Good day, I'm Peter Brook, Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 50 of 2023, and it will be the last one for the year. Time flies when you're having fun. This week I'm going to talk about some of the learnings from an excellent South African Macro Conference held by HSBC.
I'm going to start with the positives as we look forward into a new year. I thought the quality of the government team was excellent. Rudi Dicks from the Presidency, Duncan Pieterse, the Director General of the National Treasury, and Deputy Governor Fundi Tshazibana. They know their stuff, but it was also interesting to see how open and honest and talking to each other and questioning the audience. I thought that was great.
Now, it's not new news that National Treasury and the South African Reserve Bank (SARB) are centres of excellence, but I think it's worth highlighting Cyril Ramaphosa’s role in this. Currently, there's a very negative narrative around the President and his indecisiveness, but we must remember that things could have been very different. And I'm pretty sure that the people I've mentioned would not be in their positions, doing the good work that they do without the umbrella that he's provided, which has allowed pockets of excellence to come back into public service. The next area of good news is surprisingly around Eskom. Now this is mainly due to the rollout of PV, or photovoltaic, and the big pipeline of embedded generation coming through from the private sector.
But it was good to hear how Eskom and the private sector worked well on getting Kusile up and running faster than expected, with business for South Africa providing key project management skills. Another area of improvement was the acting CFO spoke about the benefit of the government debt support.
Because the National Treasury is paying Eskom's interest bill, this allows them to build up free cash flow, which they can invest in capital expenditure, including long term projects. Good example is transmission stations are bespoke builds and require a multi-year order pipeline. Some of that is already taking place, but the critical setup of the transmissions company is expected by the end of quarter one next year.
The news on interest rates was more mixed, and that really depends on whether you're a saver or a borrower. The SARB appears to be in no hurry to cut rates and quite like talking about the table mountain view, which is big up and then we go flat for a while before you get cuts. Now that would be good news for savings products, but bad news for the consumer.
As always, we prefer to focus on the longer-term perspective. The direction of travel in rates is down. I personally felt that the news from National Treasury was negative. The DG is very competent, and it looks like they will deliver on spending cuts that they've put through. But for a longer-term improvement in our debt dynamics, we need either austerity or growth.
Austerity is politically painful, and all around the world, I see very few politicians with an appetite for pain. Now the National Treasury can hold the line, but eventually the politicians will weasel money out. And for growth, we need structural reform. And while I am optimistic that the private sector can solve some of our big network problems, like electricity and transport, if they are allowed in, they can’t solve broad based delivery. For instance, the decline of municipalities is a slow rolling train wreck. But once again, this is a political choice, which brings us to the 2024 elections. The closing session of the conference was from Richard Calland and Carol Payton, two political analysts. And a throwaway scenario about Cyril Ramaphosa resigning if the ANC did badly and Paul Mashatile stepping up to negotiate what is probably the most important coalition the ANC would face in its history, left me distinctly anxious.
Now the election represents a known unknown. We know it is coming but we don't know the outcome. Therefore, our focus is on risk management, looking at a wide range of possible outcomes. What's interesting is the biggest risk for foreign investors is a good outcome as they are very underweight South Africa and would be forced to come in pushing up prices.
I hope you enjoyed the last year of podcasts and that you have a great break. Speak to you in the new year.