Drought spreads to SA

Manuel nudges the banks

Finweek English Edition - - Economic Trends & Analysis - GRETA STEYN gre­tas@fin­week.co.za

SOUTH AFRICANS, used to hear­ing that they’re too in­debted, must have been sur­prised by a throw­away com­ment in Fi­nance Min­is­ter Trevor Manuel’s Bud­get speech that sug­gested bor­row­ing had slowed too much. Manuel said: “Credit ex­ten­sion has slowed, prob­a­bly more rapidly than is de­sir­able. We ex­pect our banks to con­tinue to ex­tend credit to wor­thy cus­tomers, not­ing that it’s pre­cisely the rapid with­drawal of credit that has plunged much of the de­vel­oped world into cri­sis.”

That was a gen­tle nudge to South Africa’s banks not to turn the credit taps too tightly closed. It’s no se­cret SA’s banks have tight­ened their credit cri­te­ria con­sid­er­ably. For ex­am­ple, they’re now de­mand­ing 20% de­posits on mortgages whereas pre­vi­ously loans of 105% of the value of a new home were the norm.

The last credit fig­ures (for De­cem­ber 2008) sug­gest there might be some ev­i­dence to sup­port Manuel’s as­ser­tion that credit ex­ten­sion growth was fall­ing too fast. Pri­vate sec­tor credit ex­ten­sion (PSCE) de­clined by 0,6% in De­cem­ber, or R11,3bn. Stan­lib econ­o­mist Kevin Lings says that was the first monthly de­cline in to­tal pri­vate sec­tor credit since May 2004. On an an­nual ba­sis, PSCE growth slowed mean­ing­fully to 14,04% yearon-year from 15,3% in Novem­ber. The mar­ket was ex­pect­ing growth to ac­tu­ally rise to 15,50%, for tech­ni­cal rea­sons re­lat­ing to the base in 2007.

The de­cline in pri­vate sec­tor credit was mainly due to a fall-off in leas­ing ac­tiv­ity, which dropped 2% month-on-month, and a de­cline in the “other loans and ad­vances” cat­e­gory of 2,4%. The other main cat­e­gories of credit de­mand rose over the month, though rel­a­tively mod­estly. Lings says mort­gage debt in­creased by just 0,4% month-on­month in De­cem­ber, the small­est monthly in­crease since late 2002.

Lings says over­all growth in pri­vate credit has slowed mea­sur­ably over the past 12 months. In par­tic­u­lar, mort­gage credit is now grow­ing at only 13,2% year-on-year, well down from a peak of 30,9% in Oc­to­ber 2006. Sim­i­larly, credit card growth has eased to an an­nual rate of only 4,25% from growth of well over 35% in 2007.

Lings doesn’t blame the banks’ tighter lend­ing cri­te­ria for the slow­down in credit growth. He says the in­creases in in­ter­est rates, the in­tro­duc­tion of the Na­tional Credit Act, a slump in dis­pos­able in­come growth, a slow­down in hous­ing price growth, in­creased job losses and wors­en­ing con­sumer con­fi­dence have all had a mea­sur­able im­pact on over­all de­mand for credit as well as con­sumer and hous­ing ac­tiv­ity.

How­ever, Brait econ­o­mist Colen Gar­row says banks aren’t lend­ing and SA finds it­self in an en­vi­ron­ment where credit growth can plunge. Lings ex­pects credit growth to fall to well be­low 10% year-on-year in first half 2009.

Gar­row says one SA bank’s sources of fund­ing has dried up – that is, the money they raise from off­shore banks. For­eign banks, find­ing them­selves in dire straits, aren’t lend­ing to emerg­ing mar­kets. That’s partly the rea­son why SA banks have be­come so tight-fisted about lend­ing.

“SA might find it­self in a sit­u­a­tion sim­i­lar to that over­seas, where deep cuts in in­ter­est rates haven’t trans­lated into growth in credit ex­tended to the pri­vate sec­tor. That’s all the more rea­son for the SA Re­serve Bank to cut in­ter­est rates ag­gres­sively, as the ef­fect of less ag­gres­sive cuts will be muted by banks’ strin­gent credit con­trols.” Gar­row says the prime over­draft rate should be cut to 9%. It cur­rently stands at 14%.

Ned­bank econ­o­mist Den­nis Dykes says it’s clear from credit ex­tended for new mortgages (not draw­ing down of ex­ist­ing fa­cil­i­ties) that banks have tight­ened lend­ing con­sid­er­ably. New mort­gage credit is fall­ing at a rate of around 25% year-on-year. He says banks have tight­ened in re­sponse to the wors­en­ing growth out­look, of which the fall in house prices is one man­i­fes­ta­tion. Banks want their cap­i­tal ad­e­quacy ra­tios to look good and so are con­se­quently keep­ing a lid on some credit growth. In­stead of grant­ing peo­ple 105% mortgages, home­buy­ers are get­ting 75%.

Though Dykes says drops in in­ter­est rates will help ease the sit­u­a­tion it will take some time for the re­duc­tions in rates to trans­late into eas­ier lend­ing con­di­tions. “Banks are hy­per-cau­tious at the mo­ment. That cre­ates some­thing of a catch-22. As banks be­come more cau­tious and lend less that af­fects prop­erty prices and busi­ness con­di­tions in gen­eral and re­in­forces the banks’ cau­tious­ness.”

Bankers who aren’t economists are re­luc­tant to ad­mit to turn­ing the screws too tightly. FirstRand’s head of re­tail credit risk man­age­ment Jo­han Thomas says credit de­mand has slowed and the bank also doesn’t want to put peo­ple in a po­si­tion where they aren’t able to re­pay loans. “If a per­son is cred­it­wor­thy we’ll lend,” he says.

The prime over­draft rate should be 9% . Colen Gar­row

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