The Industrial Development Corporation (IDC) sees an expanded role for itself in various areas of SA’s economic reconstruction and recovery plan, despite its most recent annual losses.
A troubled economy, the early stages of the Covid-19 onslaught and severe volatility in its investment portfolio, notably petrochemicals giant Sasol, were among the “never seen before” events that led to a plunge in the performance of the development financier, its CEO Tshokolo Nchocho said at a briefing on the release of its latest annual results.
The lender — which reported a loss of R3.8bn for its year to end-March — saw a R30bn downward fair value adjustment on its shares held in Sasol, Kumba Iron Ore and BHP Billiton as markets globally experienced pandemic-driven turmoil.
Sasol, which made up the bulk or R22bn of the adjustments, has had a torrid year, including severe problems at its Lake Charles expansion project, when the pandemic struck and oil demand all but collapsed.
In addition, the depressed economic environment, which was prevalent well before Covid-19 struck, drove a deterioration in expected credit losses and resulting in an increase in its impairment ratio on loans to 32%.
The IDC is the latest state lender to outline the difficulties the pandemic and poor economic growth have had on its bottom line. The Development Bank of Southern Africa reported an 84% fall in profits.
Both institutions were recently downgraded by ratings agency Moody’s Investors Service after the downgrade of the sovereign rating to junk status. Moody’s said at the time that the downgrade came as a result of a reduced likelihood that the state could provide adequate or timely support to either entity should they run into financial difficulty.
Despite the challenges, the IDC sees an active role for itself in the recovery plan announced by President Cyril Ramaphosa recently, said Nchocho, particularly in areas such as efforts to secure energy supply, localisation and industrialisation, as well as infrastructure development.
The IDC has already invested R12bn in renewable energy capacity and has more headroom for additional investments, he said. The IDC would also focus on network infrastructure, which “enables economic performance”, including rail, ports and telecoms, he added.
The IDC remained well capitalised and is well supported by its various funding partners, including international development finance institutions and the local debt capital market, said Nchocho.
He added that the IDC would focus on selecting “good quality investment assets”.
The economic recovery efforts will be boosted if investment choices “are made on [a] strong financial sustainability basis [and] on a strong development effectiveness basis”, he said.
The IDC would also be looking for greater co-financing and more participation with other players in the market, including government departments where grant funding could be made available for projects, he said.
The lender said that since the finalisation of its year end there has been a partial recovery in its listed assets, including in Sasol and its other major investments such as Kumba.
But given the volatility experienced in its listed portfolio and the implications this has on its finances the IDC is considering greater diversification as a means of managing this risk, as well as more active management of this portfolio.
Nchocho acknowledged that the IDC’s level of non-performing loans has risen to an uncomfortably high 26% during the year. This was in part due to a change to IFRS-9 accounting standards, he said.
The IDC has undertaken to resolve historically problematic investments and will take a better approach to risk management ahead.
“It is not about the IDC pulling back its financing programme, it’s about doing risk better, such that we build sustainability into the investments that we make,” he said.
The wider economic malaise also resulted in a 10% decline in transaction approvals and 36% decline in the IDC’s job creation targets.
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