Top banking CEO on South Africa: ‘This can’t continue’
Nedbank chief executive officer Mike Brown says that South Africa’s economy can no longer suffer the dithering and inaction from the government in dealing with various crises it faces.
Commenting on the state of the economy in the bank’s financial results for the year ended December 2022, the CEO said that urgent and decisive leadership, action and delivery are desperately needed in the country.
Brown said that economic conditions deteriorated further over the final quarter of 2022 as the country’s electricity crisis worsened, global growth slowed, commodity prices dipped, and the pressure on household income from the earlier inflation surge and the interest rate increases intensified.
Network infrastructure – mainly provided by state-owned monopolies and needed to enable higher levels of GDP growth and sustainable job creation in South Africa – has been deteriorating over many years, including, in particular, the crises being experienced in the areas of electricity supply and distribution, transport and logistics, and water infrastructure.
In addition, municipal service delivery is poor, and crime and corruption levels are unacceptably high, he said.
“These are critical foundations required for business confidence, sustainable investment, higher economic growth and job creation as well as fiscal sustainability, and more urgent action is needed.
“Progress on structural reforms to address these matters has been far too slow, and the will of the political and public sector to make meaningful changes is uneven and actual delivery is poor.
“This cannot continue. More urgent and decisive leadership and action is required,” the chief executive said.
He said that Nedbank is willing and ready to work alongside the government in accelerating and delivering key structural reforms.
Regarding load shedding specifically, Nedbank said that the impact on its own operations was limited. Generator run-time across its operations, including offices and branches, increased by over 200%, however – and diesel-related expenses doubled to R59 million in 2022.
The real impact of load shedding was seen with clients, where the electricity outages adversely impacted business and consumer confidence, and, as a result, GDP growth will be negatively impacted in 2023 and beyond, it said.
“From an SME perspective, load-shedding is making it increasingly difficult to start a business.”
Bleak outlook
According to Nedbank, the global economic environment is expected to deteriorate further in 2023, with a slowdown in advanced countries likely to intensify as the prior year’s surge in inflation, sharply higher interest rates, and reduced wealth effects hurt household incomes and spending.
The group said that the war in Ukraine, uncertain energy supplies, sharply higher production costs, and sluggish global growth prospects would also likely erode company profits and subdue fixed investment.
“Emerging and developing countries face similar challenges, with slower growth in advanced countries likely to weigh on export earnings, while higher inflation and interest rates will subdue domestic demand.”
China’s decision to abandon its strict zero-Covid policy will provide some support to global trade and commodity prices, it said, but the risk of sovereign defaults will remain high.
Many developing countries with substantial exposure to foreign debt are struggling to meet debt obligations given extremely limited fiscal space, a relatively strong US dollar and sharply higher US interest rates.
In South Africa, the bank noted that economic conditions deteriorated significantly in early 2023, hurt by a sharp escalation in rolling blackouts as the country’s electricity shortage escalated.
“Load-shedding is likely to continue at elevated levels throughout 2023. Combined with slower global demand and softer commodity prices, this will negatively impact domestic production and exports, resulting in a wider current deficit in 2023.
“Furthermore, the rise in inflation and higher interest rates will continue to weigh on household incomes and contain consumer spending,” it said.
While renewable-energy projects will support fixed investment, the upside will be limited by regular power outages and weaker domestic and global growth prospects, along with easing commodity prices, slow progress with structural reforms and persistent policy uncertainties that will continue to hurt investor sentiment, it said.
The bank sees gross domestic product growth for South Africa slowing in 2023, while it anticipates headline inflation to continue easing. However, due to inflation remaining higher for longer than expected, it sees another interest rate hike coming from the South African Reserve Bank later in March – with rate cuts likely in 2024.
In the broader economy, the bank said that concerns over job security and earning prospects will keep households under pressure – though it said debt should remain manageable. However, persistent uncertainty due to the poly-crisis hitting the economy will keep investment subdued.
“Heightened uncertainty about the country’s growth prospects amid paralysing structural constraints will probably discourage new large capital projects and subdue demand for general loans,” it said. “However, renewable-energy projects should provide some foundation for corporate loans.”
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