Categories
Our Voices

Stopping The Next Pandemic In Its Tracks

Stopping the next pandemic in its tracks

scroll for more

By Werner Venter, Senior Manager, Group Financial Crime

Can curbing the illegal wildlife trade prevent another COVID-19?

The Illegal Wildlife Trade (IWT) has long been viewed as just another conservation issue, however, the onset of a global pandemic has shifted expert focus from just preserving species for future generations, to assessing the impact of IWT on human health. According to a recent report by the Financial Action Task Force (an inter-governmental body that develops policies to combat money laundering), annual proceeds from the IWT range between $7 and 23 billion. This figure is compounded by the economic and social devastation brought on by animal to human viral transmissions, such as the coronavirus.

While many associate IWT with rhinos, elephants and pangolins, activity is certainly not limited to these animals. Exotic bird trafficking in South America is prevalent, owls are extremely popular in India and there is a growing demand for endangered glass eels from Europe. Essentially, an opportunistic crime, markets or ‘little economies’ tend to develop around specific and emerging products.

Key operating tactics have been noted by investigators and the sad reality is that poachers are usually from vulnerable communities, living below the poverty line. Local syndicates are then ideally positioned to exploit these individuals to obtain what they need. Following this, illicit goods are moved to a transit or destination country, often stored alongside legitimate products. Criminals have been known to hollow out timber and place ivory inside, disguising cargo as perfectly ‘normal’ shipments. In most instances, corruption features prominently throughout the IWT value chain. For example, officials altering origin countries in transportation documentation; lowering suspicions and ensuring that end products enter relevant markets as quickly as possible.

The Abalone (perlemoen) trade, in and of itself, involves layers of complex syndicates, all contained within a larger structure. South Africa loses billions of rands per year as a result of illegal harvesting and related activities, one of which is the manufacturing of drugs as this highly desired invertebrate is utilised as a barter for precursors to methaqualone and methamphetamine.

Interestingly, the industry is gaining more insight into the IWT and the individuals behind it. Traffic, a leading NGO, recently interviewed over 100 criminals convicted of wildlife crimes, hoping to learn more about motives and common modi operandi. Those brought to book are usually those who ‘pull the trigger’ so to speak, and catching the kingpins of operations is a far more difficult challenge. Those higher up are usually reluctant to speak out, for fear of the negative repercussions.

Following the trail

While protecting natural resources and environmental governance is central to any organisation’s sustainability strategy, financial institutions are especially equipped to take it one step further, by playing a significant role in pinpointing suspicious transactions. Financial investigators can also assist in gathering the evidence required for successful prosecution.

There are various obstacles to cracking down on wildlife criminals, namely a  lack of resourcing and the fact that priority is given to other transnational crimes. It is important to note that all of these crimes do converge to an extent, and that targeting wildlife crimes frequently exposes other illicit activities.

We are not out of the woods

The question remains, how can financial institutions (particularly those operating across Africa) effectively take action against the IWT? What is the best approach to helping to protect biodiversity, economies, and livelihoods, and prevent the spread of disease and subsequent collapse of health systems and other government structures? First and foremost, banks etc. must fully understand their risks and potential exposure to the IWT. The United for Wildlife, a forum with over 170 members comprising of financial institutions, transport companies and Non-Governmental Organisations, led by the Duke of Cambridge and The Royal Foundation, has developed a bespoke ‘tool’ which member banks etc. can utilise to assess their IWT risk. Once this is established, risk mitigation must be prioritised – assessing, identifying, and addressing exposures.

Lastly, actively participating in public-private partnerships and forums – like the South African Anti-Money Laundering Integrated Taskforce (SAMLIT), United for Wildlife, Focused Conservation, and the Basel Institute on Governance – ensures that intelligence, typologies, and trends can be shared and used as crucial indicators when evaluating suspicious financial flows and enhancing existing controls. The keyword here is ‘shared’; innovative measures and a willingness to cooperate with other organisations in the financial sector is one of the best ways that IWT can be successfully controlled. Now is the time to stop beating around the bush and combine all available resources, technology and otherwise, for the sake of both humans and animals.

Categories
Our Voices

Shoring Up Defences Amid Increasing Data Exposure Threats

Shoring up defences amid increasing data exposure threats

scroll for more

By Sandro Bucchianeri, Chief Security Officer

In December 2013, Manchester United goalkeeper, David De Gea, famously equalled the Premier League record for saves in a single match (14). He helped Manchester United beat Arsenal 3-1 at the Emirates Stadium in London.

It was an astonishing performance from the Spaniard as he almost single-handedly kept Arsenal at bay, and the score line could have been very different but for his man-of-the-match display.

This brings to mind the significant challenges that Chief Security Officers (CSOs) worldwide face daily in constant attacks against the foundation stones – the goalposts in an organisation’s football terminology.

As our world has become more digitalised, so too has the frequency and intensity of cyber-attacks and security breaches, with CSOs directly in the firing line and doing all they can to prevent such, ala De Gea.

The hard truth of the matter, though, is that data breaches and leaks are no longer the exception to the rule but an almost everyday occurrence.

The stats support this growing trend and make for difficult reading for anyone in the cybersecurity sector. Research published by AtlasVPN revealed that as many as 45% of businesses globally had a data breach in the 12 months, between September 2019 and September 2020.

The published figures are based on a survey conducted by Kaspersky and B2B International that involved interviewing 4,179 global businesses with between 50 and 4,999 employees. Companies that took part in the survey came from the financial services, government, manufacturing, IT and telecommunications, and retail and wholesale sectors.

The analysis revealed that, out of the 4,179 businesses, 45% had lost data to hackers over the year. IT and telecommunication companies saw breaches most often, with 53% of companies losing data to security breaches. This is of particular concern because IT and telecommunication businesses often hold sensitive customer information.

The retail and wholesale sectors also didn’t fare very well, with 52% of businesses having experienced a data breach during the period under review. The consequences of a breach can frequently lead to brand damage and a breakdown in trust across the customer base.

Financial services were third on the list, with exactly half of the respondents reporting that their business lost sensitive data to cybercriminals. This is of particular concern given that customer accounts, monies are at stake, and breaches are likely to draw regulators’ attention.

Those in the government sector are not immune as 46% had a data leak in the 12 months. According to AtlasVPN, “attacks aimed at the government are more often than not supported by foreign authorities, whose aim is to obtain political and military information”.

