SA economy may not recover for five years FirstRand CEO —
Alan Pullinger, CEO of FirstRand, one of the country’s largest financial institutions, says SA’s economy has deteriorated so sharply that growth has “gone off a cliff” and a recovery could take as long as five years.
“The economy is on its knees,” Pullinger said at the group’s interim results presentation on Tuesday, where he presented a bleak outlook for the full year, saying it would trail behind its previous forecast of delivering earnings growth above inflation.
“Our GDP outlook for the year anticipates 0% growth and will probably drift negative. We are pretty sure we will not deliver real earnings growth for the year, but should remain positive,” he said.
Real earnings growth implies earnings rising faster than inflation. With inflation at 4% and FirstRand delivering growth in headline earnings of 5% for the six months to endDecember, Pullinger’s statement implies the results in the second half will be weaker than the first half.
Like its competitors, FirstRand, whose portfolio includes First National Bank, Rand Merchant Bank and WesBank, reported an increase in nonperforming loans, reflecting the stress that consumers are feeling within a stagnant economy and increased joblessness.
These are likely to get worse as companies and a state sector struggling with an unsustainable fiscal position seek to consolidate spending, especially on wages. An economy that slipped into its second recession in two years in the fourth quarter is facing fresh headwinds from the coronavirus spread, which has seen growth forecasts for economies across the world slashed.
FirstRand said costs relating to bad debts, as represented by the credit loss ratio, rose from 0.96% to 1.05% excluding its British subsidiary, Aldermore.
Pullinger lamented the slow pace of implementing structural reforms, echoing comments made by his counterpart at Standard Bank Group, Sim Tshabalala, last week. He said that SA’s economic recovery could take three to five years and that a widely anticipated downgrade of the country’s debt by Moody’s Investors Service to junk is almost irrelevant because it is unlikely to be the only one with key reforms not forthcoming.
“The sense of urgency just doesn’t seem to be there, and as a country we are truly running out of choice and time. We never mentioned Moody’s in our presentation because to us it’s almost irrelevant. We are now anticipating a cut beyond the downgrade,” Pullinger said.
While he lauded the government’s determination to address the public sector wage bill, he said reaching an agreement with the unions is going to be extremely difficult.
In any event, if the reductions were agreed to, the medicine would make the situation worse over the short term, and that would mean everyone is going to feel the pain of lower wage increases for public servants, he said.
On the positive side, with consumer price inflation so well anchored in the middle of the targeted range, it gives the Reserve Bank the space to continue lowering interest rates.
The central bank could cut the repo rate 25 basis points three or four times, though this “has to be weighed against foreign creditors demanding a higher yield to lend to an economy that is stagnant”, he said.
FirstRand’s normalised profit for the six months to endDecember rose 5% to R14bn, with the group raising its interim dividend 5% to 146c.
“We are profitable, we are generating good returns and we are well capitalised,” Pullinger said.
FirstRand closed 4.5% higher at R52.26 per share, beating a 1.9% gain by the FTSE/JSE Africa banks index. Its share price is down 17% in 2020 so far.
5% increase in FirstRand’s normalised profit to R14bn for the six months to December 31