14 Nov 2019

IMF insights: global economic doom and gloom not universal

Ingrid Booth

Digital content specialist, Investec

US bankers are feeling bullish while South Africa could see a surprise windfall from global pension funds, says Investec Bank CEO on his return from the annual IMF meetings in Washington.

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Despite the IMF downgrading global growth to 3% for 2019, the slowest pace since the global financial crisis, a strong domestic economy is fueling the confidence of US banks; while back home, South Africa has high hopes of partaking in an emerging market rally.

 

For over 30 years, leaders from Investec have attended the annual IMF meetings in Washington to swap insights with other global banks. The Focus team interviewed Richard Wainwright, CEO, Investec Bank Ltd, who returned from the trip with a renewed positivity about South Africa’s future.

IMF insights on the South African economy

A “wall of money” heading our way?

With 70% of all European government bond yields now negative, European bankers are bracing themselves for “lower interest rates for longer,” says Wainwright, who believes this could go on for another three to five years.

 

While this is bad news for Europe, there could be an unexpected upside for emerging markets like South Africa.

 

Lower interest rates mean that pension funds are searching for yields in different asset classes. “A lot of these pension funds are still defined benefit structured funds whose liability bases are rising by 4-5% in dollar terms globally. If you’ve got negative or very low interest rates, where do these pension funds put their money?” asks Wainwright.

 

“These global pension funds are moving up the risk curve looking at asset classes like emerging markets, private equity and hedge funds - any form of private assets,” explains Wainwright.

 

This sentiment is backed up by the most recent update to the IMF’s World Economic Outlook (WEO) which says that while the growth of advanced economies is set to slow to 1,7% in 2019 and 2020, growth in emerging and developing markets is projected at 3.9%, rising to 4.6 percent in 2020.

 

Investors need to be careful of asset bubbles with money flowing towards new assets classes, warns Wainwright. However, he’s still bullish about South Africa’s prospects. “As a South African banker sitting there, I took that as a very positive signal. There’s potentially massive amounts of investor money available, both debt and equity, for our economy, if we start to get things right.”

 

Citing South Africa’s deep and relatively liquid equity, capital and debt markets and an impressive 4.5% real yield on our bonds, Wainwright believes that pension funds could soon look to our shores. “You could see the rand strengthen very rapidly if that wall of money starts looking towards South Africa.”

“Eskom not too big to fail”

A highlight of the IMF week is a breakfast that Investec hosts for over 180 bankers from around the world to market SA Inc. This year, Investec Joint CEO Fani Titi moderated a panel between Lesetja Kganyago, Governor of the South African Reserve Bank (SARB), and the ANC's head of economic transformation, Enoch Godongwana.

 

On the panel, Kganyago re-emphasised his strong positioning on the independence of the central bank and assured bankers that inflation targeting is very much on track.

 

Speaking about a SARB stress test for a default situation on Eskom, Kganyago said that the South African economy could withstand a default and that the utility is not too big to fail.

Godongwana backed this up by saying that of the R450bn Eskom debt, the sustainable debt levels are R200bn. “He said that the other R250bn, and it will grow, would need to be taken on by government. Eskom itself can’t ever pay that debt, not in its current business model,” recounted Wainwright.

Godongwana was unequivocal in saying that President Ramaphosa has the support of the ANC, particularly on the potential restructuring of Eskom and Tito Mboweni’s economic policy statement that came out of National Treasury.

International investors encouraged by the Zondo Commission

Another theme that emerged from Investec’s meetings with international investors and banks was that the Zondo Commission is seen as a “strong sign of a true democracy”. “Foreign investors see the Zondo Commission as a ruling party in power doing an audit on itself in public,” says Wainwright.

 

Global economic insights from the IMF

US banks leading the charge

While the global slowdown in growth is impacting European banks, the US banks are more immune says Wainwright, thanks to a strong domestic market and the fact that they restructured their balance sheets a lot quicker than their European counterparts post 2007.

 

“The big global US investment banks are leading the league tables globally,” says Wainwright who met with Daniel Pinto, Co-President and Chief Operating Officer of JPMorgan Chase in the US, who told him that JP Morgan is not seeing any signs of financial strain from their 80m domestic customers.

 

When asked about trade wars and the upcoming US elections, the US banks and investors seem fairly certain that President Trump will do a deal with China in order to get re-elected. “It won’t be a permanent deal, it will be a deal to satisfy the markets to ensure that he gets elected,” says Wainwright.

 

“The general feeling is that he will be re-elected if the economy is strong in America.”

 

Climate change and sustainability

 

Wainwright says that in the seven years he’s been attending the IMF, this year is the first time that climate change and sustainability were front and centre at most of the meetings. “It is on everybody’s agenda and all senior management in banks around the world are interested in this topic and are getting ready for it.”

 

Pre the IMF event, Fani Titi travelled to New York for the first meeting of the Global Investors for Sustainable Development Alliance. Titi is is one of only two South Africans to join a group of global leaders tasked with freeing up trillions of dollars from the private sector to finance the Sustainable Development Goals, of which Investec has prioritised six.

About the author

Ingrid Booth image

Ingrid Booth

Lead digital content producer

Ingrid Booth is a consumer magazine journalist who made the successful transition to corporate PR and back into digital publishing. As part of Investec's Brand Centre digital content team, her role entails coordinating and producing multi-media content from across the Group for Investec's publishing platform, Focus.

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