Citigroup Disappointed by South Africa Investment as Deals Stall

JOHANNESBURG (Capital Markets in Africa)  – Citigroup Inc. invested to expand in South Africa. Now all the New York-based bank needs is deals.

“We have in the two last cycles appropriated additional capital to continue to grow our business, but we haven’t seen as big a deal flow to be able to execute against that,” said Citigroup Chief Country Officer Peter Crawley. “We’re very much sitting on the side and battening down the hatches, planning for a difficult scenario. But hands on today, eyes on tomorrow.”

President Cyril Ramaphosa’s slow progress in returning the continent’s most industrialized economy back to growth is stunting takeovers and bond issuance and causing equity-related deals to plummet to record lows. His administration is also grappling with how to deal with power utility Eskom Holdings SOC Ltd., which has debt equal to about 8% of gross domestic product.

South Africa is one step away from falling out of the World Government Bond Index, with only Moody’s Investors Service assessing the nation’s debt as investment grade — a rating due for review in November. The economy has shrunk four out of the past nine quarters, weighing on business and factory confidence. Spending by households, which accounts for 60% of GDP, remains weak, while the government’s expenditure continues to outpace income.

A number of foreign investors are “sitting on the sidelines” waiting for clarity on Eskom and Moody’s, Crawley said. More also needs to be done to appease foreign direct investors on property rights, he said, as the country debates how to give the majority black population greater land ownership. “Challenges are policy certainty and growth.”

While the value of mergers and acquisitions in the first half of this year rose 25% to 2.25 billion rand ($160 million) from the same period in 2018, there were no deals of over $100 million in the second quarter, according to data compiled by Bloomberg.

There were six announced deals in the first six months of 2019 — including Naspers Ltd.’s plans to buy full control of a Russian online classifiedsbusiness for $1.1 billion. That’s unchanged from a year earlier. Citigroup advised on the Naspers deal to top South Africa’s M&A league table.

Citigroup’s local commercial-banking unit is seeing “mid-single digit growth” in rand terms year-on-year, Crawley said, adding that the lender will focus on the immediate needs on the multinationals it serves in the country. Uncertainty over the direction of the rand is opening up hedging opportunities, he said.

Citigroup’s South African unit is the largest foreign lender in the country, with assets of 60.7 billion rand as of the end of April, according to data compiled by the nation’s central bank. That compares with 1.37 trillion rand held by Standard Bank Group Ltd.’s South African unit.

“Any prudent banker should be planning for a downside, but equally we have invested capital here and we do expect modest recovery over time,” Crawley said. “So right now, given some of the uncertainty in terms of execution against the current stated policy direction, we are just sitting tight.”

Bloomberg Business News