Although manufacturing and industrial companies experienced data breaches least often, they still saw a significant amount, at 43%. These breaches are generally because a competitor hires a hacker to steal inside data to destroy competitive advantage.

Among the notable and high-profile breaches recorded during 2020, Microsoft reported that several servers used to store user analytics had been exposed on the internet without proper protection. It was further revealed this month that the software giant had also been targeted by hackers who homed in on Microsoft’s business email software and reportedly compromised the integrity of tens of thousands of accounts.

In early 2020, the Defence Information Systems Agency (DISA), which handles IT for the White House, admitted to a data breach possibly affecting employee records; global hotel chain Marriott suffered a cyberattack which affected over five million hotel guests; and Whisper, the anonymous secret-sharing app saw millions of user-profiles and data exposed. Other corporates which saw data breaches of one form or another during 2020 included Nintendo, EasyJet, and South Africa’s Postbank. In November last year, Manchester United said it was investigating a security incident affecting its internal systems.

External threats come in many forms and are directed at both organisations and clients or customers. I’ve written about this before, and there is no reason for any of us to let our guard down when it comes to external attacks.

But what about internal threats?

Far more discreet but also destructive is the threat that comes from within. According to ObserveIT’s 2020 Cost of Insider Threats study, the latest research available, insider threat incidents increased by a massive 47% globally since 2018. The average annual cost to companies of insider threats has also rocketed, rising 31% to $11.45 million in only two years.

Closer to home, local companies, including Absa, have experienced insider threat incidents. Last year, we dealt decisively with an employee who shared data unlawfully. The employee was dismissed and faces criminal charges, as has been reported in the media.

Internal monitoring and control systems need to be continuously reviewed and revised, particularly as remote working becomes more mainstream and brings challenges in ensuring adequate security protocols are place across the business’s entire operation.

Vigilance remains everyone’s responsibility – from businesses which keep data, to customers who must monitor their transactions and bank statements closely, and who should never share their pins and passwords.

The role of CSOs – and indeed, the broader leadership of organisations – is continually expanding to incorporate a deeper understanding of the human psyche and human element. The COVID-19 pandemic has placed intolerable stresses on individuals and households, and this can easily default into erratic, negligent, and even criminally deviant behaviour.

Part of businesses’ growing responsibilities from a security perspective will be to understand and assess employees and the benefits and risks they pose to the organisation. This is our new normal, and CSOs can begin the step-up security by implementing the following basic rules:

  • Constantly educate and update your teams about what constitutes potential threats
  • How to recognise, report and address suspicious behaviour
  • Purge dormant accounts
  • Implement robust authentication protocols
  • Strictly monitor third-party access
  • Sentiment analysis such as log-in times and lengths can help early detection of a threat

Our job is to make it harder for cybercriminals and those with malicious intent to compromise our defences and score goals. We have to be like David De Gea was on that December day in 2017 and stand tall and firm in the face of the barrage of attacks.

Categories
Our Voices

AfCFTA, The Long Road To Africa’s Promised Land Of Trade And Prosperity

AfCFTA, the long road to Africa's promised land of trade and prosperity

scroll for more

By Bohani Hlungwane, Managing Director, Trade and Working Capital Sales Absa

The African Continental Free Trade Area (AfCFTA) has been touted as the supercharger of Africa’s long-term economic success. Here, Bohani Hlungwane, Managing Director, Trade and Working Capital Sales at Absa, looks at how far we have come and what needs to be done.

There is little doubt that the African Continental Free Trade Area (AfCFTA) is one of the golden keys to unlocking the continent’s long-term economic prosperity.

The free trade area has been a long time in the making, and there are still considerable hurdles to overcome, not least of which is the requirement for each member state to deposit their full schedule of zero-tariff goods and services. Some states also have valid concerns about whether infant industries should be protected from stronger country or industry players, while financing and political risks remain. Then there are the non-tariff barriers in restrictive regulations affecting the ease of border crossings and product safety requirements, and requisite approval processes.

But as the milestones are ticked one by one, we should not lose sight of how far the continent has come in creating a single and unified African market to deepen trade and economic integration. From the 1980 Lagos Plan of Action of the then Organisation of African Unity, the forerunner to the African Union, to the 1991 Abuja Treaty, which created the platform for free trade areas, Africa’s path to economic freedom and prosperity is marked by steady and measured steps of progress.

We should not be under any illusions as to the size of the undertaking in putting a continental free trade area into place. Europe created a single market for the movement of goods, services, people, and money in 1993, and the ensuing years have seen the European Union bloc grow to include more countries, the healing of the deep historical divides of the past, and the adoption of a single currency. So even though Brexit caused a rupture in the EU family of nations, it bears remembering that Croatia became the 28th member state in 2013.

In Africa, we seek to create a single market comprising almost double the number of EU states. Furthermore, the EU has its genesis as far back as 1950 when six founding countries – Belgium, France, Germany, Italy, Luxembourg, and the Netherlands – formed the European Coal and Steel Community in a bid to unite European nations economically and politically in the wake of the end of World War II.

It can be daunting when one looks through the lens of needing to bring together 54 individual and diverse countries into a single market. But already, we have eight regional economic communities with varying levels of liberalisation, so while we still have a long way to go, it is not as far as 54 completely disparate entities.

So, where does Africa find itself today in terms of AfCFTA?

The 1st of January 2021 was the go-live date of the Free Trade Area. This meant that those countries whose Parliaments had ratified the agreement and deposited a schedule of tariffs under which 90% of the goods will be zero tariffed goods and services were permitted to trade under the area.

Countries that have still not deposited their schedule of tariff-exempt goods and services have been given until the end of June 2021 to complete this, which is very transformational in and of itself because, instead of having sets of levies for various imports and exports, the majority of those defined goods and services will be subjected to zero tariffs.

There are still important issues to clarify, including broad agreement and acceptance around the question of rules of origin and intellectual property and how this impacts the value of components added as part of the value chain.

Can Africa pull this off?

The other big and seemingly eternal question revolves around infrastructure, or the lack thereof across the continent.

There is a ready acceptance that Africa has an enormous infrastructure deficit, and by all accounts, the annual required spend is well upwards of $100 million over at least the next decade, amounting to around $1 trillion.

