Heed warnings on outlook

Year-end results from banking group FirstRand last week provided a sobering counter to any undue optimism that might have followed the news that the economy had emerged from recession.

It’s not that there was anything wrong with the banking group’s results, which, in its own words, reflected “a resilient performance in a difficult economy”. It grew revenue in a period in which some of its rivals did not and the group is so strongly capitalised that it was able to pay back some of the surplus capital to its shareholders, increasing its dividend payout 13% on diluted earnings, which were up 7%.

However, FirstRand’s leadership made clear the dim view they have of the economic cycle from here out, emphasising the need for its cautious approach to lending and highlighting the risks that face the economy and banking sector.

“We will not chase growth at the expense of returns,” said CEO Johan Burger.

And while he talked of the group’s investment in new growth initiatives, this came with a warning: “We do, however, expect the macroeconomic environment to continue to be characterised by low domestic demand, pressure on personal incomes and possible further ratings agency downgrades and this will create headwinds for topline growth in the group’s domestic franchises in the current financial year.”

As FirstRand has reminded us, it’s surely a case of when, not if, SA will be downgraded further. And this time downgrades by Moody’s and S&P Global Ratings would take SA’s local currency ratings, not just its foreign currency ratings, to junk status, causing SA to be ejected from the key Citi global bond index and prompting likely capital outflows of anything up to R130bn.

For banks, the cost of funding has already risen due to downgrades. Further downgrades would make it even more costly for banks to borrow and, therefore, for their customers. Nor can anyone say SA hasn’t been warned, repeatedly, particularly by Moody’s, which issues frequent updates on SA. The latest of these was last Thursday, when it commented on the recent poverty statistics and what these might mean for the public purse.

The title of its note said it all, making it amply clear that the agency is taking a gloomy view of the outlook and of SA’s fiscal metrics: “Rising poverty and unemployment raise spending pressures, challenging fiscal consolidation and reform commitment,” says the title. All three agencies have warned that if SA cannot deliver on its promises to bring down the government deficit and stabilise the debt ratio over the next three years, it could face a downgrade. Now, Moody’s believes that pressure to increase public spending in response to rising poverty will further complicate fiscal consolidation efforts, which it says are already under pressure from underperforming revenue and weak state-owned enterprises. It cautions, too, that the lead-up to December’s elective conference could further depress business confidence and diminish the impetus to reform the economy.

But it is the comparative slant Moody’s puts on SA’s poverty, inequality and unemployment figures that is perhaps the most depressing. The bottom line is that compared with the countries with similar Baa ratings (or in some cases even worse Ba ratings), SA’s unemployment rate is quite extraordinary, from which follow inequality and poverty ratios that are much higher than those of our ratings peers such as Brazil, Morocco or Turkey.

That’s the real human catastrophe behind the GDP numbers or the banking results or ratings metrics and for all the rhetoric from the government of President Jacob Zuma, there is little evidence of a resolve to do anything about it. Bankers are right to be cautious and businesses to be wary.

AS FIRSTRAND HAS REMINDED US, IT’S A CASE OF WHEN, NOT IF, SA WILL BE DOWNGRADED FURTHER