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David Gracey

David Gracey

David Gracey | Head of Foreign Exchange and Fixed Income Trading

This parrot has seen better days

• Good morning all and a happy belated New Year. 

• As is customary at the beginning of each year it's worth having a look at the major trends that could evolve in the months that lie ahead.

• To be honest, there are so many moving parts driving asset prices, that it's quite difficult to pinpoint those factors that will have a major impact on investor sentiment.

• In this morning’s note we will focus on the domestic issues facing our beloved country and we will leave the international factors for a later episode.

• And domestically we have to start with Eskom – or as I prefer to refer to it “Exkom”

• To borrow from Monty pythons wonderful pet shop skit (see YouTube link below for more context)

'E's not pinin'! 'E's passed on! This parrot is no more! He has ceased to be! 'E's expired and gone to meet 'is maker! 'E's a stiff! Bereft of life, 'e rests in peace! If you hadn't nailed 'im to the perch 'e'd be pushing up the daisies! 'Is metabolic processes are now 'istory! 'E's off the twig! 'E's kicked the bucket, 'e's shuffled off 'is mortal coil, run down the curtain and joined the bleedin' choir invisible!! THIS IS AN EX-PARROT!!

• Replace the word parrot with Eskom and you get my general drift.

• I have written about Eskom many times over the past few years, so much so that I know you may be more than a bit tired of reading my musings on this topic.

• But I do feel that we have now progressed beyond the point of no return.

• Recently Eskom announced (or were permitted) a 18.5% tariff rate increase. This has caused more than a little angst in society, but also for the ruling party, leading to the President calling for a relook from the utility.

• In my less than humble opinion, Eskom can increase tariffs by 100% and it will have little impact on its ability to generate any profits…here’s why.

• Solar prices have now become extremely competitive and are now very close to the point where domestic users will be able to finance any installation with savings made from not having to pay Eskom. Factor in that users can pay off that installation in 5-7 years, leaving them with 10-15 years of free electricity until they have to install new batteries. Said installation will also provide continued energy supply where Eskom is cutting users from the grid at very regular intervals.

• For those users that can afford an installation it’s really a no brainer. And so consequently, Eskom has a declining consumer base, which leaves Eskom with a group of clients who are struggling to meet the economic demands of the utilities ever increasing tariff increases, and thus the utility becomes increasingly unsustainable.

• The price of Eskom product, therefore, becomes irrelevant because consumers have a choice. THIS IS AN EX UTILITY.

• I realize that Eskom's client base is not only made up of domestic consumers…but if the economics work for home owners, you can be very sure that industrial and commercial users are also busy making alternate arrangements.

• Obviously there will be a transitional period, which leaves the Country and economy extremely vulnerable to a total system collapse.

• Impact for the currency – NEGATIVE.

• The second macro issue facing the country is the general election next year. It may seem a long way off but it needs to be factored in for the following reasons.

• The ruling party is losing support very quickly as the economy has been in a slumber for almost 2 decades. This as the cost of living has risen dramatically. Unemployment is at crisis levels and service delivery is close to nonexistent. 

• As we approach next years election we could very well see an increase in populist measures from the ANC in order to combat the decline in voter support.

• Some indications of Governments' thinking became apparent after the ANC’s elective conference in December last year.

o NHI – unaffordable, but the government is forging ahead.

o Nationalizing the reserve bank – this old chestnut has again raised its head. This may seem rather innocuous as around the world most Governments own their respective central Banks. But coupled with the potential for meddling with the CB’s mandate it could very well open up a smelly can of worms.

o Changing the Reserve Banks mandate – a potential means to artificially lowering short term interest rates, one of the measures used to combat inflation, but also an important factor in determining exchange rate management.

o Social grants increasing – negative for the fiscus.

• Investors will do well to watch this space for any potential impact on government spending and Inflation targeting.

• Impact for the currency – NEGATIVE.

• There are always other developing factors, but at the start of the year we see these two issues as the major conditions to be aware of.

• In the shorter term we will see a shuffling of the Cabinet for sure. This will give us some clue as to the Presidents thinking and status within the ruling party. 

• At some point he will have to deal with the Phala Phala allegations as well.

• And then of course the Finance minister will table his budget for the new year soon. That’s a nasty navigational exercise.

• Not everything is all bad all at the same time, but the domestic backdrop is poor and continues to deteriorate. 

• Twenty twenty three is going to be a tough year for the country. It will be interesting to see what the impact of these challenges are on the currency.

• Happy new year.

Have a watch: Monty Python Dead Parrot