And while that is a daunting figure, the reality is that Africa will bridge the infrastructure gap because of the enormous potential and gains inherent in seeing the creation of a single inter-connected market. Moreover, global corporates, asset and fund managers see the opportunity presented by a single market in Africa and the potential evident in factors such as labour competitiveness that make the continent supremely primed for manufacturing and large-scale industrial development.

We already see essential infrastructure projects across the continent underway that will add to the growing network of roads, rail, port, and other notable infrastructure development nodes. This is critical because, as more infrastructure projects are completed, these will generate increased confidence among global investors and finance institutions demonstrating that Africa is on the right track. It also counters the narrative of Africa’s dismal record in moving projects to successful closure.

Added to this is a solid political will to make AfCFTA succeed. The issues around non-tariff barriers such as delays with customs as one example can sink the very best initiatives. However, the AfCFTA Commission has established a digital platform whereby countries and any person involved in the trade of goods and services can flag issues that hamper the effective and efficient trade movement. This points to a commitment to engage with key stakeholders to ensure that critical issues are addressed.

Digital infrastructure will play a critical role in facilitating the workings of the free trade area. For example, the registration of businesses and the movement of goods across borders and general business administration requirements are completed quickly and seamlessly.

As we have seen with Absa Regional Operations (ARO), the COVID-19 pandemic and large-scale drive towards digital transacting speaks to the very future of the free trade area and how business will increasingly be conducted. By its very nature, digitisation drives integration much faster than regulatory reform as entrepreneurs and SMEs seek innovative solutions.

The current reality and the challenges are stark. According to the World Bank, Africa has a population of 1.3 billion people with a combined gross domestic product estimated at $3.4 trillion. Yet, despite its abundant resources and riches, the continent only contributes around 3% to total world trade, while intra-Africa trade sits below 20% of total trade on the continent.

For the first time, Africa is gearing up to ensure that the value found on the continent is to the ultimate benefit of African economies and her citizens.

Categories
Our Voices

AI And Humans Needed To Combat Financial Crime

AI and humans needed to combat financial crime

scroll for more

By Nic Swingler, Head of Financial Crime

The state of a country’s financial sector is a key factor in determining its stability and sustainability. During the height of the pandemic, financial institutions had no choice but to remain resilient, whilst contributing to national relief efforts and accommodating customer payment holidays. An additional element to maintaining and protecting this vital system is accurately identifying and mitigating risks; including money laundering, which can be detrimental to both society and economies.

The Financial Intelligence Centre (FIC) defines money laundering as “the processing of criminal proceeds to disguise their illegal origin.” This can range from drug trafficking and smuggling to illegal arms sales and prostitution rings. In fact, according to the FIC’s latest annual report, the number of suspicious transaction reports increased from 288 000 in 2018, to 300 000 in 2019. Artificial Intelligence (AI), in the form of algorithms and models, has made great strides in flagging suspicious activities, however, expert skills and human discernment cannot be discounted when it comes to effectively addressing ongoing and constantly evolving threats.

Combining intelligence

There are a number of aspects to money laundering. Criminals need to place illicit money in the system through property or other assets, distance themselves from it (often through what’s known as “fronting”) and then integrate the funds back into the formal economy, usually through banking channels. Not surprisingly, this modus operandi is deployed across the spectrum of illicit activity – from sanctioned countries such as North Korea to illegal wildlife traffickers to recipients looking to conceal the proceeds from corrupt activities.

All banks are required to detect and report unusual or suspicious transactions and activities to the FIC who then collates a financial intelligence report and if necessary, consults with relevant authorities for further investigation. Financial crime cannot be addressed if all touchpoints of the value chain don’t cooperate – this comprises the private sector such as banks and other accountable institutions, FIC, law enforcement, prosecuting authorities and government bodies. All of these need to be fully capacitated and have an aligned view of priorities in order to become truly effective. South Africa took a very positive step in this regard by creating SAMLIT (South African Anti-Money Laundering Integrated Task Force) in 2020. This is a public-private partnership across the banks, industry representatives, FIC and the Prudential Authority to share resources and information to drive early detection of criminality and to ensure that the banking system is not abused for financial crime.

Regulatory frameworks dictate that banks need to know exactly who their customers are, how they are behaving and the extent of their financial transactions and activities. All relevant SA institutions are now required to utilise a risk-based approach, which requires institutions to also know the financial crime threats and risks being faced and to develop appropriate responses to manage and mitigate those threats. While AI is useful in identifying ongoing patterns, solutions need to be tailored to incorporate all business units and enhance accuracy, so that resources are prioritised based on risk and do not spend disproportionate time on insignificant items and ‘false alarms’. Interestingly, deployment of AI techniques can also be very effective at reducing the level of ‘false alarms’. Systems that integrate sophisticated data analysis, automation, and behavioural risk models are also essential to a robust risk management strategy. Technology assists with the high volumes of activity that need to be assessed every day, however, there remains a decree of subjectivity and decision making for which human intelligence and expertise are still required to evaluate the nature of the transactions and determine if they are associated with illicit activity.

Catch and release

Of course, employee screening comes with the territory, including background checks and regular account and activity monitoring. However, establishing a risk and compliance culture within, and across the organisation can go a long way in shifting behaviours and attitudes, as can continuous training and capacity building. Embedding core governance principles at the centre of all functions also enables comprehensive surveillance of all transactions, connections, and networks, from the moment the client opens the account through to ongoing monitoring. It goes without saying that organisations must continuously review threats, risks, protocols, policies, systems etc. to ensure that they are always up to date and relevant. Sourcing the appropriate talent, equipped to keep abreast of changing threats and risks, legislation, international standards, and best practice, is non-negotiable.

The reality is, closing a client account or exiting a customer relationship is not taken lightly. Due process needs to be followed and it’s no good catching a ‘fish’ and throwing it straight back into other parts of the system. Appropriate, collaborative, and swift action across the private and public sector (by both technology and humans) needs to be taken, with follow through from the legal system and other sector players. Guess we’ll have to wait for the robot takeover – for now.

Categories
Covid 19

South Africa’s Economy Heading For Even Tougher Times

South Africa's economy heading for even tougher times

scroll for more

By Peter Worthington, Senior Economist, Absa Group
As the COVID-19 pandemic escalates both globally and domestically, concerns are mounting at an exponential pace about the ultimate impact on the South African economy. South Africa was already in recession when COVID-19 hit our shores, and Moody’s credit rating downgrade to sub-investment grade was likely even before the lockdown, due to South Africa’s stalled growth momentum, ballooning fiscal deficits and slow progress with essential structural reforms. Notably, Moody’s has retained a negative outlook on its new rating.

