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Rise of finance leading factor in rising inequality

Rise of finance leading factor in rising inequality

Excerpt based on an article by Adriano José Timossi, Senior Programme Officer of the Global Governance for Development Programme (GGDP) of the South Centre.

“The global financial system remains fragile. The world economy struggles to recover. Climate change accelerates. Digitization and globalization depress wages. Income inequality is on the rise. Geopolitical turbulences are spreading. Lies are presented as truths. Truth remains unspoken. And people are angry. Karl Marx thought that capitalism was sowing the seeds of its own destruction, eventually leading to a revolution. We believe that rather than anonymous forces, it is the policies of the G7 countries that are now undermining the foundations of the market economy. The G7 policies in the domains of monetary policy, fiscal and macroeconomic policy, prudential policy, defence and climate change policy have a common feature: They are lax, reckless, and irresponsible”.

These astute observations were expressed by Dr YV Reddy in November this year when he participated in a panel of experts to mark the launch of a new book, Playing with Fire, authored by Dr Yilmaz Akyüz, the Chief Economist of the South Centre. The panel discussion took place at the UN Office in Geneva, Switzerland.

The panel was moderated by Mrs Yuefen Li, Special Advisor on Economics and Development Finance of the South Centre, with presentations by Dr. Richard Kozul-Wright, Director of the Division on Globalization and Development Strategies (GDS), UNCTAD, Dr. Y.V. Reddy, South Centre Board Member and Former Governor of the Reserve Bank of India, and Dr. Peter Dittus, Former Secretary General of the Bank for International Settlements (BIS).

Mrs Li said that 20 years from the Asian financial crisis and 10 years from the subprime crisis, there is now a significant build-up of financial fragility in the world economy. Playing with Fire provides a wealth of data and information with insightful analysis of the integration of emerging and developing economies into the global financial system.

Dr. Richard Kozul-Wright welcomed Dr. Akyüz’s book as it brings new and challenging insights to the discussions on development policy. The UNCTAD economist noted that Playing with Fire provides a comprehensive treatment of global financial linkages of emerging and developing economies and the vulnerabilities they entail. In this regard, the book describes two sets of linkages. First, the institutions, innovations and policies that propelled finance to its vanguard role in what Dr. Akyüz describes as finance-led globalization or what UNCTAD calls “hyper-globalization”. Secondly, the linkages which trace the impact of financialization in the world economy.

Dr. Kozul-Wright enumerated three key relations raised in the book; namely, the finance-inequality nexus, the finance-commodity nexus and the nexus between finance and foreign direct investment. Quoting examples of the work done by Stiglitz and Piketty, he said that already in the 1990s the issue was first brought to attention by UNCTAD in its Trade and Development Reports, prepared under Dr. Akyüz’s guidance, addressing the relationship between rising inequality and growing dominance of finance.

Dr Reddy further noted that Dr. Akyüz’s book combines important elements of academic work, policy and institutions. “A monster has been created which is still not under control. Increasingly it seems as if the 2008 Great Financial Crisis may only have been a dress rehearsal for a worse crisis which lies ahead. It will come as the result of the excessive use of the money printing press, the build-up of asset price bubbles, the debt accumulation encouraged by low or negative interest rates.”

Dr. Peter Dittus said “one can see that vulnerabilities of emerging and developing economies have actually increased today. This, despite the fact that many countries have moved to floating exchange rates, accumulated large amounts of reserves and pursued much better fiscal policies. The fragility and potential exposure to a crisis in the world has actually increased, and policy options to deal with it have decreased.”

“The policy of rapid liquidity expansion and low interest rates has given rise to a search for yield and greater appetite for risk. It has therefore played a key role in the growing international lending and investment in emerging and developing economies. External financial liberalization in these economies themselves also played an important role. Some of the measures taken were designed with the objective of reducing external vulnerability. However, in reality they have created new sources of vulnerability without removing the old ones,” he continued.

