Nedbank CEO Mike Brown has flagged SA’s high public debt as one of the factors driving up the country’s risk premium and increasing borrowing costs across the economy, with the government having to borrow an average of R2bn a day while foreign appetite for SA bonds has fallen.
Brown was speaking after Nedbank reported earnings growth of 11% for the six months to June, in a difficult economy in which the bank had to hike provisions for bad debts by 57%, offsetting a 22% increase in pre-provision operating profit.
Nedbank is the first of the big four banks to report for the June period, and its results are a sign of things to come from its competitors. All are expected to report higher levels of arrears and bad debts as consumers and businesses come under pressure from higher interest rates, and a weak economy and load-shedding take their toll.
Brown announced in June that he would retire after 30 years at Nedbank, 14 of which as CEO. The board has started a process to find his successor and is expected to provide an update when the bank reports full-year results early next year.
Brown said he fully supports the process. “I am not leaving to go anywhere and will remain in the job and 100% focused on Nedbank until the process is completed,” he said.
The economy is under huge pressure, partly due to a difficult external environment but mainly because of a number of “own goals”, he said.
Low growth
Nedbank sees economic growth of 0.3% this year and 1% next year, and estimates that load-shedding in the last six months cost the national economy R900m-R1bn a day in lost production.
Low growth will keep unemployment and social funding needs high and put extraordinary stress on the fiscal deficit. To finance the deficit and refinance maturing debt, the government will need to borrow an “extraordinary” R500bn a year, or about R2bn every weekday.
Brown said the risk premium investors attach to SA and long-term government bond rates has been driven up by load-shedding, logistics constraints, crime and corruption, and question marks over whether the country’s foreign policy actions align with its nonaligned status.
Demand for government long bonds by foreign investors has materially reduced, he said, with net outflows of R116bn from the bond market for the year to date.
“When you’ve got more sellers than buyers the price goes up, and when the price of bonds goes up the cost of capital goes up. That in turn is negative for investment because investments have to meet a higher hurdle rate. That is a huge concern,” Brown said.
Energy
However, Nedbank is seeing strong project and mandate levels on “anything to do with renewable energy”. The bank, the market leader on green finance, is mandated on just under 2GW of commercial private generation to the value of R13bn — “that is industrial companies, mining companies [that] have all got board approval and have mandated a bank and are starting to build”, Brown said.
Nedbank has a further R10bn mandated on the government’s bid windows 5 and 6, which are waiting to close. While it is hard to measure how much Nedbank’s personal and business clients are investing in small-scale solar rooftop power, the bank estimates that it will probably end this year at R750m-R1bn and growing.
There are still significant constraints to the rollout of new renewable energy and that is a concern, but Brown noted it is one of the key focus areas for CEOs’ engagements with the presidency. He was one of the leaders of the CEO Initiative formed in early 2016 to stave off a ratings downgrade, and is confident the new partnership between business and the government to arrest the slide in the economy will make a difference and ultimately help SA reach its growth potential.
“But I think we have all got to be realistic ... these are difficult, long-term issues and success needs to be measured over the long term, not weeks,” he said.
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