Does SA's credit crunch still lie ahead?

Port Elizabeth - Many South Africans did not realise the full effect of the financial crisis that hit the world in 2008 when the international market for securitised mortgages and credit default swaps collapsed.

In some cities in America, banks repossessed up to 20% of houses; countless banks either went bankrupt or had to be bailed out by other banks or the US government. The financial crisis effectively bankrupted whole countries.

SA escaped the worst of the financial chaos, due more to luck than design. One of the causes of the global financial crisis was the relaxation of lending criteria by international banks which allowed people to borrow excessive amounts to buy houses, cars and other toys.

From 2005 these banks lent out as much as they could, because clever investment bankers and brokers packaged these high-risk loans, stamped them with dubious credit ratings and sold them to somebody else.

At the time - in March 2006 - SA authorities passed the new National Credit Act. This laid down very stringent criteria for individuals to get loans, and very strict procedures for financial institutions to follow before they could grant loans.

The cure for irresponsible lending and borrowing was simple: if banks lent money to people who could not afford to repay it, banks were seen to be reckless and the law basically sided with the borrower.

Figures bear out the facts that bankers immediately complied with this new sense of sanity. While the world was heading into a banking crisis in 2007, SA banks were getting stronger. The banking sector’s capital ratio improved from 12.3% in 2006 to 12.8% at the end of 2007.

Loans and advances increased at a healthy pace, but this growth was off a low base as there was little growth in 2006. Bad debt as a percentage of total loans and advances was low at 1.1% before deteriorating to 1.4% - which is still negligible compared to what was happening in the rest of the world.

Which brings us to the present: we were lucky to escape the problems in 2008, but how will a few interest rate hikes affect us now?

Latest Reserve Bank figures show that total bank loans to individual households exceeded R1 362bn at the end of December 2013.

The recent interest rate hike of 50 basis points to a prime lending rate of 9% means that households’ interest payments have increased by more than R6.81bn per annum, or nearly R570m per month.

One should actually do the same calculation on the total outstanding debt in SA, which includes loans to companies.

If companies have to pay more interest, there is less profit to divide among shareholders – whether it is a small company with a few shareholders or a huge corporate with a few thousand shareholders. The owners are in the same boat as salaried employees and they have less money to spend.

The total outstanding debt in SA amounts to R2 440bn. The recent increase in the interest rate has pushed interest payments to R12.2bn per annum, or more than R1bn per month. In short, we have R1bn less every month to go and spend at Woollies, Pick n Pay and Panarottis.

It might get worse. The first interest rate increase can be considered a warning shot after several verbal warnings by Reserve Bank governor Gill Marcus. The first interest rate hike has had very little effect on people’s behaviour and spending patterns.

Consumer inflation has been at the upper end of the inflation target for months and the latest producer price inflation numbers indicate that the consumer proce index will remain high.

A weak rand, high imports, lower exports due to strikes and a continued outflow of investment capital will necessitate the Reserve Bank to consider further interest rate increases.

At a prime lending rate of 10% - another two interest rate hikes of 50 basis points each – interest obligations by SA households would increase to R20bn per annum or R1.7bn per month. On the total debt, interest payments will increase to R36.6bn per annum while total disposable income will shrink by as much as R3bn per month.

This little calculation is also the reason why this year’s national budget is more important than others.

Any inkling of political interference in an election year, with the ruling party facing its strongest opposition ever, might send foreign investors running back home and interest rates climbing much higher.







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