With the global economy now likely to enter a fierce recession, South Africa looks set for a very cold economic winter. Absa recently forecast that GDP in South Africa would contract in the second quarter by 23.5% quarter on quarter after seasonally adjusting and annualising the data, with particularly hard knocks for mining, manufacturing, and various service industries supporting tourism, which has now come to a dead stop.

At this stage, no one knows when the pandemic will be brought under control, nor what the multiplier effects of different negative economic shocks will bring. COVID-19 is a health shock which has mutated into a complicated tangle of a demand shock, a supply shock and a financial shock, all coming together at a time when South Africa was poorly fortified economically to deal with it.

We assumed in our recent forecast that some partial growth recovery would be likely in Q3, and that overall, the country would post a GDP contraction of about 3% in 2020. However, as we warned then, the risks were and are still skewed heavily to the downside here, and they have likely mounted in the short time since we published that forecast.

If the need for strict social distancing measures, which keep firms shuttered and people sequestered at home, lasts for longer than currently envisaged, the economic hit will be greater than we initially envisaged. With South Africa having reported the first confirmed coronavirus cases in some of its densely populated townships, Italy provides a sobering warning, with the government there now warning that the national lockdown, which was initially supposed to end only on 3 April, will instead be very long and lifted only gradually.

Italy whose population is only slightly larger than South Africa’s, is considerably further along the pandemic incidence curve, with nearly 102 000 confirmed cases (compared to South Africa’s 1 326 as of 29 March 2020) and nearly 11 600 deaths.

Positively, there is a possibility that South Africa’s relatively early rise to the challenge compared to some hard-hit countries that were caught more unawares will shepherd South Africa through the crisis somewhat relatively lightly.

But this is a hope, rather than a strong likelihood. Widespread poverty, and consequent crowding in densely populated townships, high rates of potential co-morbidity factors like HIV and tuberculosis, and weak public healthcare systems suggest that the crisis could easily escalate sharply and quickly here too. It is unclear how long the draconian social distancing measures, with their attendant costs on the economy, will need to last to bring Covid-19 under control.

Moreover, even assuming that the pandemic is brought under control by the end of Q3, the economy is unlikely to reboot immediately. Many parts of the economy will be damaged in the intervening period: firms will close, people will lose their jobs, capital will have fled to safety. This will not be easy to recover from. The SARB has introduced substantial measures to ease financial conditions in South Africa, including 125bp of interest rate cuts since the end of 2019. We think another 50bp of easing are likely in May.

Additionally, the SARB has implemented a range of other measures to secure essential liquidity in South Africa’s financial markets, including a watershed decision to buy government bonds as needed to secure orderly financial markets.

But at the end of the day, monetary policy measures are unlikely to be enough to lift the economy out of the ICU. Rather, substantial fiscal medicine is needed. Alas, the medicine is exceptionally expensive in South Africa, which had no fiscal buffers to speak of entering the crisis and which pays a high real interest rate for the spending medicine.

National Treasury has announced various steps to support the economy, including most notably an expansion of the eligibility criteria for the employment tax incentive to encourage firms to hang on to their workforce during the crisis. The value of this measure is estimated at R10bn, while, the two other two measures – the deferral of PAYE and provisional tax for small and medium-sized enterprises – will cost the fiscus R5bn.

The R15bn may seem like a large amount to help South Africa’s economy to get on its feet, but it is not. It amounts to about 0.3% of GDP. Elsewhere, particularly in wealthy developed countries, governments are rapidly ramping up their spend.

The US $2 trillion stimulus package amounts to about 10% of GDP, and other countries such as the UK and Germany, are set to spend an even greater share of national income on the crisis. South Africa’s government will also likely have to lift its assistance, to firms and workers (including 2.9 million citizens who were eking out a living in the informal sector as of Q4 19) the question of how this can be financed remains unanswered, especially since BOND yields have shot up amidst investors’ flight to safety.

The IMF says it is ready to deploy about $1 trillion lending capacity to allay the effects of the current pandemic – but it also says it has over 80 countries queuing up for assistance and that emerging markets’ financing needs total over $2.5 trillion. So far, its Catastrophe and Containment and Relief Trust assistance is focused on low income countries. The BRICS bank and the World Bank are oriented towards project lending, but this could shift under the exigencies of COVID-19.

For now, however, Finance Minister Mboweni has said he is keeping his options open about approaching international financial institutions for help. It’s not yet clear, however, exactly which sorts of programmes will be both available and palatable to such a unique country as South Africa for such a novel type of crisis. Ultimately, South Africa is going to need not only enhanced spending on health care, but also likely much higher levels of support for hard-hit firms and consumers who have lost their jobs.

Around the world, the COVID-19 epidemic’s likely long-lasting negative impact on employment has elevated the idea of universal basic income to frontline of debate. As everywhere, the challenge is financing but in South Africa it is all more acute, given the extreme income inequality and narrowness of the tax base.

Even at the upper bound poverty line of R1 227 per month, a basic universal income for every South African adult over the age of 19 would amount to nearly R550bn, around 10% of GDP. Of course, this cost could be brought down by means testing the benefit (essentially turning into a guaranteed basic income) or by eliminating the existing old age pension and child support benefits (worth just shy of 3% of GDP) as additional benefits or, more drastically, by setting the UBI at the lower-bound poverty line of just R561 per month, but even so the numbers in aggregate look unworkable without a deep reordering of OUR fundamental socio-economic architecture.

So COVID-19 leaves the question front and foremost: what is to become of our millions of jobless and working-but-impoverished citizens? As the government scrambles for money in the near-term to deal with the crisis at hand, it would also do well to heed the words of one of President Obama’s advisors to “never let a good crisis go to waste”. Times of severe crisis can generate paradigm shifts, allowing movement where before there was only a logjam.

President Ramaphosa’s authoritative handling of the COVID-19 crisis may, ultimately, place him in a stronger position politically to drive a far-reaching structural reform agenda – covering agriculture, mining, energy, telecommunications, transport, finance, state-owned enterprises, and the public service – that could sharply lift South Africa’s growth potential.

