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Covid 19

South Africa’s Downgrading By Rating Agencies

South Africa's downgrading by rating agencies

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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.

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Covid 19

COVID-19 Is An Economic Calamity

COVID-19 is an economic calamity

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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.

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Covid 19

Economies Bracing For Prolonged COVID-19 Recession

Sub-Saharan African economies bracing for prolonged recession and downturn

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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.

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Covid 19

Coronavirus and the chance to change

Coronavirus and the chance to change

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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.

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Covid 19

Art in isolation during COVID-19

Art in isolation during COVID-19

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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.

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Covid 19

South Africa’s consumer sector has to adapt and reinvent

South Africa's consumer sector has to adapt and reinvent

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Isana Cordier, Consumer Sector Head, Absa, Corporate and Investment Banking

The Covid-19 crisis and its impact on virtually every facet of social and economic life has revealed that moving with the times is no longer just an option for South Africa’s consumer sector. We will most likely require a re-invention and re-birth of the sector in order to shape a new normal across all socio-economic classes, as we start to recognise that our co-dependencies are bigger than we ever imagined.

Even before Covid-19, South Africa’s retail consumer sector was lagging the international trends in adapting to a new and younger demographic market that is always digitally inter-connected, probably with good reason given our socio-economic divide. However, the pandemic might very well be the event that will start levelling the playing field, forcing both the sector and all consumers to change their behaviour more than we can anticipate now.

What we have seen so far

Covid-19 revealed once again that when times are tough, food and essentials still trump all. Unless human beings learn to, again, become self-sustainable on a macro scale –growing our own produce, living of the land, and manufacturing our own soaps – retailers that trade in the essential food and household goods remain best positioned above the rest. 

We have also witnessed this in the past, with Black Friday sales via our card acquiring data that the biggest portion of spending goes towards food and basic goods. It therefore echoes true that these retailers are most resilient in all economic conditions.

There were also other beneficiaries of the pre-lock down spending outside the essential bucket, such as building materials, sports equipment, gaming, as well as home entertainment. These could have continued in trading well (even if only online), if they were allowed, as people potentially have more money and time to spend on home improvement and entertainment, whilst being locked in their houses.

The unexpected “die hard” sector in all tough conditions – the liquor and gaming sector - for the first time faced a situation where it has borne the brunt of an economic crisis through Government interventions.  No doubt a territory they are unfamiliar navigating through.

Likely consequences

If the consumer’s behaviour was on a slow trajectory towards online and Omni-channel shopping, the pandemic has, and probably will, further accelerate this to a large extent.

Social distancing is mostly likely here for the medium term and one can presume if online sales are allowed, that these will take off quite significantly. Most retailers have already reported exceptional increase in online shopping channels even though delivery will only occur after the lockdown.

It would thus not be inconceivable that this trend will continue past the lockdown and the pandemic, as people become more accustomed to shopping online, and reduce their trips to shopping malls – thus further pressure mounting on department store models and traditional retail. 

The high cost of leasing mall space might be what further entice retailers to reduce their physical footprint and adopt a more aggressive Omni-channel strategy to leverage their sales whilst reducing costs. Co-logistics and co-warehousing models might not be inconceivable either, where retailers share these expenses, as well as leveraging on each other’s supply to market.

Moving Forward

To try and understand this potential new economy and consumer we will be facing; we might need to consider things from a different perspective. Perhaps the question should thus rather be around what new trends will emerge from this pandemic, and how our consumer sector could possibly adapt to these.  

What will we value in the future; will we go back to travelling and how long will that take; will we value family time and health, creativity and education more than before and how will this shape our behaviours?

As our ways of working are potentially changing for good, we need to try and consider how this will impact our spending patterns. For instance, if we do not have to travel to the office, or be bound by office hours or country borders, how will this impact our shopping behaviour in when, where and how we shop?

Additionally, we need to consider how the global resourcing of talent might be impacted by this change in the ways of work, and even the currencies people will be capable of earning as a result of a potentially borderless resource talent pool.  We are effectively not only recognising our co-dependencies as South Africans, but our global co-dependencies could quite possibly drive significant change as a result of this worldwide pandemic.

