Olga participated in Bloomberg panel discussion on the topic: “The role of capital markets in reviving economic growth and strengthening investor sentiment”.
Economic growth and strengthening investor sentiment needs all participants in the ecosystem to play their part. Delays and confusion set us back, time and again.
Our view, as presented at the panel, is that it is not the de facto role of capital markets to revive economic growth or to improve investor sentiment. I would argue that these are by-products of a capital market that is working well. When capital markets work well, they connect capital users and capital providers in a transparent and cost-effective manner. After all, what is a capital market but a place where users of capital (those who need capital to open, maintain and expand their businesses) and providers of capital (including institutions like Futuregrowth, whose capital we invest on behalf of the nations’ savers) can transact in a fair and transparent manner?
Key building blocks in the capital market ecosystem
For capital markets to be effective, key building blocks need to be in place, and everyone within the ecosystem needs to play their role. These include:
relevant and effective regulation;
appropriate laws and legal frameworks;
robust reporting and disclosure;
price discovery mechanisms;
suitable investor protections;
appropriate competition between participants; and
appropriate transaction and other costs.
How do capital markets contribute to economic growth and investor confidence?
I would suggest that this happens when people and companies within the economy have the confidence (policy certainty) and ability (jobs) to save and invest and plan for a better tomorrow. When people save, their savings are invested in the economy – either in the form of equity or loaned as debt, to companies and organisations that use that money to expand their businesses, provide goods and services, employ more people, produce more goods/services, sell more, and pay more tax. The savers are compensated for investing their capital through dividends and share price increases (for equity) or through earning a risk-adjusted interest rate (for debt).
Where has this worked?
On the supply side of capital, there is ample evidence to indicate capital is available - the asset management industry is responsible for investing over R3.2 trillion of savings. Over R200 billion of this was deployed in the REIPPP Programme over the past 10 years (arguably it could have been much more had the programme not been stalled).
Renewable energy independent power producers programme (REIPPP) take-aways
What, then, has gone wrong?
Capital needs bankable deals to invest in, and this is where the eco-system has largely been falling short. One of the most obvious examples is the lack of electricity supply and slow/ineffective action to resolve this problem. We have known we were going to need additional electricity generation capacity since 2003 (twenty years ago!). It is unconscionable that the crisis had to become this extreme (as illustrated in the CSIR graphic below) before meaningful action was taken - which arguably only began in earnest in 2022.
Despite all the attention given to the predicament and appointment of various crisis committees, we continue to see obfuscation, delays and confusion such as has happened with (amongst others) the Electricity Regulation Amendment Bill, which was approved by cabinet in March, has still not been processed by Parliament’s mineral resources and energy committee and is unlikely to be passed by Parliament before the end of 2023. See here:
Our repeated calls
How can we expect meaningful investment to be made in the face of this ongoing procrastination and uncertainty surrounding electricity reform - a key building block in economic growth and improved investor confidence? The government needs to be laser-focused on speaking with one voice and acting with extreme urgency on this and other infrastructure needs, for investors to have the confidence to invest in greater magnitude in the economy. The capital is ready and waiting. We have outlined this previously:
We are not alone
Nedbank stated in its “Capital Expenditure Project Listing H1 2023” on 25 June 2023, that “underlying investment activity remains subdued and well below pre-Covid 19 levels, predominately due to weak business sentiment. The RMB/BER Business Confidence Index has remained below the critical 50 level (which divides contraction and expansion) for the past two years. weighed down by many factors, including acute power outages, surging operating costs, deteriorating logistical infrastructure (such as rail, roads, and ports), weaker global and local growth prospects, tighter financial conditions, and slow implementation of much needed economic reforms. Consequently, the private sector has been hesitant to expand production capacity”. They also recognised that “the sharp drop in new investment plans point to a deeper slowdown in 2024 and beyond. The electricity shortage and its adverse impact on domestic economic activity will keep business confidence subdued for some time to come, thereby limiting investment in new projects. A sustained increase in fixed investment by the private sector will occur only when the energy crisis has been resolved and structural reforms are accelerated.”
Not only are investors and economists articulating this view, but the government itself seems to agree about the barriers to economic growth and improved investor sentiment. Public Works Minister Sihle Zikalala acknowledged in a recent Parliamentary reply that an effective infrastructure-led economic recovery would need government to overcome various challenges in the infrastructure ecosystem, including “poor project preparation and lack of capability and capacity in the public sector”. The problem and the disabling role of the government in the ecosystem is thus apparently recognised. The Minister is also reported to have indicated that “given the risks and uncertainties of project preparation, the private sector has understandably been hesitant to get involved during the early stages of infrastructure projects or programmes”.
Yet, even with significant money (R600 million) being made available to assist with this project preparation, we have yet to see meaningful momentum on the delivery of bankable projects to the market.
What do funders need to see?
Investors have a common and clear understanding of what needs to be done to unlock the significant capital that we hold on behalf of our pension fund clients. This has been communicated multiple times to various levels of decision makers.
Unlocking funding for SOEs and infrastructure
We are ready to do our part, and have the funds readily available to invest in viable projects. We just need the key building blocks to be in place to unlock these opportunities and move the country forward.