“Many of these economies have taken certain measures to increase their resilience to financial shocks,” said Dr Dittus. “However, useful as they are, these can prove inadequate in the face of a severe external financial shock and massive and sustained exit of capital. It is not possible to anticipate when and how this might occur, but the credit and asset bubbles under way for almost a decade do not look sustainable.”


Pictured at the South Centre panel discussion, from the left, Dr YV Reddy, Dr Peter Dittus, Mrs Yuefen Li, Dr. Yılmaz Akyüz and Dr. Richard Kozul-Wright.


 

 

About The Author

Sanlam 2018 Annual Results

7 March 2019

 

Sanlam’s 2018 annual results provides testimony to its resilience amid challenging operating conditions and negative investment markets

Sanlam today announced its operational results for the 12 months ended 31 December 2018. The Group made significant progress in strategic execution during 2018. This included the acquisition of the remaining 53% stake in SAHAM Finances, the largest transaction concluded in the Group’s 100-year history, and the approval by Sanlam shareholders of a package of Broad-based Black Economic Empowerment (B-BBEE) transactions that will position the Group well for accelerated growth in its South African home market.

Operational results for 2018 included 14% growth in the value of new life insurance business (VNB) on a consistent economic basis and more than R2 billion in positive experience variances, testimony to Sanlam’s resilience in difficult times.

The Group relies on its federal operating model and diversified profile in dealing with the challenging operating environment, negative investment markets and volatile currencies. Management continues to focus on growing existing operations and extracting value from recent corporate transactions to drive enhanced future growth.

The negative investment market returns and higher interest rates in a number of markets where the Group operates had a negative impact on growth in operating earnings and some other key performance indicators. This was aggravated by weak economic growth in South Africa and Namibia and internal currency devaluations in Angola, Nigeria and Zimbabwe.

Substantial growth in Santam’s operating earnings (net result from financial services) and satisfactory growth by Sanlam Emerging Markets (SEM) and Sanlam Corporate offset softer contributions from Sanlam Personal Finance (SPF) and Sanlam Investment Group (SIG).

Key features of the 2018 annual results include:

Net result from financial services increased by 4% compared to the same period in 2017;

Net value of new covered business up 8% to R2 billion (up 14% on a consistent economic basis);

Net fund inflows of R42 billion compared to R37 billion in 2017;

Adjusted Return on Group Equity Value per share of 19.4% exceeded the target of 13.0%; and

Dividend per share of 312 cents, up 8%.

Sanlam Group Chief Executive Officer, Mr Ian Kirk said: “We are satisfied with our performance in a challenging operating environment. We will continue to focus on managing operations prudently and diligently executing on our strategy to deliver sustainable value to all our stakeholders. The integration of SAHAM Finances is progressing well. In addition, Sanlam shareholders approved the package of B-BBEE transactions, including an equity raising, at the extraordinary general meeting held on 12 December 2018. Our plan to implement these transactions this year remains on track.”

Sanlam Personal Finance (SPF) net result from financial services declined by 5%, largely due to the impact of new growth initiatives and dampened market conditions. Excluding the new initiatives, SPF’s contribution was 1% down on 2017 due to the major impact that the weak equity market performance in South Africa had on fund-based fee income.

SPF’s new business sales increased by 4%, an overall satisfactory result under challenging conditions. Sanlam Sky’s new business increased by an exceptional 71%. Strong growth of 13% in the traditional individual life channel was augmented by the Capitec Bank credit life new business recognised in the first half of 2018, and strong demand for the new Capitec Bank funeral product. The Recurring premium and Strategic Business Development business units also achieved strong growth of 20%, supported by the acquisition of BrightRock in 2017. Glacier new business grew marginally by 1%. Primary sales onto the Linked Investment Service Provider (LISP) platform improved by 5%, an acceptable result given the pressure on investor confidence in the mass affluent market. This was however, offset by lower sales of wrap funds and traditional life products.