The success of the future is going to have a lot to do with collaboration between corporates, public enterprises and across sectors, both locally and on a global scale. In this respect, it is imperative that we start partnering with each other, to leverage our competencies, strengths, and resources, which will enable South African retailers and other companies to find ways to adapt to a “new normal”.   Only time will tell who will survive and how this will play out in the future.

As the power shifts in economies at large, chasing after profits might not be enough any longer for organisations. We are most likely entering an era where everything we do, would be to have an impact for the greater good of all in this inter-connected and co-dependant reality.  If ever there was a time to build a company strategy around social and environmental sustainability, it certainly is now.

In this new world which we will have to navigate, the best advice to the consumer sector is probably to remain agile, adaptable, innovative, and to find the opportunities amidst the change that will most definitely come.  It has been said more than once that Covid-19 has effectively pushed a worldwide reset button – we can only start to imagine what the world would look like as we start back up.  

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Media release

Proparco And Absa Join Forces To Support SMEs Impacted By The Covid-19 Crisis

Proparco And Absa Join Forces To Support SMEs Impacted By The Covid-19 Crisis

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Proparco is collaborating with South Africa’s third largest bank by assets, Absa Bank Limited, by granting it a senior loan of $20 million to contribute to its support plan for Corporate SMEs in the context of the continuing Covid-19 crisis. 

South Africa’s small and medium-sized enterprises (SMEs) represent more than 98 percent of all businesses, employ between 50 and 60 percent of the country’s workforce across all sectors, and are responsible for a quarter of private sector employment growth – particularly among young people[1]. Before the Covid-19 crisis, SMEs were already facing difficulties, which have been exacerbated due to the pandemic.

Absa Bank Limited (Absa) is the South African subsidiary of Absa Group, one of the top four African banking groups by earnings, assets and market capitalisation. The group is present in all customer segments and conducts the majority of its business in South Africa. Absa Group also has subsidiaries in Kenya, Botswana, Ghana, Tanzania, Uganda, Mauritius, Mozambique, Zambia and the Seychelles. With more than 600 branches, 8,600 ATMs, and 9.5 million customers in South Africa, Absa has an extensive presence across the country.  At 30 June 2021, its gross loans and advances to business banking customers totalled R130 billion.

During the Covid-19 crisis, Absa was one of the first banks to announce a comprehensive support plan, the “Covid-19 Payment Relief Plan”, for its clients in corporate, wealth, business bank, private bank and retail (SMEs and individuals). The plan offered a systematic deferral of payment and was the largest provided by a South African bank.

Signed on December 17th 2021, the operation between Proparco and Absa consists of a 20 million United States Dollars loan, dedicated to finance Corporate SMEs[2] operating in sectors impacted by the Covid-19 crisis: including construction, manufacturing, transport, tourism, wholesale, and retail.

For Emmanuel Haye, deputy head of the Financial Institutions Debt Group, covering Africa and Middle East, at Proparco: “This operation is fully in line with Proparco’s strategy to support the financial sector in its response to an unprecedented context of the crisis linked to the Covid-19 pandemic. We are delighted to start this partnership with Absa Bank, a key player with a strong pan-African presence and to be part of a much-needed counter-cyclical role.”

Parin Gokaldas, Group Treasurer at Absa, stated: “The agreement further enables Absa to provide financial support to corporate SMEs, a vital component of the local economy, as it recovers from the impact of the Covid-19 pandemic. We are particularly pleased with the agreement as we view the relationship with Proparco, a significant development finance institution in Africa, as strategically important.”   

[1] McKinsey & Company: How South African SMEs can survive and thrive post-covid, July 2020.

[2] SMEs with an aggregated annual turnover amount between ZAR 40 million and ZAR 400 million (equivalent to 2.5 and 25 million dollars)

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Absa Purchasing Managers’ Index (PMI) Rose To 57.1 Index Points In January 2022

Absa Purchasing Managers’ Index (PMI) Rose To 57.1 Index Points In January 2022

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The seasonally adjusted Absa Purchasing Managers’ Index (PMI) recovered from December’s loss of momentum and rose to 57.1 index points in January 2022, following a dip to 54.1 in December 2021. The current level is in line with November’s reading, but above the average recorded in the fourth quarter of 2021 and reflects a strong start to the year for the manufacturing sector.