In the meantime, financing for the immediate needs is essential. If regular bond issuance is seized up, perhaps a tax-free COVID-19 solidary bond, perhaps aimed at retail investors, might be an idea worth considering. But it should also begin exploring options with the international financial institutions.

Categories
Covid 19

South Africa’s Downgrading By Rating Agencies

South Africa's downgrading by rating agencies

scroll for more

By Jeff Gable, Head of Research, Absa Group
South Africa’s sovereign credit rating was downgraded by Moody’s Investor Services on Friday evening.  Thus for the first time since South Africa’s return to global markets in 1994 the country is no longer rated investment grade by any of the large global credit rating agencies.  Moody’s, which now rates South Africa Ba1 (one notch below investment grade) and with negative outlook, joins Fitch Ratings and S&P Global Ratings, who also currently rate the country’s long-term local currency debt one notch below investment grade and with negative outlook.

With nuances at the margin, all three rating agencies remain concerned about the underlying weaknesses in South Africa’s economic growth and the political and social constraints that have made necessary structural reforms difficult to date, and the country’s deepening fiscal challenges and sharply deteriorating public debt outlook and consequent constraints on the state’s capacity to stimulate the economy.  Furthermore, the unprecedented economic and social challenges presented both globally and domestically by the coronavirus pandemic are likely to further diminish South Africa’s credit worthiness.

South Africa’s credit rating has not only symbolic importance, but also is an important driver of the price of debt financing for the government curve and beyond.  Markets have focused on the potential for a downgrade from Moody’s as South Africa deterioration to a speculative grade rating (or “junk” in common parlance) will trigger the exit of the government’s rand-denominated bonds from several major global bond indices, including the FTSE Russell World Global Bond Index (WGBI) and the World Inflation-linked Securities Index (WILSI).  That exit is now expected to take place at the end of April, effective early May.  Absa’s FIC Research team estimates that this is likely to trigger $4-8bn in forced selling from global funds that passively track these indices.

It wasn’t always this way, and from South Africa’s inaugural credit ratings in 1994, the country’s ratings had enjoyed an upwards trajectory through the 1990s and much of the 2000s.  Over this period, the country’s economic growth had tended to strengthen, stronger public and private sector investment helped generate significant numbers of new jobs, public finance went from strength to strength and the public debt was shrunk considerably as a proportion of GDP, many state owned companies operated without government financial assistance and the country’s institutions were seen as strong. Fitch and S&P each upgraded the country’s credit rating four times during this period, and Moody’s awarded South African with 3 upgraded.  Indeed, South Africa’s entry into these very same global bond indices in 2012 came as the country’s credit rating was at its peak.

The period that has followed has been less kind to South Africa’s perceived credit worthiness and the country’s credit rating has been on a downward trajectory since S&P first cut the country by one notch (to A) in January 2011.  Further downgrades were delivered by all major credit agencies in the years since.  Fitch was the first to cut South Africa’s credit rating to speculative grade in April 2017, followed by a similar move by S&P in November of the same year, and now Moody’s has followed suit.

It is tempting to ask the question, “how long does it take for a country to regain investment grade status?”  Often answers are informed by looking to the experience of other Emerging Markets with a sort of average time figure being used.  This misses the underlying point, however.  South Africa’s credit rating has deteriorated because of very low (and currently negative) economic growth, large fiscal deficits and sharply rising public debt, loss-making state-owned entities, and deep contestation of proposed social and economic policy reforms.   That all agencies currently hold the country’s credit rating under negative outlook suggests that they do not see significant improvement likely soon. And it will be that significant improvement, if delivered, that will ultimately determine whether South Africa will be able to plot of a difficult return to investment grade in the years ahead, move sideways at current levels, or slide further away from investment grade.  The answers will be found here in South Africa, rather than by looking at the examples of other Emerging Markets and the specifics of their economies, policy choices and politics.

One final point that is important to remember in this difficult time is that credit rating agencies do not exist to lecture governments, to try to diminish the democratic process, or even to try to influence government policy.  Rather their job is focused on helping investors understand the creditworthiness of an issuer.  With that in mind, it is hard to argue that South Africa hasn’t witnessed a steep deterioration in fundamentals, in part by our own ability to act over the last decade and in part due to the new risks due to the global virus.  And so it is the agencies’ duty to reflect that in their ratings.  Similarly it is clear that it is up to South Africa, and not the credit rating agencies, as to which direction that country would like to take going forward.

Categories
Covid 19

COVID-19 Is An Economic Calamity

COVID-19 is an economic calamity

scroll for more

By Peter Worthington, Senior Economist, Absa Group
The COVID-19 pandemic is cutting a swathe of economic devastation across the world; an unprecedented global recession now upon us. Unfortunately, South Africa, which was already in recession when COVID-19 hit, will not get away lightly. The second quarter of 2020 will mark a huge step-down in activity in South Africa, with only a gradual and partial recovery afterwards, given likely permanent firm closures, worker layoffs and impaired balance sheets

We now forecast real GDP to contract by 6.4% in 2020, more than double our -3.1% forecast a few weeks ago before the lockdown extension, manifesting via consumer spending, business capex and exports. The magnitude of the recession that South Africa is likely to suffer suggests that economic activity could take more than two years to return to pre-2020 levels – a huge welfare loss to the nation. And downside risks to growth still dominate, as weakness begets more weakness.

A recession this deep and long will ravage South Africa’s already-fragile public finances, as tax revenues crater and critical spending needs that cannot be fully financed by reallocation from within the existing budget envelope manifest.

Even before President Ramaphosa’s announcement of a much needed R500bn economic support package on Tuesday, we expected the budget deficit to hit a huge12.5% of GDP this year, and public indebtedness to surge upwards. Now, since only R130bn of the support package is to be met by reallocation within the 20/21 Budget expenditure envelope, South Africa’s deficit and debt ratios are set to rise even higher, although the R200bn loan guarantee program which forms a major part of the support package will presumably not manifest above-the-line, but rather only as a contingent liability of the government.

Still, with such a large budget deficit, financing is a critical issue. In addition to the R130bn reallocation, President Ramaphosa said last night that South Africa would also look to domestic institutions, citing specifically the Unemployment Insurance Fund. At end March the UIF had a net asset value of roughly R152bn at end-March, but it is unclear how much more cash it can supply, on top of the R40bn it is providing into the previously announced Temporary Employer/Employee Relief Scheme.

