Futuregrowth... or lack thereof
South African Finance and Economics Update
It's red across the board as far as our local economic indicators are concerned.
Members of the US Federal Reserve have continued to suggest that the US will raise interest rates this year. This makes the US a relatively more attractive place to save money and as a result the dollar has strengthened against most currencies. However, I had a conversation with a very experienced fund manager during the week who felt that the fall in the rand was "90% local". He is of course referring to the ongoing risk of Finance Minister Pravin Gordhan being arrested by the Hawks and President Jacob Zuma's decision to put himself in charge of a committee to oversee state owned enterprises ["SOEs"]. On Wednesday Futuregrowth, an large investor, added itself to the list of issues by saying it would no longer lend to state owned companies (see below).
South Africa's exports decreased 9% or R9.4bn from June to July. Imports decreased by 2.4%. This is a sign of both decreased demand for SA's goods overseas and weak local growth. The relatively larger fall in exports makes SA's trade surplus smaller and weakens the rand.
Clothing retailer Mr Price reported that its comparable sales fell 3.6% in the 18 week period ending 6 August. The shares are now down nearly 18% this year with competitors Foschini and Truworths in an even worse position. SA's retailers are suffering from low economic growth, high unemployment, weak consumer confidence and a warm start to winter. Retail sales in June were up only 1.7% vs. the previous year, well below expectations.
(Sources: CNBC, Times Live, BusinessTech, Business Day, Trading Economics)
On Tuesday 30 August Futuregrowth Chief Investment Officer, Andrew Canter, told Bloomberg news that his organisation would stop negotiations to lend to three of South Africa's state owned enterprises ["SOEs"] and suspend lending to Eskom, Transnet, Sanral, the Landbank, IDC and DBSA . Futuregrowth is owned by Old Mutual and is Africa's largest private investor in interest bearing and developmental investments.
The rand fell by as much as 1.7% vs. the US dollar, the yield on Eskom's bonds jumped to the highest level in 7 months and the yield on South Africa's government bonds went up. You can think of yield like interest rates, up is bad if you're a borrower.
The company said in statement on its website that its decision was driven by months of "conflict between branches of South Africa’s government, the possible machinations of patronage networks, and a seeming challenge to the independence of the National Treasury". Futuregrowth said they would breach their responsibilities and duties to investors if they continued to lend money while there were concerns about governance, budgeting and approval processes at SOEs.
Wow! Thats a huge statement. One commentator has even compared it the decision of international banks to stop lending to the apartheid government after PW Botha's Rubicon Speech (even more dramatic!)
Are things really that bad?
The key question is what impact Futuregrowth's actions will have. The company manages around R170bn of assets across all of its investments and the loans to the 3 SOES that were cancelled amounted to R1.8bn. SA's SOEs have total assets of greater than R1 trillion and government has been prepared to issue billions of rands worth of state guarantees. Eskom has made a statement that the decision does not put Eskom's funding plan at risk.
As an isolated incident, Futuregrowth's decision is not the end of the world. What remains to be seen is whether other investors will make the same decision. Unfortunately Denmark's Jyske Bank (I hadn't heard of them either) has already announced that it has stopped lending to Eskom.
Our view is that the financial impact of Futuregrowth and a couple of other lenders refusing to lend to SOEs is far less important than the message they send about the underlying state of the economy and politics in South Africa. We've made a similar comment in a Louwdown about the ratings agencies and we recently argued that the results of the local government elections were a strong signal that the electorate wants to see implementation of sensible growth policies like the NDP and a return to political stability. The ongoing persecution of Finance Minister Gordhan and renomination of Ms. Myeni as Chairperson of SAA are indications that government has not heard the message.
What would you still lend to SA's SOEs if you were an asset manager.... participate in our survey and join the conversation on Facebook.
Dr Andrew R Louw CFA
(Sources: Bloomberg, Futuregrowth, biznews.com, Business Day, ANC, Eskom, BusinessTech, Twitter, IOL)