The improvement in the headline PMI was to a large extent driven by a rebound in the business activity index, up from a low 48.7 points in December to 56.6 in January. The series is seasonally adjusted, so it should not merely be a ramp-up in production after a Christmas break that boosted output. Indeed, an improvement in the (also seasonally adjusted) new sales orders index suggests that demand looked better. In particular, respondents noted a rise in export sales, which could have boosted output. Further supporting the rise in the headline index was another increase in the inventories index. The employment index, albeit still below the neutral 50-point mark at 49.2 points, was less of a drag on the headline reading than the previous month.

Generally, the PMI and most of the subcomponents rose to November’s levels following a decline in December. The forward-looking index paints an even more optimistic picture. The index tracking expected business conditions in six months’ time rose to an almost four-year high of 71.3 points – this is more than ten points above last year’s average reading. Especially amid a likely more challenging global environment of slower real GDP growth and higher interest rates, it is difficult to pinpoint a specific reason that drove the stark improvement in January. Perhaps the rapid downtick in South African COVID cases, without the necessity of strict restrictions on activity, eased some fears that future COVID waves would directly restrict output growth. With Omicron cases also peaking, or already having peaked, in many of South Africa’s trading partners, it could also be expected that export growth improves going forward as demand from the affected services sectors normalises. If sustained, the slight easing of supply chain disruptions in recent months will also be positive for the sector. Another boost to sentiment may come from a bounce back in the local tourism industry following the unwinding of travel bans, aiding manufacturing subsectors with linkages to the hospitality industry.

After reaching an almost six-year high last month, the purchasing price index nudged only slightly lower and remained high at 88.9 points. The decline in the fuel price at the start of January might explain the slight drop in the index relative to December. If so, the increase in the fuel price, effective tomorrow, may once again put upward pressure on costs.  

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Absa Group 2021 Earnings Increase On Lower Impairments, Higher Pre-provision Profit

Absa Group 2021 Earnings Increase On Lower Impairments, Higher Pre-provision Profit

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*Salient points

  • Revenue increased 6% to R85.9billion
  • Operating costs rose 4% to R47.4 billion
  • Cost-to-income ratio decreased to 55.2% from 56%
  • Pre-provision profit increased 7% to R38.5 billion
  • Impairments fell 59% to R8.5 billion
  • Headline earnings per share increased to 2197 cents from 946.5 cents
  • Return on equity improved to 15.8% from 7.2%
  • Group CET 1 ratio improved to 12.8% from 11.2%
  • Dividend per share declared: 785 cents (no dividend in 2020)

*Note: Normalised values are reflected (stripping out the effect of the separation from Barclays PLC)

Absa Group headline earnings more than doubled to R18.6 billion in 2021 (R8 billion in 2020), well in excess of 2019 earnings, as pre-provision profit increased and as the impairments charge reduced substantially.

The improvement in part reflects a stronger than expected economic recovery in South Africa, where Absa generates most of its income. South Africa’s gross domestic product improved from a low base in 2020 and showed improving momentum for most of the year. All of the countries in which Absa has a presence look to have returned to positive economic growth during 2021.

“This is a strong set of results which reflect the benefit of, not only the improved operating environment in 2021, but also the deliberate actions that we have taken to ensure that Absa remains resilient and poised to resume our growth plans in a favourable environment,” said Jason Quinn, Absa Interim Group Chief Executive. “Our purpose-led approach to supporting our clients and communities defined our success in a tough environment while also creating value for shareholders,” he said.

Revenue growth remained resilient at 6%, or 8% in constant currency, supported by strong growth in net interest income (up 9%). Non-interest income was in line with 2020 levels, as the negative impact of Covid-19-related claims in the insurance business eroded the benefit of strong income increases in areas including Global Markets.

Solid revenue growth and cost management helped to deliver positive pre-provision profit growth over the past two years.

Absa continues to make material investments in information technology (IT), where costs increased by 19% to R4.9 billion as Absa sought to build on the gains made during the past three years in improving system reliability and stability for customers, and to strengthen security and controls.

Impairment charges were significantly lower than in the prior year as fewer customers defaulted on loans and the outlook for defaults improved on the back of improved macro-economic conditions.