President Ramaphosa also said that South Africa was talking to various international financial institutions, including the IMF and the New Development Bank, as well as unspecified “global partners”.

However, the governing alliance has so far insisted that it will not seek any money from the IMF that comes with policy conditions, and so it will be interesting to see whether the IMF’s typical lending conditionality might be relaxed for COVID-19 related assistance. Overall, though, there is scant fiscal room to manoeuvre.

The good news is that while there may be limited fiscal space, there is still substantial room to offer further monetary policy support. The SARB has done a lot already. We estimate that the SARB’s 225bp of rate cuts so far this year will provide R35bn to consumers and R48bn to businesses, but of course these benefits flow only to debtors.

Additionally, just after the March MPC meeting, the SARB unveiled a raft of other measures, including, notably, a decision to purchase government bonds in the secondary market (on a limited but unspecified scale) and the relaxation of banks’ capital requirements, which it estimated would allow South Africa’s commercial banks to lend an extra R390bn or so (provided of course that there is demand for credit). These ancillary support efforts are unprecedented in scale and scope, a clear indication of the unusual times.

Fortunately, there is still more that the SARB can do if needed, especially since inflation is not a concern. We forecast a downside breach of the inflation target this year which is reason for the SARB to cut another 50bp at the May meeting. And of course, with the repo rate at 4.25% currently, South Africa is quite far from the zero bound on nominal interest rates, so if inflation surprises to the downside, or activity shrivels beyond expectations, then further policy cuts are a possibility. At this juncture the costs of not doing enough on monetary policy seem so much greater than the costs of doing too much. But, as the SARB frequently and correctly argues, monetary policy alone cannot save South Africa.

Once the health crisis recedes, South Africa will still need to wrestle its enormous budget deficit down and implement a raft of challenging structural reforms to reboot the economy. There are some hints that the government intends to ‘not let a good crisis go to waste’, essentially using the urgency of the crisis to implement policies that previously seemed just out of reach.

We see four reforms, which are already on the government’s agenda, as particularly critical over the next year to lift business confidence, boost growth and avoid further credit rating downgrades. The first is securing electricity supply in a liberalised market for generation. The government is now awaiting concurrence from the regulator on its plans, but more could be done.

The second is delivering regulatory certainty in the key mining sector, in part via an agreement on the ‘once empowered, always empowered’ standoff that is preventing agreement on the Mining Charter. The third is opening the visa regime for skilled foreigners once the travel ban is lifted. The fourth is the auction of broadband spectrum.

So far, the crisis has not sparked any evolution in the governing alliance’s thinking about labour market rules, but reformers in the ANC must understand that increased labour market flexibility is as key to job creation as much better government performance in delivering quality public education. Perhaps in the political ebb and flow moves towards greater labour market flexibility could be offset by a fresh look at a basic universal income approach to social welfare, especially if firms lay off lots of workers and growth is slow to recover. The commitments to top up social grants for the duration of the crisis could mark a step in this direction.

Indeed, many countries around the world have sharply stepped up direct cash payments to citizens to help them through the crisis and if weakness persists, these welfare approaches may need to remain in place. The fact is that after this unprecedented shock, the world, and South Africa face extraordinary uncertainty. No one knows for sure how long the pandemic will last, nor how long countries will have to continue with stringent social distancing and its terrible economic costs, nor what the multiplicative negative effect of the economic aftershocks will bring.

COVID-19 will force profound social, political, and economic changes across the globe. At this stage we can only dimly understand what they look like and what they are going to mean for our lives. It seems though that the assumption of an ever more hyper-globalised will be scrutinised more closely.

Local may become lekker for a huge range of products beyond the artisanal cheese at the farmers’ market. Nations may look to insure themselves by seeking robust self-sufficiency in terms of supply of foodstuffs and medical supplies. Materialistic consumerism may not survive. Anything that involves mass movement and aggregation of peoples may be viewed more dimly. Firms may rush to automate, and many types of work may remain online. In the interests of public health many governments may seek to increase monitoring of their citizens’ lives.

Some countries are likely to come through this crisis in a much stronger relative position than others. For South Africa, with its scant fiscal space, limited bureaucratic capacity and ongoing socio-political divides, all of which hobbled the country even before COVID-19, the challenges will be huge. However, it is early days still. Perhaps the challenge of COVID-19 will pull the nation together in a way that leaves it better placed afterwards to deal with its multiple challenges. Certainly, the broad-based support from all the social partners behind the support package offers hope in that direction.

Categories
Covid 19

Economies Bracing For Prolonged COVID-19 Recession

Sub-Saharan African economies bracing for prolonged recession and downturn

scroll for more

By Ridle Markus, SSA Macroeconomist, Absa Group
Sub-Saharan Africa (SSA) is now bracing for a sharp downturn in economic activity as a result of the COVID-19 outbreak which has further exposed the vulnerabilities of many countries in the region to unexpected structural and natural shocks.  The impact of COVID-19 is on such an unprecedented level that the International Monetary Fund (IMF) says it will cause the worst global recession since the Great Depression.

Following a tentative economic recovery in 2019, we had anticipated an improved performance for our SSA coverage region on aggregate in 2020. Our conviction for this recovery to gather further steam was premised in part on improved weather conditions, signs of rising demand for commodities, an increase in the pace of infrastructure outlays and accommodative monetary policies in key markets.

All that has changed as evidenced by the economic disruption that COVID-19 has brought to many countries, who have and continue to respond with varying levels of fiscal and monetary interventions to manage the fallout and prepare for an eventual recovery. The unprecedented nature of the current global crisis suggests elevated downside risks to the SSA region’s economies, with particularly poorly diversified commodity exporters most vulnerable.

SSA’s recovery was rather sluggish in 2019 as US/China trade tensions, Brexit uncertainties, geopolitical concerns, insecurity, adverse weather conditions, elections and fiscal constraints weighed on the region’s economic growth. Primary sector activity remained weak in many markets, while the services sector also performed poorly. This lacklustre performance was largely led by SSA’s three largest economies, with Nigeria’s economic growth again falling well short of the government’s target of 3%, South Africa’s growth barely in positive territory and Angola’s economy failing to exit a three-year long recession.

As COVID-19 spreads throughout the continent, the region’s health vulnerabilities have become a major point of discussion and concern. With around 26 million people being HIV positive in SSA, 240 million considered malnourished, millions suffering from tuberculosis and other diseases/chronic illnesses and over 400 million living in poor conditions with little sanitation facilities and access to clean water, the realistic fear is that the region is very susceptible to the virus.

