Drought spreads to SA
Manuel nudges the banks
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