Customer deposits grew 12%, supported by strong performance in the retail and business banking and corporate deposit portfolios and the closure of the Absa Money Market Fund, with a significant portion of those customers electing to migrate to Absa deposit products. Growth in gross customer advances at 7% was supported by strong growth in secured assets in South Africa, where home loans increased 9% and vehicle asset finance rose 10% as Absa continued to gain market share in these areas.

“We have come through the crisis in a strong position, having focused on managing operating leverage, building balance sheet resilience and preserving capital,” said Punki Modise, Absa Interim Group Financial Director. “These actions and our financial performance resulted in a return on equity that exceeds our cost of equity, years ahead of expectation,” she said.

Return on equity improved to 15.8% in 2021, while Absa Group’s Common Equity Tier 1 (CET1) ratio was strong at 12.8%. At this level, Absa’s capital reserves are above the Board target level and above the minimum regulatory capital requirement level.

Retail and Business Banking (RBB)

RBB earnings more than doubled as significantly lower impairment charges were partially offset by a 3% contraction in pre-provision profit, reflecting the impact of higher excess mortality claims in the life insurance business, customer fee cuts of R600 million to alleviate strain on customers, and increased performance costs. RBB operations outside of South Africa contributed to the improved performance and returned to profitability in 2021.   

Since the start of the Covid-19 pandemic, RBB has focused on being close to customers and responding proactively and empathetically with initiatives to support them. This approach continued in 2021 as customers were supported through lockdowns and civil unrest with bespoke relief measures including debt restructuring, debt consolidation and assisted asset realisation.

In 2021, the focus shifted from mitigating the financial consequences of the Covid-19 pandemic to growing the business in a sustainable and selective manner through dynamic execution of the strategic transformation journey launched in 2018. The customer franchise strengthened as reflected in key performance indicators in South Africa, including:

  • a 49% increase in home loan registrations
  • vehicle asset finance production increasing 24%
  • new personal loans increasing 40% in South Africa
  • cheque account sales increasing by 73%, which is 24% higher than 2019 levels

RBB SA is in the second phase of its 2018 strategy, focusing on smart growth. Its main priorities include improving customer primacy, making progress with digitisation and growing capital-light revenues, including in our integrated bancassurance operations. 

In 2021, RBB revamped key capabilities within the customer relationship matrix, including the launch of a behavioural rewards programme – Absa Advantage – which, as a data-driven customer communication approach, has improved the understanding of customer preferences and therefore enhanced the ability to engage empathetically in all interactions. 

Social media engagement with customers has been elevated across the business as evidenced by the improvements made in the 2021 BrandsEye Net Sentiment Banking Index where Absa came out on top after being the bottom ranked bank for a number of years.

Absa also remained at the forefront of digital payment innovation with the launch of Apple Pay in South Africa, as well as contactless payments with Garmin and FitBit wearables as well as the introduction of the universal QR scan to pay functionality in the Absa app in 2021.

Corporate and Investment Banking (CIB)

CIB headline earnings increased to levels higher than prior to the pandemic, with strong growth recorded across corporate banking and investment banking and across regions. Earnings performance was supported by income growth of 10% as the client franchise grew and primary-banked client numbers increased. Improved credit performance and a 78% drop in impairment charges further supported earnings.

All core business units delivered double digit revenue growth in constant currency, with strong performance from Markets despite the high base. A 14% increase in Global Markets income was supported by solid franchise growth across both Corporate and Institutional client base.

Having completed the balance sheet led phase of its strategy and separation from Barclays, CIB is also successfully prioritising customer primacy, as well as deposit and non-interest revenue growth, carefully balancing growth and returns.

Absa made significant progress in building on existing environmental, social and governance (ESG) capabilities and in its aspiration to become an African leader in this space. Absa was the first South African bank to announce sustainable finance targets with the aim to finance or arrange over R100 billion for ESG-related projects by 2025. We also announced Africa’s first certified green loan from the International Finance Corporation, with a value of $150 million.

An active force for good

Absa actively contributed to creating inclusive sustainable economic growth in Africa, investing close to R195 million in support of communities through various education and youth employability, advocacy and thought leadership, as well as COVID-19 and Civil Unrest response initiatives.  These included, among others:

  • The launch of the Absa Fellowship Programme, which aims to support the development of authentic, accountable, and ethical future leaders with the potential to play a shaping role in their respective communities in Africa.
  • The Absa Cross Skilling programme, a collaboration with our CIB clients to cross-skill 238 young people after Covid-19-related job losses.
  • 17,873 unemployed youth supported through technical, vocational and digital skills among others.

