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    A man holds an African National Congress flag as South African ruling party African National Congress supporters gather to listen to President Jacob Zuma delivering a speech during an Election campaign rally at Umasizakhe stadium in the Eastern Cape city of Graaf-Reinet on April 10, 2014

    S African Financial Sector Hit by Political Risks, Poor Economic Outlook

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    South Africa's financial institutions have been hit by a combination of rising operational costs and declining profitability due to poor macroeconomic conditions, crumbling infrastructure, and elevated political risks.

    Kristian Rouz — South African banks are struggling to grow their business amid slow economic growth, impending credit rating downgrades, and crippling unemployment, along with the alleged corruption and mismanagement in the central government. However, some lenders are cautiously eyeing brighter economic prospects after the upcoming elections.

    South Africa's largest banks say years of tepid economic growth are impacting their business plans, as they see shrinking opportunity amid the slowing business activity and structural woes.

    Indeed, South Africa's economy hasn't grown above 2 percent per year since 2013, while the lingering 27-percent unemployment has persistently weighed on labour productivity across most sectors. The Rainbow Nation suffered a short two-quarter recession last year, and its rebound was only modest, with GDP expanding 2.6 percent in 3Q18, and 1.4 percent in 4Q18.

    In light of this, bankers are urging a decisive structural reform to revive South Africa's productive forces. However, what they appear to be getting instead is sweeping power outages resulting from alleged corruption in the nation's largest utility Eskom, along with a controversial land reform, that sceptics say could undermine property rights and reduce the nation's debt rating to "junk".

    "This is showing just how tough the South African environment has been, while their African operations are outperforming", Patrice Rassou of Cape Town-based Sanlam Investment Management said. "It's a function of low top-line growth and rising costs".

    The majority of private-sector enterprises say they are holding off their investment plans until after more clarity emerges in the controversial land expropriations reform. Meanwhile, South Africa's state-owned enterprises (SOEs) are heavily-indebted, thus posing a threat to the nation's fiscal sustainability.

    Meanwhile, mounting political risks are yet another factor contributing to what appears to be a nascent economic desolation in the once most-advanced economy on the African continent.

    The ruling party, African National Congress (ANC) has been split since last year's corruption scandal that saw then-President Jacob Zuma ousted and replaced by sitting leader Cyril Ramaphosa. Zuma supporters, including the powerful Gupta family, are still around — and are opposed to Ramaphosa's planned economic reforms.

    "His (Ramaphosa's) rivals and enemies remain entrenched in both the ANC leadership structures and in the government bureaucracy", Prof. Robert Schrire of the University of Cape Town said. "He is therefore, unlike his predecessors, unable to dominate policy and personnel".

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    At the same time, the main opposition party, the Democratic Alliance (DA) is seeking to win big in the upcoming elections in May, after achieving some success battling corruption and boosting regional and local economies in the Western Cape province, along with several major metropolitan areas, including the economic powerhouse of Johannesburg.

    The upcoming elections have already produced heated debates, and are expected to be the most-contested race since the ANC took power in 1994.

    "Most of the discussion was about Eskom, ratings, the fiscal path and how to restore growth", Richard Segal of London-based Manulife Asset Management said.

    Over the past few weeks, South Africa's "Big Four" commercial banks — which include Standard Bank Group, FirstRand, Absa Group, and Nedbank Group — reported disappointing earnings, with outlooks of either pessimistic or hardly viable. Bankers say their operational costs are rising at a quicker pace than their operational profitability.

    The rising costs stem from political risks, poor infrastructure, rampant poverty and low consumer purchasing power, as well as a lack of jobs. Profits, for their part, are shrinking due to the threat of credit rating downgrades, concern over property rights, and high monopolisation across most industries, and, as a consequence, rife corruption.

    Meanwhile, lenders say, even if they ramp up the issuance of new loans, they'll face a tougher challenge of non-performing loans (NPLs), as most private and corporate clients would struggle to services their debts amid the poor macroeconomic conditions.

    "There are no easy answers", Manulife's Segal said.

    South Africa's 2019 general election is slated for 8 May.

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    Tags:
    economy, investment, economic reform, GDP, Democratic Alliance, African National Congress, Cyril Ramaphosa, South Africa
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