This is further compounded by weak health systems, poor infrastructure, insecurity and poor governance in parts of the region, which does not bode well as it can result in a humanitarian crisis, and, ultimately, an economic crisis that could have a lasting impact.

While substantial actions are being undertaken to avert a humanitarian and economic crisis, the region’s structural vulnerabilities, constrained public finances and already high debt burden suggest that 2020 could be a very difficult year for all SSA’s economies. On the policy front, in line with major global markets, many SSA central banks have cut monetary policy rates and reduced cash reserve requirements for banks to make funding available to the private sector.

In some instances, authorities have also put relief funds together for key sectors, including manufacturing and health sectors of the economy. The inflation outlook has deteriorated on the back of a sharp depreciation in local exchange rates against the US dollar. While we expect inflation to increase, it will likely be offset by dampened consumer demand and improved food security on better weather conditions.

However, inflation is unlikely to be the primary driver of monetary policy during this crisis period, with the 2020 focus rather being on supporting economic growth. The regional outlook appears challenging, with many economies likely to contract this year.

In West Africa, we believe Ghana may escape a recession, although Nigeria’s economy is expected to contract as a result of the significantly weaker oil prices. East Africa’s economic growth is likely to remain in positive territory, although agriculture exports and remittances inflows are likely to decline sharply, while the fiscal impact is likely to be large. In southern Africa, only Mozambique’s economy may avoid a contraction, albeit barely. We expect all major economies in this southern African region to slip into recession.

While the situation is complex and the near-term outlook gloomy, we remain hopeful that conditions will begin to stabilise in the second half of 2020 on the back of efforts to contain the virus and economic stimulus programmes announced by both large global economies and domestic markets. Still, a possible economic recovery deep into the year may not be enough to prevent some of the economies in SSA from contracting this year.

It is also evident that many countries in the region have had no choice but to turn to multi-lateral funding organisations because of inadequate or limited fiscal policy space to deal with the pandemic. The response packages announced in recent weeks by some countries highlights the limited policy space they have to cushion the impact of the virus.

So far, most of the measures have been announced by monetary policy authorities with a few governments coming out with meaningful support packages. Support announced so far largely involves special relief packages through commercial banks, including extended repayment terms and a moratorium on repayments; funding to critical economic sectors, including the health sector; a reduction of policy rates and interest such as rates on debt repayment; and a reduction in cash reserve ratios to assist businesses accessing credit.

Outside of South Africa, Nigeria’s pledge to provide support of up to $2.7 billion appears to be the largest funding package so far in the region, even though that appears rather small given the overall size of the economy. With oil prices at less than half of their 2019 peaks, oil producers’ options are limited. Kenya’s government is focused largely on tax relief measures and providing comprehensive relief for individuals and companies under financial distress from the impact of the virus.

SSA markets will likely have little choice other than to look towards multilaterals and traditional development partners for additional assistance. Countries will likely tap into International Monetary Fund (IMF), World Bank and development bank packages. For example, the IMF is making available about $50bn for low-income and emerging market countries ($10bn available at zero interest for poorer members that can be accessed without a full-fledged IMF programme). The African Development Bank has made a USD10bn Rapid Response facility available to assist regional members fighting the pandemic.

The World Bank and the International Finance Corporation (IFC) have a $14bn package of fast-track financing, aimed at strengthening health preparedness and supporting the private sector. The IMF has also indicated that it has access to about $1 trillion in overall lending capacity, with low-income countries having access to the rapid disbursing emergency financing. The support from the IMF and World Bank is, however, largely in the form of hard currency and will still need to be paid back, adding to an already rising debt burden across the continent.

It remains to be seen whether current stimulus measures, which include lower policy rates and tax relief, will reverse the decline in demand as business and consumer confidence levels decrease, with sectors such as tourism, manufacturing and transport particularly at risk.

What is clear therefore is that notwithstanding the response by the region to the COVID-19 pandemic, including the promised support from multilateral funders, it is going to be a long and difficult road to eventual recovery for the region. One can only hope that countries will be able to flatten the curve of COVID-19 infections sooner rather than later, that will enable a managed return to normality, which is crucial if economies are to begin to recover from the current slump.

Categories
Covid 19

Coronavirus and the chance to change

Coronavirus and the chance to change

scroll for more

By Dr Roze Phillips: futurist, medical doctor and Absa Group Executive for People and Culture.
Every year, Oxford Dictionaries selects its “Word of the Year”, normally a word or expression that has attracted a great deal of interest over the last 12 months. In 2019, they chose the term “climate emergency” – a self-explanatory choice.

In the last few weeks, something happened that has changed the world as we know it. Towards the end of December 2019, a novel coronavirus that causes respiratory illness (called COVID-19) broke out in Wuhan, the ninth most populous city in China with 11 million people. The city was placed under quarantine on 23 January. Since then, the virus has rapidly spread across the globe. South Africa is in lockdown!

An unseen disruptor

We are only three months into 2020 and already “coronavirus” is being considered the uncontested title holder of “Word of the Year”. Who would have thought that the greatest disruptor of the technological age would turn out to be a silent, unseen virus capable of destroying economies and sending humans retreating into their homes with packs of toilet paper?

Speaking at the recently held Cape Town Design Indaba, the celebrated 69-year-old Dutch trend forecaster Li Edelkoort described COVID-19 as “a sobering force that will temper our consumerist appetites and jet-setting habits”. We have seen how the deadly virus has upset manufacturing cycles, travel plans, conference schedules as well as sporting and other events around the world. Edelkoort believes we can emerge from the health crisis as more conscientious human beings.
I hope so!

The coronavirus has changed the way we engage and associate with others. Social distancing is fast becoming the norm, so much so that this term is likely to be the runner-up in the contest for “Word of the Year”. The coronavirus pandemic is testing many of the assumptions of our highly interconnected, globalised world.

Protecting other people by being without other people

When we talk about social distancing or self-quarantine, or our current lived reality of country lockdowns, you may think: “How can I be without other people?” Humans are social creatures. We struggle to be alone. Joint research conducted at the universities of Harvard and Charlottesville in the United States found that people, particularly men, would rather receive mild electroshocks than be alone with their thoughts.

