South Africa’s economy remains under pressure and recent indicators do not provide much hope for an economic acceleration anytime soon. The economy is also threatened by political turmoil. The recently withdrawn fraud charges against the finance minister suggest a level of political interference which has created uncertainty in investor’s minds.
In late October, the government delivered its Medium-Term Budget Policy Statement and announced that it will opt for a more restrictive fiscal policy against the backdrop of slower economic growth. The threat of a ratings downgrade to junk status looms which could create a very difficult and bumpy 2017.
Review of 2016
As with all emerging markets, South Africa faced significant challenges from weaker commodity prices, lower Chinese demand and the possibility of rising US interest rates. These difficult headwinds were further compounded by domestic factors including policy uncertainty, infrastructure gaps and a severe drought that gripped the country. The forecast for real GDP growth is 0.8% in 2016, down from 1.3% in 2015 and the lowest rate of growth since 2009.
In spite of these challenges, the Islamic finance industry continued to show growth. The banking sector was boosted by the introduction of Shariah banking services by Standard Bank. Innovation and product development within Islamic finance is assisting in attracting new customers to the Islamic banking industry.
Asset managers continued their recent growth trends; however, the returns for most asset managers were under pressure given the volatility in the markets. With only one Takaful operator in the market, the growth of Takaful has been sluggish over the year. The demand for General and Family Takaful remains strong but increased competition or greater partnerships with the Islamic banks is needed to propel this market. The market is watching this space closely and the success of the Takaful offering will result in acceleration from other financial institutions to develop products like life covers, pension funds, medical aid and the like.
With South Africa’s need for funding, speculation has been rife around the issuance of a second Sukuk. The South African government issued its debut US$500 million Sukuk in 2014. The Sukuk facility was four times oversubscribed, highlighting the appetite for this product. It was expected that a second issuance would happen in 2016 but development is ongoing and it would seem that this Sukuk would be issued sooner rather than later.
Preview of 2017
In December, South Africa faces a sovereign credit rating review and the country will either just manage to scrape through or face a downgrade to junk status. The effect of a downgrade will be felt for some time and would adversely affect growth.
The Islamic finance industry, with low penetration rates, has room to grow; however, there will be some significant challenges.
The volatile currency is forcing investors to look for more stable investment options. We see an increasing number of customers moving into the international property market, and with business confidence down, property finance deals are increasingly coming under pressure in terms of volumes and profit margins.
Over the course of 2016, we have seen new car sales figures plummet. It is expected that this trend will continue and will have an impact on the banking and Takaful markets.
With the local economy under pressure, the South African Islamic finance industry has to adapt, innovate and evolve to continue on its growth trajectory. The market is looking for alternatives but there is a need for education and awareness to highlight the value that Islamic finance provides. One of the major opportunities remains the expansion into the rest of sub-Saharan Africa where the market is crying out for affordable, interest-free banking.