The expected R33-billion inflow from the Barclays/Absa deal could boost South Africa’s gross domestic product (GDP) growth by as much as 0,5% for a couple of years, according to Absa’s chief economist, Christo Luus.
He says that apart from representing the biggest single foreign equity investment undertaken to date in South Africa, British banking group Barclays’ bid for a 60% stake in local bank Absa marks an historical shift in character for the local banking industry and reflects heightened foreign investor confidence in the local economy.
“At the same time, the bid has important potential implications for banking liquidity in South Africa, liquidity on the JSE [Securities Exchange] and the course of interest rates,” Luus says.
“In order to give some perspective regarding the size of this amount,” he explains, “South Africa’s current account deficit for 2005 is forecast to measure some R68-billion, implying that such a deal could be able to finance some half of this deficit for the year.
“This is significant, given that this deficit is anticipated to be sizeable [about 4,7% of GDP] by historic standards.
“Since the beginning of 1994 through to the end of 2004, FDI [foreign direct investment] into the country averaged only $1,6-billion per annum [1,2% of annual GDP], while net FDI averaged an even smaller 0,7% of GDP per annum during this period.
“Over the past six years [1999 to 2004], foreign direct investment inflows amounted to $18,1-billion [R121-billion], and included the De Beers purchase by Anglo-American, which can scarcely be regarded as true FDI.”
Although the exact timing and extent of the inflow relating to the deal is not known, he adds, the Barclays/Absa deal could potentially amount to almost 30% of total FDI inflows over the past six years.
“By potentially bolstering the country’s reserve position by a similar rand amount as the size of the inflow, South Africa’s ability to grow faster for longer will be increased. There will be less need to cool down the economy because of a current account constraint.
“The rand could then also remain stronger for longer which would contribute towards the inflation target continuing to be met and obviate the need for much higher interest rates,” Luus says.
He says that dividend payments to the tune of R1-billion a year will evidently accrue foreign shareholders each year (affecting the current account), but may be offset by potentially bigger inflows accruing to Absa via expanded African operations.
Furthermore, by improving domestic business opportunities, investment and growth, the deal may reduce the desire of both resident and foreign shareholders to repatriate dividend income.
“Any capital that is freed up and made available to existing Absa shareholders could be applied in any of the following ways: consumption expenditure; fixed capital formation; foreign investment; or saving (eg by investment in asset markets).
“While it is estimated that traditionally around 30% of net FDI will, within a couple of quarters, flow into gross fixed capital formation, most of the macro-economic magnitudes stand to benefit, and would therefore also be beneficial to South Africa’s GDP growth.
“Annual GDP may be boosted by as much as 0,5% for a couple of years as a result of an FDI inflow of this magnitude,” Luus states.
South Africa’s notoriously low ratios of gross domestic saving and gross fixed capital formation as a percentage of GDP could therefore be boosted by between 1% and 2% (from their levels of respectively 14,9% and 15,8%). Higher levels of fixed capital formation could support the formation of new businesses and employment, and increase government revenues (tax income), which would facilitate higher levels of social and infrastructural spending by the government.
“It is estimated that some 60 000 new jobs may be created over a period of five years due to a capital inflow of this magnitude,” Luus contends.
The boost to sentiment that such a large FDI deal will provide must be rand-supportive, he adds. Such support would assist in further improving South Africa’s country risk rating and facilitate the final abolition of the country’s exchange-control regulations.
“The deal also gives substance to National Treasury director general Lesetja Kganyago’s stated intention to turn South Africa into a global financial hub. With Barclays being a major player on the African continent, the merger could benefit Johannesburg in becoming an African hub for the banking group, thus leading to the expansion of the local financial-services sector with positive job-creating implications.
“For domestic companies with foreign trade or investment links, the prospect of a truly global bank being present in South Africa facilitates and lowers the cost of doing business globally.
“Where Barclays can contribute to improvements in efficiency, through providing economies of scale, increasing competition in local banking, or through improving quality through skills transfer, it can make a contribution towards reducing banking costs for both retail and wholesale customers, contributing to lower inflation and enhancing South Africa’s competitiveness.
“Absa, along with other South African companies, may be able to access international capital markets [London] more easily, impacting positively on their cost of capital. This might even lead to more, and sustained, inflows of foreign capital.” — I-Net Bridge