2010 Legacy: We need to bank on South Africans

2010-07-15 13:22

The financial sector is banking on a turnaround in the economy to sustain its performance through to 2014.

In fact, global forecasting ­company Global Insight predicts that South Africa’s ­real gross domestic product (GDP) growth will average 3.9% between 2010 and 2014.

It is intriguing that foreign investors have a positive view of South Africa’s financial sector.

One could argue that it is in this sector that South Africa has built up a ­global comparative advantage.

Indeed, the World Economic Forum’s 2009-10 ­Global Competitiveness Report rated South Africa fifth for the soundness of its banking sector and sixth for financial market sophistication out of 133 countries.

Coupled with strong economic growth in ­sub-Saharan Africa (averaging 4.9% to 2014), as well as rising trade and investment flows between Africa and other emerging markets, the outlook for financial ­services looks solid.

The sector’s two greatest challenges in the years leading up to 2014, however, will be financial inclusion and rising competition.

The challenge facing our financial system is how to democratise finance (this refers to the provision of financial services to more people).

We need to keep developing solutions which are affordable and profitable and meet the needs of customers who have been excluded.

It is because of heightened competition – where ­banking services are increasingly being provided by new entrants as well as retailers and information technology and telecommunications companies – that this democratisation of finance is so important to banks.

Other than creating more customers, there is a more important benefit to be gleaned from financial deepening. The achievement of real transformation in South Africa will lower the country’s risk rating – and hence the cost of capital – through lowering income inequality and unemployment and raising GDP per capita.

If the proposed Industrial Policy Action Plan is ­effectively implemented, we expect to see a marked ­improvement in manufacturing and the creation of ­employment through labour-absorbing industrial ­activity.

If the contemplated recapitalisation of development finance institutions occurs, then small and ­struggling businesses should have access to cheaper funding, which should provide new jobs by 2014 and support bank lending.

The National Treasury expects South Africa to create one million jobs by 2014, reducing unemployment to 21.7%. All of this should boost GDP growth towards the 5% forecast and bring more people into the formal economy and tax base.

The two key variables for successful financial deepening are employment and inflation.

Customers can open a bank account only once all their documentation for the Financial Intelligence Centre Act has been presented.

One needs a formal-sector job before this is possible in order to prove one’s income level, and boosting ­sectors that employ semi- and unskilled labour will be critical to reduce our structurally high unemployment.

Inflation is key because of its relation to nominal ­interest rates. Lower interest rates drive higher affordability – the current downward cycle in prime from 15.5% to 10% has improved monthly debt affordability by 29%.

Global Insight suggests that inflation will be between 4.7% and 5.8% from now until 2014, which should keep interest rates relatively low.

This should stimulate bank lending, job creation and financial deepening.

Financial institutions also have a broader role to play by providing a funding conduit to Africa, for funds that increasingly come from the Far East.

African fiscal discipline and macroeconomics are improving, with average real GDP growth of 8% for the past 10 years. Inflation and interest rates are declining and banking supervision is improving – all leading to increased bank lending.

Opportunities abound on a continent with almost one billion people.

With an increased trajectory of South African government policy towards the rest of the ­continent, it is likely that by 2014 more South African corporates will have expanded their presence as a more integrated market starts to take shape.

Africa accounts for 3% of global trade, but by ­facilitating African trade and investment activity, banks should play a role in helping this to rise by 2014.

We can definitely improve the South African national competitive advantage by 2014 and beyond, for the ­benefit of all of South Africa.

»?Tshabalala is chief executive of Standard Bank South Africa

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