RMB boss warns of flatlining economy
The CEO of one of the country’s largest corporate and investment banks has warned that the path the country is on could lead to an economic quagmire unless new ways to revive growth and manage spiralling public debt are tackled.
“There is a real risk that reductions in consumer spending mean we could see an L-shaped recovery characterised by the economy flatlining at a lower economic output, which would be a terrible outcome for SA and the region,” says Rand Merchant Bank CEO James Formby.
“So, it’s critical we find ways to support growth and encourage National Treasury to bring SA’s debt under control.”
Formby’s comments come on the same day as consumer confidence plummeted to a level last seen 35 years ago, during the period encompassing the defiant Rubicon speech by apartheidera president PW Botha, according to the latest FNB/BER consumer confidence index published on Tuesday.
The index is widely regarded as a leading indicator of consumer spending, which accounts for two-thirds of GDP.
The rapid deterioration in the economy, which was already shedding jobs before the pandemic arrived, has sparked a contentious debate over whether the government should issue more debt in order to direct further spending as a way to revive the economy.
With a sudden contraction in GDP expected this year — as much as 10% by some estimates
– after a decade of profligate public spending and endemic corruption, government debt has spiralled. Government debt relative to GDP is expected to reach 80% at the end of the 2020/2021 fiscal year, according to projections made by finance minister Tito Mboweni.
Deputy Reserve Bank governor Kuben Naidoo on Tuesday warned – after similar comments by governor Lesetja Kganyago – that SA risked becoming another Argentina if it didn’t set out a “clear and realistic path for reducing the deficit”.
“The state’s spending, 35% of which represents wages, has grown well above inflation over the last decade, and we know the government is in fiscal trouble. Unless it cuts back spending, we are going to arrive at a debt level the country just can’t afford,” says Formby.
As a sign of the times the FirstRand group’s investment bank faced during the lockdown, Formby says there were “drastically escalated” levels of engagement with clients who were seeking the bank’s help in developing scenarios to help manage their cash reserves.
“We were inundated with requests for short-term liquidity. Many clients drew down on existing facilities to ensure they could withstand different sce
narios, and many wanted to shore up reserves and asked for additional facilities.
“Those that had less capital structure flexibility had to approach the banks for things like debt covenant waivers. These can only be described as abnormal times,” says Formby.
This resulted in corporates drawing down on loans, seeking new lines of credit and obtaining a relaxation on some of the conditions of their debt.
On the other side of the equation — stimulating economic growth — Formby is encouraged by initiatives to develop infrastructure through public-private partnerships.
At the president’s direction, the country convened the inaugural Sustainable Infrastructure Development Symposium last month, which aims to prioritise and co-ordinate the rollout of large infrastructure projects.
The projects will not require funding from the fiscus and will be directed through a new office in the presidency under the leadership of former Gauteng MEC for economic development Kgosientso Ramokgopa. The office is called Infrastructure SA.
“It’s pleasing to see the president putting his political capital behind this and we are seeing a lot more momentum building on the issue. If Infrastructure SA can get a mandate to be the centre of excellence in government to drive infrastructure and attract the necessary skills, then it could really have a major impact,” says Formby.