FirstRand’s outgoing CEO, Alan Pullinger, has warned that SA is running out of money and resorting to unconventional financing methods that could jeopardise economic stability and growth prospects.
Speaking shortly after SA’s largest lender by market value issued its half-year earnings report, Pullinger said the country was facing a less forgiving global environment in which investors were demanding high returns in exchange for long-term financial assistance.
“The recent budget reading by the minister of finance was not an easy day in the office for him. However, a good budget emerged, which recognised a much greater role for the private sector,” Pullinger said.
“But there was also a stark message in the budget that time is starting to run out. We are already witnessing the first phase of what we refer to as unconventional government financing and debt management as capital markets become tighter and more expensive for SA to access.”
Pullinger’s comments come a week after Enoch Godongwana presented the national budget, the highlight of which was the Treasury’s intention to access a portion of the R500bn-plus of unrealised gains in the gold & foreign exchange contingency reserve account (GFECRA).
The government will use R150bn in these gains to lower its high borrowing needs over the next three years.
“I think you can see the first sign here. This is really a sign that money is starting to run out. And the minister of finance, I think he did an excellent job with the budget. But you can see this was not easy, because there was not enough money.”
Short-term debt
Pullinger’s sentiments come amid a jump in the issuance of short-term debt in the form of Treasury bills, which are expected to average R45bn, or just over 10% of the estimated government debt pile of R5.7-trillion in the 2025/26 fiscal year. The Treasury has also outlined plans to issue sukuk bonds, which are Islamic financial instruments.
Pullinger said those moves reflected the steep yield curve and waning appetite for SA’s long-term debt.
The yield curve — the interest differential between bonds of different maturities — has become steeper in recent years, indicating that investors are willing to buy new longer-term bonds only at yields that are among the highest in emerging markets. The nominal yield on the government 10-year bond is about 10%, and with inflation at about 5%, investors are demanding a real return of roughly 5% to lend SA long-term money.
“It’s staggeringly high. I can complain and say I think it’s too high and it needs to come down, but unfortunately this is why I say that the world is now unforgiving for a country like SA,” Pullinger said.
In such circumstances, the Treasury has had to resort to “unconventional financing methods”, that include issuing more short-term debt, which is cheaper.
“But the problem with that is we are starting to chip away at one of the massive benefits we’ve had as a country, which is the term structure [of government debt].
“The term structure of our lending, our borrowing from investors, has always been very long and that’s been a huge benefit for us so that we don’t face a lot of refinancing,” Pullinger said.
Short-term debt — where the maturity varies from one day to 12 months — hinders SA’s ability to finance infrastructure.
Pullinger, whose role at FirstRand will be filled by Alexandra-born COO Mary Vilikazi, said the country needed to get back to conventional channels and be able to issue long-term bonds.
The lender, the first among the big five banks to issue financial results, painted a bleak picture of SA’s economic prospects, citing the collapse of state-owned enterprises and consumers choking under huge personal debt.
The company, which owns FNB, WesBank and Rand Merchant Bank, posted a 6% rise in profit to R19.1bn for the six months to end-December, boosted by top-line growth, particularly net interest income.
Bad loans
The credit performance was better than expected, with the credit-loss ratio well below the midpoint of the so-called through-the-cycle range of 80-110 basis points (bps).
The overall credit-loss ratio, a measure of bad loans as a percentage of total loans, rose to 83 bps from 74 bps, with increases across all portfolios except broader Africa and the UK operations.
FirstRand said the benign credit-loss ratio reflected the benefit of its approach to origination, especially since the pandemic when new business was weighted towards the low- and medium-risk categories.
The group declared an interim dividend of R2 a share, up 6% year on year.
Update: February 29 2024
This story has been updated with additional information.
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