Absa invested in initiatives that promote fairness, equality and transparency across all our African markets. These included, among others, financial contributions and leadership support towards the Gender-Based Violence and Femicide Response Fund in South Africa.

Absa also contributed to initiatives in support of business relief for informal traders and micro-enterprises affected by Covid-19 and Civil Unrest in South Africa.

Looking ahead

The outlook for the global economy in 2022 is particularly uncertain. Events in Ukraine are acute, and sharp moves in commodity prices and potential interruptions to supply are likely to trigger significant re-assessments. Absa currently expects South Africa’s economy to grow by 2.1% in 2022, returning to pre-Covid absolute GDP levels by the end of the year. In countries outside of South Africa, where Absa has a presence, GDP-weighted economic growth of 5.3% is expected.

Based on these assumptions, and excluding further major unforeseen political, macroeconomic or regulatory developments, Absa expects high single-digit revenue growth in 2022 and return on equity at similar levels to 2021.

“While the outlook for the global economy in 2022 is particularly uncertain, we feel positive about the strong base that we have built in the past few years and how this has positioned us to deliver on our strategic objectives,” said Quinn. “We will pursue growth opportunities appropriate to the environment and shore up buffers as needed to ensure that the bank remains resilient.”

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Absa Group Strengthens Executive Team, Refines Operating Model

Absa Group Strengthens Executive Team, Refines Operating Model

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Absa Group Strengthens Executive Team, Refines Operating Model

As part of Absa Group’s journey to enhancing market competitiveness and with due consideration to its transformation imperative, the Group today announced a strengthened Group Executive Committee (Exco) and a refined operating model, effective 1 July 2022.

Absa embarked on a new strategy in 2018. The strategy, which has been refreshed, set Absa on a growth path and enabled it to build momentum. The Group is now positioning to intensify its efforts to compete.

“We are reconfiguring Group Exco to create an organisation that is closer to customers, shows superior commercial performance and is fuelled by functional excellence,”  said Arrie Rautenbach, Absa Group Chief Executive Officer. “The inclusion of best-in-class commercial and revenue-generating skills from key customer segments will complement Absa Group’s existing high-calibre Exco team and give credence to Absa’s re-anchored strategy while allowing us to accelerate strategy execution,” he said.

Group Exco changes:

  • Given the elevated importance of both strategy and sustainability, and the integration of the two in the current environment, Punki Modise has been appointed Group Chief Strategy and Sustainability Officer, part of the Exco team.
  • Key leaders in the former Retail and Business Banking (RBB) business unit have been appointed to Exco roles. They are Faisal Mkhize, Cowyk Fox and Geoffrey Lee, responsible for Relationship Banking, Everyday Banking and the newly constituted Product Solutions Cluster, respectively.
  • In addition to his current responsibilities, Saviour Chibiya is now responsible for RBB ARO as Chief Executive: ARO and assumes full accountability for the RBB ARO business. ARO refers to Absa Regional Operations.
  • Thabo Mashaba was recently appointed as Interim Group Chief People Officer, also an Exco role.

The changes see Absa Group move from two commercial business units – RBB and Corporate and Investment Banking (CIB) – to five business units. These are: Everyday Banking, Relationship Banking, Product Solutions, CIB Pan-Africa and RBB ARO. CIB remains unchanged and will continue to be led by Charles Russon, who maintains accountability for CIB Pan-Africa.

“There are clear commercial benefits that will flow from the operating model changes and a more diverse leadership team, with further opportunities to strengthen our transformation profile,” said Rautenbach.

Progress is underway with regards to permanent appointments in the roles of Group Chief People Officer, Group Chief Information Technology Officer and Group Chief Brand and Marketing Officer, which will be announced in due course.

The additions to the Exco structure complement Absa Group’s existing high-calibre executive team. The new structure and operating model are intended to support Absa’s strategy, and increase the scope of Absa’s senior leadership, ultimately allowing the Group to harness greater talent and transformation from the internal pipeline.