there must be an about-turn in the stance as the economic and other consequences start to become obvious. This will not happen for a number of reasons.

First, the deeply embedded glee with which lecturing of the West is undertaken is simply too embedded and too much second nature to so many and overrides pragmatism on the size and significance of the relationships.

Second, the quality of the department of international relations & co-operation — of SA’s connections in Washington in particular — and the quality or strategic nature of foreign policy thinking (and particularly the links between foreign policy and economic policy) around the president and elsewhere in the government are so weak.

Risk and consequences

I just don’t believe Pretoria has a good understanding of the risk profile around the African Growth & Opportunity Act (Agoa), for instance, either in terms of logistics of how and why designation would be lost or in terms of economic consequences.

Just as markets never really needed to think on foreign policy, so it seemed nor did the department.

The third reason there cannot be an off-ramp is that economic shocks never come on day one.

We saw this with sovereign rating downgrades several years back when there was a slow repricing over time and then slowly after the event as bond holdings were reduced by foreigners. The trend is still continuing.

Locals tried to latch onto a narrative that SA would be back to investment grade within a few years, but that view is now dying off given the multitude of risks crystallising — such as foreign policy, state-owned enterprises, social issues and load-shedding. These risks have offset, in rating terms, better shorter-term fiscal outcomes. The risks around the next ratings moves are now seen by markets as just as likely to the downside (within junk territory) as to the upside.

We also saw this with the Financial Action Task Force greylisting; again nothing happened on day one. And the effect is slowly building as foreign banks and other intermediaries layer on more paperwork, checks and due diligence, which raises costs for SA banking intermediation. Over time (we think towards the end of 2023) many foreign banks will make longer-term assessments of whether SA can be off the list within a short period. They are likely to decide no, given slow progress on actual substantive implementation of the requirements — and therefore further tighten the screws

So it is now again — and this is what I think should worry SA more than the sanctions risk that the Reserve Bank has highlighted — that there is a broader tightening of the screws by investors based on SA’s foreign policy stance. This will apply to everything from official aid and other co-operation to most obviously Agoa but also portfolio investments.

There is a risk that a more sceptical lens will now be put on SA’s sovereign environmental, social and governance ratings internally within many investors. Such things are subtle and behind the scenes. There will be no announcements and no real ability to track it, or for the media to cover it beyond anecdotes.

Putin visit

Russian President Vladimir Putin visiting SA for the Brics summit would accelerate all this and harden views for both the public and private sector offshore, though such a visit is looking less likely (albeit Putin seems to want to inflict some pain on President Cyril Ramaphosa with a last-minute decision).

In this context, and with the reminder of the past few days that SA is also rapidly losing friends outside the US, so the recent rally in markets looks rather temporary, with many deep foreign policy potholes ahead, assuming that SA indeed doesn’t take an off-ramp.

All this is entirely within the elected government’s prerogative.

But the final reason there is unlikely to be a change is that market signals are — at best — poorly understood by policymakers and at worst are antagonistic (such as white monopoly capital dictating foreign policy).

While the Treasury has been able to imbue into the cabinet a more general worry over debt levels into a more general acceptance of restraint in fiscal policy, it has not yet been able to slam home enough of the message on what higher debt service costs, now with an even steeper curve, mean. Or quite how paper thin auction uptake is at the moment and in general how weak bond market liquidity is, even if notionally on the surface “all is fine”.

Equally, the economy has shown remarkable resilience to load-shedding in recent data, but dealing with a deeper shock and tightening of financial conditions is quite another thing.

All this portends an extremely rocky time ahead, especially when one side doesn’t fully understand the risks being taken. SA exceptionalism, after all, is not a thing when it comes to the functioning of the bond market.

• Peter Attard Montalto leads on political economy, markets and the just energy transition at Intellidex. This article first appeared in Business Day.