Cape Town - South Africa’s banking sector is becoming a battleground between President Jacob Zuma’s patronage-driven ANC and those opposing that faction, said two analysts from the global bank BNP Paribas.
Nic Borain, political analyst, and Jeffrey Schultz, economist, said in a joint report issued by the bank that the noise surrounding the leaked report on Absa’s so-called bailout, Mineral Resources Minister Mosebenzi Zwane’s comments last year about a bank investigation, as well as the lack of urgency in signing the Financial Intelligence Centre (FIC) Bill into law are interrelated.
“All this points to modest systemic risk for South Africa’s financial services sector,” Schultz and Borain said, which could even lead to an eventual credit rating downgrade later in the year.
Zwane’s ‘bank investigation’
The risk spiked last year when Zwane released what he claimed was a cabinet statement calling for an investigation into the banks that had suspended the accounts of the politically influential Gupta brothers and their associated companies, an investigation Zwane said should extend to the South African Reserve Bank (Sarb).
Although Zwane was eventually called to order, among others by the president, the threat of such an investigation has lingered.
A recently leaked report by the public protector suggests that Absa might have to pay back an apartheid-era “bailout” of some of its predecessor entities.
“This issue has become a focal point for media linked to the Guptas, most obviously the ANN7 television network and The New Age newspaper, as well as numerous Twitter accounts, with claims that 'white monopoly capital' has a stranglehold on the economy and that Finance Minister Pravin Gordhan is an agent of that agenda,” Borain and Schultz said.
The renewed (negative) focus on the financial sector and the deals struck under the apartheid regime are morphing into a priority to step up the pace of “radical economic transformation”.
The ANC’s recent lekgotla reportedly saw Zuma send back a draft policy document indicating that it was not radical enough.
FIC Bill – delaying tactics?
In addition, the president sent the FIC Bill back to parliament in November on the grounds that some of its provisions might be unconstitutional, especially those relating to “warrantless searches”.
The bill in its current form has been met with a significant amount of hostility from Zuma’s support base.
The Black Business Council and the Progressive Professionals Forum have also expressed concerns that the legislation would subject politically influential persons to more vigilant monitoring and supervision by banks and the FIC, rather than by the police and state security agency.
A commission of inquiry into the banks now looks likely to be held this year and to address the sector’s need to step up “empowerment quotas” for black individuals and businesses.
Comments from the chairperson of Parliament’s standing committee on finance Yunis Carrim indicate that the “transformation objective” is now a political priority in terms of the financial services industry, whatever impacts that might have on its stability or profitability.
“We expect this to be confirmed when the ANC hosts its national conference in December,” Borain and Schultz said.
These developments are likely to unnerve the banks, which until now have been secure in the notion that the current banking charter and black economic empowerment targets are adequate.
The banking sector has perceived itself to be protected from further government pressure, as it is uniquely covered by a special “once empowered, always empowered” clause (black ownership need not remain at or above the required 26% if a black owner chooses to sell a stake), something that the mining sector is currently disputing in the courts.
The authors of the report cited research by Intellidex in 2015 into the value creation of BEE deals conducted by the 100 largest companies on the JSE, which shows that the largest generator of wealth through such schemes was mining (R101bn of value since 2000). According to the report, this is almost double the amount of value that banks have created.
“It should be noted that the BEE value creation of both banks and the broader financial sector stands at more than R90bn. The sector accounts for a much bigger slice of GDP than mining does (financial services make the single largest sectoral contribution to GDP growth at more than 25% of the total),” Borain and Schultz said.
SA's reputation on the line
“In our view, the signing into law of the FIC Bill is of paramount importance. Further delays to its implementation could have severe consequences for South Africa’s financial services industry which, according to the World Economic Forum’s 2016/17 Global Competitiveness Report, ranks number one in the world on the strength of its auditing and reporting standards, number two on the soundness of its banking system and number three on the regulation of its securities exchange.”
South Africa continues to rely heavily on foreign financing of its still swollen twin deficits, Borain and Schultz said.
“We think a failure to enact the bill could have similar implications for the country’s future costs of funding as a downgrade of the sovereign credit rating to junk status would, although this is difficult to quantify, as the extent of a global backlash in that event is unclear.
“Indeed, a refusal to sign this bill into law might also lead to a sovereign downgrade down the line, depending on its economic and financial-market implications.”