The strong growth in new business volumes at Sanlam Sky had a major positive effect on SPF’s VNB growth, which increased by 7% (14% on a comparable basis).

Sanlam Emerging Markets (SEM) grew its net result from financial services by 14%. Excluding the impact of corporate activity, earnings were marginally up on 2017 (up 8% excluding the increased new business strain).

New business volumes at SEM increased by 20%. Namibia performed well, increasing new business volumes by 22% despite weak economic conditions. Both life and investment new business grew strongly. Botswana underperformed with the main detractor from new business growth being the investment line of business, which declined by 24%. This line of business is historically more volatile in nature.

The new business growth in the Rest of Africa portfolio was 68% largely due to corporate activity relating to SAHAM Finances, with the East Africa portfolio underperforming.

The Indian insurance businesses continued to perform well, achieving double-digit growth in both life and general insurance in local currency. The Malaysian businesses are finding some traction after a period of underperformance, increasing their overall new business contribution by 3%. New business production is not yet meeting expectations, but the mix of business improved at both businesses.

SEM’s VNB declined by 3% (up 6% on a consistent economic basis and excluding corporate activity). The relatively low growth on a comparable basis is largely attributable to the new business underperformance in East Africa.

Sanlam Investment Group’s (SIG) overall net result from financial services declined by 6%, attributable to lower performance fees at the third party asset manager in South Africa, administration costs incurred for system upgrades in the wealth management business and lower earnings from equity-backed financing transactions at Sanlam Specialised Finance. The other businesses did well to grow earnings, despite the pressure on funds under management due to lower investment markets.

New business volumes declined by 13% mainly due to market volatility and low investor confidence in South Africa. Institutional new inflows remained weak for the full year, while retail inflows also slowed down significantly after a more positive start to the year. The international businesses, UK, attracted strong new inflows (up 57%).

Sanlam Corporate’s net result from financial services increased by 4%, with the muted growth caused by a continuation of high group risk claims experience. Mortality and disability claims experience weakened further in the second half of the year, which is likely to require more rerating of premiums in 2019. The administration units turned profitable in 2018, a major achievement. The healthcare businesses reported satisfactory double-digit growth in earnings, while the Absa Consultants and Actuaries business made a pleasing contribution of R39 million.

New business volumes in life insurance more than doubled, reflecting an exceptional performance. Single premiums grew by 109%, while recurring premiums increased by a particularly satisfactory 56%.

The good growth in recurring and single premium business, combined with modelling improvements, supported a 64% (71% on a comparable economic basis) increase in the cluster’s VNB contribution.

Following a year of major catastrophe events in 2017, Santam experienced a relatively benign claims environment in 2018. Combined with acceptable growth in net earned premiums, it contributed to a 37% increase in gross result from financial services (41% after tax and non-controlling interest). The conventional insurance book achieved an underwriting margin of 9% in 2018 (6% in 2017).

As at 31 December 2018, discretionary capital amounted to a negative R3.7 billion before allowance for the planned B-BBEE share issuance. A number of capital management actions during 2018 affected the balance of available discretionary capital, including the US$1 billion (R13 billion) SAHAM Finances transaction. Cash proceeds from the B-BBEE share issuance will restore the discretionary capital portfolio to between R1 billion and R1.5 billion depending on the final issue price within the R74 to R86 price range approved by shareholders.

Looking forward, the Group said economic growth in South Africa would likely remain weak in the short to medium term future, and would continue to impact efforts to accelerate organic growth. The outlook for economic growth in other regions where the Group operates is more promising. Recent acquisitions such as the SAHAM transaction should also support operational performance going forward.

“We remain focused on executing our strategy. We are confident that we have the calibre of management and staff to prudently navigate the anticipated challenges going forward,” Mr Kirk concluded.

Details of the results for the 12 months ended 31 December 2018 are available at www.sanlam.com.