We pursue travel, change our personas, change our diets from Banting to plant-based, change our looks, our clothes, our homes, our friends, our jobs, even our spouses – “escaping from the disconcerting consistent status quo which is us”. “This might partly explain why we’re struggling so much with being alone with ourselves,” says Tim Leberecht, co-founder and CEO of The Business Romantic Society. “It eliminates the option to be somebody else.”

With the internet, we can now even escape our physical realities, using our smartphones as a portal into a virtual world where we can reinvent ourselves, exchanging a few deep genuine relationships for many shallow commoditised connections.

Slowing down and being emotionally present

As a consequence of this new form of ”connectedness”, we have trouble with free moments, even just a few minutes. We don’t want to miss anything and we battle to slow down. We task-switch from one tab to another and one screen to another, protecting ourselves from boredom and the fear of missing out (FOMO). If we don’t have something to show for our time, we think that we’re wasting it. And so we find it hard to be alone with our thoughts. It feels like a waste of time.

Along comes COVID-19. In these desperate times of social distancing or collective self-quarantine, too much distraction is immediately replaced with no distraction; FOMO is replaced with NOMO (the necessity of missing out). And we are woefully unprepared!

Once we sit at home, alone, doing nothing, in a time of #CancelEverything, we might realise that, having become so skilled at filling our lives with activity, busyness, chatter and noise, silence is an unfamiliar companion. In forcing us to slow down, the coronavirus is ‘helping’ us redefine productivity ... and perhaps even redefine ourselves. We now have time to appreciate all that we previously considered unnecessary in our lives.

A chance to change

There are some parts of our “slowing down” that are going to be good for us on a level we may not yet fully understand. Slowing down will mean different things to different people.

It may mean replanting your winter herb and vegetable garden, thereby boosting your intake of vitamins and homegrown produce. Learn to cook. Read a book; or, better yet, write a book or start a blog. Reconnect with friends and family on Facetime. Enroll for a short online course on a personal interest or passion. Learn a language. Play with your kids – have undistracted, creative fun. You may also choose to do nothing. Practise silence.

Most importantly, here is an opportunity to learn to appreciate your own company!

Let’s not waste this crisis

Former US President Barack Obama’s chief of staff, Rahm Emanuel, famously said, “Never allow a crisis to go to waste”, when he outlined the opportunities for reform that the 2008 financial crisis presented.

Leberecht encourages us to embrace NOMO, the necessity of missing out ... or at least NOSMO, the necessity of sometimes missing out. I cannot agree more.

Coronavirus has given us the unexpected gift of uninterrupted time. Let’s try and consume less. Buy less. Need less. And be more. While we may need to be socially distanced, we can most definitely become more emotionally present. Let’s make “emotionally present” our Phrase of the Year!

First published on Business Live.

Categories
Covid 19

Art in isolation during COVID-19

Art in isolation during COVID-19

scroll for more

By Dr Paul Bayliss, Absa Senior Specialist Art Curator.
The coronavirus pandemic had a sudden and substantial impact on arts and culture. Very suddenly and without warning, by March 2020, cultural institutions worldwide had been closed indefinitely, with exhibitions, events and performances cancelled or postponed.

In line with our newly declared National State of Disaster, the Klein Karoo Nasionale Kunstefees (KKNK) – which is a highlight on the South African arts calendar and which Absa sponsors – was called off. Around this time, our Absa L'Atelier competition winners were due to fly to Paris for their long-anticipated residencies, but this too was postponed.

African art and artists will face challenges.

As economies and arts and culture organisations the world over struggle during this time, we're seeing societies change and adapt, with new business models being explored and millions allocated to saving the arts. Our own Department of Sports, Arts and Culture set aside R150 million to help artists left without jobs, during this period. But we're lucky. The rest of Africa isn't quite so fortunate.

The challenge we have on the continent is that we face barriers in embracing technology, unlike the more developed countries, so our galleries and artists are likely to enter uncertain times.

As a community of artists, curators and gallerists, we have a duty to provide access to art and the heritage and history that comes with each piece of work. And with physical access to art now strictly limited, our mission must become to find new ways to do so and support and grow our African artists.

Testament to this, leading local curator Sarah McGee of MStudioCommunity, who manages Absa L'Atelier 2019 winner Nkhensani Rihlampfu, moved away from a physical brick and mortar space, successfully using technology to showcase her stable of talented artists. It’s more thinking like this that we need.

The art world goes virtual.

It’s hard to match the experience of seeing an important piece of fine art or historical artefact with your own two eyes and one could easily spend a lifetime traveling the world in search of all of them. Fortunately, the digital age has made it possible - easy, even - to visit some of the world's most famous museums from the comfort of one's own home.

Google Arts & Culture's collection includes the British Museum in London, the Van Gogh Museum in Amsterdam, the Guggenheim in New York City, and hundreds more places where you can gain knowledge about art, history, and science.

Closer to home, Absa – as a digitally enabled bank – was the first art gallery in South Africa to offer online 3D-tours of art exhibitions, over two years ago. This has proved popular, and continues to act as an effective way to bring art to people virtually: explore our repository of previous exhibitions, 3D-tours, interviews, art dialogues and podcasts here.

We also spearheaded the use of QR coding where people could virtually meet the artist. Viewers scan a QR code adjacent to the work and this takes the viewer to a video of an interview with the artist, or a behind-the-scenes of the artwork, adding real value to the experience.

Today, forced by quarantine, many galleries are starting to explore what technology can offer, to showcase artworks, make sales and attract new buyers.

It’s now business, unusual.

During this period, many galleries have placed their exhibitions online, not just in the spirit of opening access to new audiences, but of course, in the hope of making a sale. However, technology shouldn’t be a plug for a pesky short-term leak. The art world should be thinking strategically about what digital and social media can do for the commercial business of the arts in the long-term.

In addition to 3D gallery tours, the opportunities are endless, from Skype meet 'n greets with artists, to studio tours and masterclasses by artists. It’s also wonderful to see auctions and interviews going live in real time on social media at the touch of a button.

Hopefully, this time gives traditional gallerists pause for thought and a taste of the power of technology in growing their businesses and in return, artists' careers.

It's not all gloom and doom. If there's one good thing that’s come out of this…

It’s that people are picking up their pencils and paintbrushes again. As one gallery director predicted: "There will definitely be an explosion in new material”. And that is what I look forward to – new art works and pioneering new ways to showcase them.