“In South Africa, the full impact of a downgrade to sub-investment status will probably only manifest over the next 12 to 18 months. Companies in strong balance-sheet positons should be cautiously opportunistic and look for value-enhancing acquisitions both in South Africa and abroad. As much as economic conditions may be tough, my view is that we should never let a good crisis go to waste,” says Zaid Moola, Head of Client Coverage South Africa for Corporate & Investment Banking (CIB) at Standard Bank. In this, the first article in a series from Standard Bank specialists, Zaid talks about the trends he is seeing in his area of expertise and offers expert advice for CFOs.
What trends are you seeing in your area of expertise that finance leaders should be aware of?
"There are several trends that we are seeing, including political instability, the search for growth, Africa versus developed markets, technology and digitisation, sector trends, and B-BBEE. I'll cover each one in turn."
"The past 18 months have seen immense volatility within the South African political arena; from the dramatic replacement of minister Nhlanhla Nene, dubbed 'Nenegate', through to the shift in the political dynamic in the local municipal elections and, more recently, the 'dismissal' of Minister of Finance, Pravin Gordhan. This all culminated in sovereign ratings downgrades to sub-investment grade status by both S&P and Fitch. In light of this, a focus on liquidity and managing risk will be critical going forward."
"Given the above, the search for growth has become a key focus for CEOs, CFOs and broader management teams. Considering South Africa's benign growth (0.5 percent in 2016), corporates have struggled to grow organically within the market. With interest rates having increased by 125bps over the past 18 months, this, coupled with 'tax creep', places the consumer under pressure, which ultimately affects corporate South Africa."
"As far as Africa versus developed markets is concerned, management teams have been forced to look outside South Africa for growth. However, considering that Sub-Saharan Africa grew at a rate of only 1.4 percent, and given the challenges faced by key markets such as Nigeria, Angola and Mozambique, South African corporates have been forced to look outside Africa to developed markets such as the UK, Europe, the USA and Australia. This will offer different growth prospects but more importantly, a level of diversification away from volatile emerging markets."
"Embracing technological advances and streamlining processes through digitisation is a key theme within the corporate world. The evolution of 'disruptors' has threatened the existence of many well established businesses, which has resulted in corporates looking to invest in innovation to explore untapped revenue streams, as well as driving cost efficiencies."
"As far as sector trends goes, sectors that have been through lengthy down cycles, for example, Metals & Mining, Oil & Gas, Construction & Cement, have seen and will continue to see consolidation. Smaller and medium-sized businesses, including family-owned businesses, have become the target acquisitions of private equity and other larger players within the industry."
"BEE is one again very relevant across a wide range of sectors, and many corporates seem to be going the B-BBEE route. Simultaneously, there is considerable focus on black industrialists, supported by government and the Department of Trade and Industry (dti)."
How are you helping your clients with these challenges?
"By supporting them and partnering with them as they grow. For example, we've worked with ABInbev as African advisors on the third-largest M&A deal in history; with Dischem, supporting a family business and helping it to become a JSE-listed player; with Liquid Telecom, partnering with Liquid on their acquisition of Neotel to create the largest, independent pan-African fibre network; with Sea Harvest, where we used our expertise to assist the client to navigate unchartered waters; and with MTN, who we consistently partner with on their journey. Aside from this, we also advise and fund many different B-BBEE transactions."
What should CFOs expect over the next 12 to 18 months?
"Given the recent political uncertainty, as well as further key milestones like the ANC's election of its new president in December 2017, there is potential for further volatility. While global uncertainty seems to have subsided for now, there is still room for surprises in the UK and Europe, due to Brexit, as well as in the US, due to Trump."
"In South Africa, the full impact of a downgrade to sub-investment status will probably only manifest over the next 12 to 18 months. Growth will be challenging and financial discipline in particular around liquidity (balance between short-term and long-term funding) will be important. Interest rate and currency risk should be managed carefully. Companies in strong balance-sheet positons should be cautiously opportunistic and look for value-enhancing acquisitions both in South Africa and abroad. As much as economic conditions may be tough, my view is that we should never let a good crisis go to waste and we should look for the opportunity within the crisis."
Standard Bank's Client Coverage business consists of skilled, sector-focused relationship managers who look to service the bank's customers by providing them with innovative, client-centric solutions and coordinating their relationship within the universal bank.
