On Monday last week the JSE lost R300-billion of value in one day and on Wednesday the rand plummeted to R9,43 to the dollar as chaos broke out across Asia and Europe.
European governments moved individually to assure bank depositors that their funds would be protected and United Kingdom Chancellor Alistair Darling called for a $90-billion emergency package to prevent the collapse of the UK banking system.
Global markets and the JSE continued to clock up losses with the All Share Index now below levels seen two years ago.
“This is panic,” said Ian Cruickshanks, an economist at Nedbank Capital, who added that any country or asset perceived as having any risk is being dumped.
“This is being directed by offshore traders selling highly liquid stocks such as Anglo American and BHP Billiton. When there is panic, there is no saying where it is going.”
Cruickshanks said in times of absolute panic asset prices can drop dramatically and recover just as quickly. “There is no rationale, global investors are looking at risk and getting out of it.”
The move has been to traditional safe havens, including short-term dollar deposits and United States treasuries, which is why the dollar has strengthened.
The only highlight for South Africa is that gold has also proven its mettle as a store of value. Gold broke through the $900 level on Wednesday. The flight to safety has seen the risk premium for emerging-market bonds rise to 500 basis points (bps) compared to 239bps at the end of last year.
On the equity side, South Africa has not faired quite as badly as some other markets, with Russia down 63%, China down 56%, India down 52% and Brazil down 47% since the beginning of the year.
The JSE, in dollar terms, has fallen 43% so far this year and in rand terms the market is down 40% from its peak in May. Pension funds and retirement annuity investments would not have the same exposure to resources as the All Share Index and one would have to look to the financial and industrial index, which is down about 10% for the year and 20% since its peak in May. On the positive side, the valuation of the market is back to levels of 2002 before the five-year bull run.
The panic, which has now spread from the US to Europe, is creating a confidence crisis in the banking system. There is a fear that depositors will start to draw money, preferring to keep their cash under their mattresses. Banks usually hold about 10% of their total deposit base in cash and with no liquidity in the market, the banks would not be able to meet those withdrawals. A run on the banks is any country’s worst financial nightmare.
Although our stock markets are feeling the full brunt, our local banks appear to remain unaffected. The lending rate between banks has remained stable, indicating that we are not faced with either a liquidity or confidence crisis. Cruickshanks said South African banks are definitely not in trouble.
Razia Khan, economist at Standard Chartered, said that while South Africa’s financial markets have been caught up in the global rout, relative to other emerging markets our banking sector is thought to be in relatively good shape. Khan said it is estimated that South African banks’ deposits cover at least 98% of their loans, although she said that figure is yet to be verified. “The perception is that exchange controls, although liberalised with respect to institutions in recent years, still means that a lot of money stayed at home.”
Khan said that while banks are experiencing increases in bad debts, this is off a fairly low base. Ironically, the fact that South Africa has had the most aggressive interest rate hikes of its emerging-market counterparts has offered us some protection from excessive borrowing while stimulating deposits.
In an address to investors earlier this week, market commentator David Shapiro said that the National Credit Act had protected the banks from the reckless lending levels seen in other parts of the world.
Cruickshanks said the only area where the banks may face some risks is if there are any outstanding positions with an overseas bank. For example, a transaction may still need to be settled with a bank such as Lehman Brothers, which has applied for liquidation and would not be able to make good on the transaction.
However, Cruickshanks said that the Reserve Bank indicated it had already assessed the outstanding positions and that most had been settled and any outstanding positions are manageable.
However, South Africa still faces an uncertain economic future. The risks to the economy have moved from higher interest rates to a lower growth rate. Banks will continue to tighten lending criteria not out of concerns of increased interest rates, but rather increased job losses. South Africa still relies heavily on imports; the manufacturing sector, for example, has an import intensity above 50%. In another words for every unit produced 50% of the components are imported.
Machinery and heavy equipment required for infrastructure development and fixed investment is mostly imported. A substantially weaker rand will increase the costs of production and these costs will ultimately be borne by the consumer. At the same time a global slowdown will result in less demand for commodities possibly putting further pressure on our current account deficit and threatening jobs.
Commodities make up about 66% of our exports and account for 8% of GDP.
Goolam Ballim, economist for Standard Bank, said that current global events will inject volatility into the determinants of economic growth and, as a consequence, both income and production will experience forecast risk over the next two years. While economists will struggle to forecast economic growth, Ballim said the one certainty was that growth prospects would be meaningfully lower as the global financial shock turned into a real economy and earnings shock.
Both global and local fixed investment is likely to be below initial forecast, which means that employment and income prospects will become more insecure. Ballim said that while South Africa is somewhat disconnected from the direct financial crisis, the impact on the real economy will temper our economic health.