The banks may yet repent if money market stability does not hold, writes Madeleine Wackernagel
A volatile interest rate climate is not conducive to long-term investment planning, either by individuals or big business. And while the surprise rate cut by Amalgamated Banks of South Africa (Absa) this week — closely followed by the other leading banks — is welcome, it is not entirely convincing.
Absa made the move because conditions in the money market had stabilised; the liquidity problem had dissipated — for the moment.
“Where is the proof, in the form of concrete data, that the capital outflows have come to a standstill? Or that the easing in the money market shortage is more permanent, thereby lending credibility to a rate cut?” asks an analyst.
The banks were very quick to raise their rates six weeks ago and in retrospect they could be accused of having acted too hastily. “On a 16-year trend, their margins were not that out of line,” says a banking analyst. “They did themselves no favours by acting when they did, alienating many of their customers as a result.”
But hindsight is an exact science, says Steven Nathan, banking analyst at Ivor Jones. “They certainly did face a severe liquidity crunch and their earnings were under pressure. Nobody wants higher rates; they lead to bad debts and hit costs. People forget that banks also have to look after their shareholders.”
The Reserve Bank helped matters further by halving the rate it charges for “second-tier” loans to the banks, thus providing a buffer should the liquidity situation deteriorate again. Its move came as an even greater surprise than Absa’s, but with credit demand easing, the pressure for punitive rates to regulate the money supply and ultimately dampen the inflation rate is receding.
“The Reserve Bank has made sure that external conditions are easier, but that is not the same as saying capital flows have turned positive,” says First National Bank’s chief economist, Cees Bruggemans. “While portfolio investors were active in May and June, the net result was negative.”
Since the first hike in interest rates, evidence of a slowdown in the economy has been growing. The latest Reserve Bank quarterly bulletin points to a decline in domestic demand for the first time since mid-1993. Total real gross domestic expenditure fell by 1,5% in the January to March period, as inventories were run down and private consumption slowed.
Thus, the conflict between domestic demands and external realities is hotting up. One school of thought is that the reaction to the falling rand was overdone, but it is not clear that sentiment really has turned around sufficiently to withstand further upheavals in the financial markets.
The government has certainly been working hard at promoting its new growth strategy, trumpeting privatisation and offering reassurances on exchange controls. But are the financial managers convinced?
“For the sake of consumers and potential investors, we must make sure this interest rate cut sticks,” says the analyst. “We can’t afford a reversal in the few weeks’ or months’ time; the blow to confidence will be immense.”
Initial market reaction to the bank’s move was promising — the R150 bond rate fell 15 points to around 15,04%, with talk of 15% in the near future, as foreign buyers piled in. The money market call rate, however, was stubbornly steady at 16 to 16,25%, signalling tight cash conditions.