Pricing panic

South Africa is not immune to global market turmoil, much as we would like to think otherwise.
Market volatility has already cost the country about R500-billion, according to Russell Loubser, chief executive of the JSE.

The total market capitalisation—or the value of total shares—of the JSE is down 10% year on year, to just under R5-trillion, and this year alone it fell by 18%, says Loubser.

While these losses are not nearly as bad as what other global markets have experienced “we are not out of the woods, not by a long way”, he says.

As international markets roil with the demise of major Wall Street institutions, financial belts are tighten­ing everywhere, limiting access to finance for major companies and institutions across the globe.

Experts are confident South Africa will weather the crisis, but not without a significant increase in the cost of credit—whether it’s credit to buy a house, a car or to build a power station.

“The world cannot function without credit, whether it’s for your house or to run a business,” says Loubser. “Without credit [business] activity stops.”

“Credit has become scarcer and more expensive overall in general terms recently and South Africa’s credit markets are not immune to events abroad,” says Craig Jamieson, general manager and lead analyst for Eskom at Moody’s South Africa.

“The current market conditions will be an important consideration for any South African corporate wishing to access both foreign and domestic markets for funding.”

The effect of the market implosion on the ability to access funding for large capital expenditure projects is of particular concern. Events will require large institutions to seriously re-evaluate their funding strategies, says Hannes Boshoff, associate director of transaction advisory services at Ernst & Young.

While local banks seems stable, South Africa will feel the global liquidity crisis where large projects, like the building of a Medupi power station, require funds that fall outside of commercial bank risk matrices, says Boshoff.

Where once this finance could be gained from large, international banks, recent events mean these options may no longer be available.

“[Companies] will have to look at alternative ways of funding large projects,” says Boshoff.

Alternatives could include looking to sovereign wealth funds, state- owned investment vehicles for finance, he says.

Reserve Bank Governor Tito Mboweni, in a recent speech to shareholders, warned that “increased market volatility, a significant repricing of risk, rising costs of international capital and less capital flows to emerging markets clearly pose threats to the domestic economy and financial markets”.

Eskom, through its capex programme, needs to borrow R150-billion from local and foreign markets in the next five years. Transnet needs to raise R80-billion over the same period and PetroSA needs R85-billion to build its mega oil refinery in the Eastern Cape, planned for 2015.

These sums do not account for the credit needs of businesses across the economy, whether they are mines, retail giants or telecoms companies.

Eskom’s ability to access funds will be affected by both the credit crisis and its credit rating, says company spokesperson Fani Zulu. Ratings agency Moody’s downgraded the utility’s credit rating earlier this year, making access to the market more difficult as well as increasing the cost of raising capital, says Zulu.

“On top of that, the credit crisis could further decrease access to the market,” he says.

But he says Eskom is still a good proposition because the company offers long-term investment stability, given the long-term nature of its build programme.

According to fellow credit rating agency Fitch Ratings, Eskom is likely to explore a variety of sources for debt funding, including domestic and international bonds and export credit agencies.

“It is likely that market turmoil and recent pressure on the rating has resulted in higher funding costs, particularly for non-domestic funding,” says Alistair Crosbie, director of corporate credit ratings.

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