Not yet the end
It’s comparable to the collapse of the share prices of Wall Street’s banks and the London Stock Exchange. However, the caption of the list of shares called “Almost freebies” doesn’t say it’s already time to buy the shares.
Unlike the situation in the United States, Britain, Europe and even Australia, SA’s financial sector isn’t on the brink of collapse. Our Big Four banks, closely followed by Investec, don’t have to cope with a US$700bn emergency plan to save them from rotten advances. Nor is it necessary for our Treasury – as is the case in the US – to buy commercial bills directly from large industries because the banks can no longer supply financing for the country’s trade and industry.
Nor, for that matter, does SA’s Treasury have to make provision for up to £70bn of new capital to its four big banks due to the burden now being placed on the British taxpayer.
But we’re also being knocked about. Share prices on the JSE have already fallen sharply and, if it hadn’t been for a few gold shares clinging bravely to their historical popularity, things would have been even more Stygian. The JSE’s Top 40 – the group of our best – have already fallen by 27% this year. And please don’t allow yourself to be misled too much by the traditional wisdom around the Saturday afternoon braai that everything will come right and that the fall in share prices doesn’t affect the long-term investor.
Everyone who has assets is poorer now. We must all realise that even if our pension assets are managed far away by someone important, the value of your assets and the size of your pension eventually will have suffered just as much over the past two months as those fellows who are still valiantly trying to manage their own investments on the JSE.
Though credit in SA isn’t yet as scarce as elsewhere in the world, there are plenty of signs the price of our credit is climbing sharply. Just like the international players worldwide, our companies borrow US dollars or sterling from local banks at the so-called Libor rate. The rate for three-month loans is now at least double what it was a few weeks ago.
But that’s not all. The margin above Libor at which banks are prepared to do business (even with good clients in SA) is rising rapidly and is probably already as much as three to five percentage points above Libor. Just a few weeks ago that was as low as 100 points.
The cost of international money – US dollars, sterling or euro – has probably already doubled from 4%/year to something close to 8%/year for good local borrowers, such as our top companies. Banks and borrowers aren’t yet keen to talk about this officially, but our effective cost of borrowed capital has also risen sharply over the past few weeks.
Prospective homeowners will also find that banks are no longer so keen to grant mortgages at the old prime minus 1,5 percentage points – or even 2% if you have a nice smile. Prepare yourself for prime plus a bit for mortgages now, which means money is becoming more expensive – even though the SA Reserve Bank says it will soon start reducing the interest rate.