The cost of offshore borrowing for South Africa has jumped by 50% in recent weeks while foreigners have withdrawn R30-billion from the country since the beginning of last month.
Although the country has been relatively unaffected by the global market fallout, it now faces significantly higher costs of borrowing — the kind that is needed, for instance, to build new power capacity.
The flight to safety from both established and emerging markets saw R20-billion withdrawn from South Africa in September, according to Reserve Bank figures.
Figures for October are not available, last week foreigners were net sellers of equities to the value of R9,6-billion. From September to now the withdrawals represent more than the expected R22,5-billion from the sale of Telkom’s 15% stake in Vodacom to Vodafone.
Although South African foreign bonds have suffered less than the average of the Emerging Market Bond Index, which has fallen 350 basis points, it will still put significant borrowing pressure on the country.
Ian Cruickshanks, economist at Nedbank Capital, said that even if South Africa could borrow at these significantly higher rates in theory, it is not certain that the funds would be available. This means projects such as Eskom’s expansion will have to be funded locally. Cruickshanks said major infrastructure projects will also face a double whammy of significantly higher capital costs as the serious deterioration in the rand will increase the cost of imports.
Comments by ANC treasurer general Mathews Phosa that the government would stand behind the banks might have looked like an over-reaction considering the health of the South African banking sector. But it is exactly the right comment for the times. Banks do not just stand and fall on their balance sheets. As keepers of people’s money, they can also suffer from a crisis in confidence if people feel safer about having their money under the mattress or opt to invest in what they perceive to be a bigger and safer bank.
Australia, which was recently rated fourth out of 134 countries for banking soundness in the latest Global Competitiveness Report, announced last week that it would guarantee all retail bank deposits. Prime Minister Kevin Rudd said the decision had been made as a result of other foreign governments offering assurances to their financial institutions. The Australian government was concerned that this would make Australia less attractive for foreign deposits. South Africa was rated 15th on the survey, with a score of 6,5 out of a possible seven points. The United States was rated 40th and United Kingdom 44th.
At this stage the South African Reserve Bank appears reluctant to make any statements about supporting bank deposits, possibly because any statement might be perceived to be a sign of trouble. But previous actions and comments from the Bank suggest that it would guarantee deposits.
In 2002 South Africa faced a banking crisis that started with the collapse of several small banks and which then took down Saambou — at the time South Africa’s seventh-largest bank. Rather than guaranteeing deposits, Saambou was put under curatorship. But this only precipitated the confidence crisis and BoE Bank, the sixth-largest bank, had to be bought out by Nedbank. This domino effect proved that a bank such as BoE, which was well capitalised and had no serious business flaws, can still be caught up in a crisis of confidence when depositors, especially large wholesale investors, make a flight for safety.
At that point the Reserve Bank, in consultation with the national treasury, issued a guarantee to all depositors that the government would fund their withdrawals. This was the remedy needed to restore confidence and Investec, the fifth-largest bank, did not suffer a similar fate. In an address to media in December 2004 Reserve Bank Governor Tito Mboweni said that the confidence crisis in BoE illustrated that “the lack of confidence could move up the scale and not only down the scale”. He said that the Reserve Bank had learned several lessons, including the fact that how a crisis is managed is critical to the stability of the banking system and that “greater problems may result if a bank in distress is not handled in a manner that provides certainty”. Mboweni said that the Reserve Bank put into place a framework of how to deal with banks in distress and how to prevent problems in one bank from spreading to other banks.
For people who are still concerned that South African banks may become vulnerable to a confidence crisis, the canary in the cage is the rate at which South African banks lend to one another. The Johannesburg Interbank Agreed Rate (Jibar) overnight rate is the rate banks are prepared to lend to one another — a sharp increase would indicate a shortage of liquidity in the market. If banks suddenly demanded a higher premium for short-term loans to one another it could suggest concerns about bank stability.
So far the Jibar rates have remained stable. By comparison the US overnight dollar rate deteriorated 50% from June to September — from 2,07% to 3,07% — and on the announcement of the collapse of Lehman Brothers the rate jumped to 6,4% overnight.
What if Barclays had crashed?
Absa might have been feeling a bit jittery in the past week about the future of its major shareholder, Barclays. Fortunately, events at the weekend shed a positive light on Barclays, which seems to be in good shape as it did not take up the British government’s offer to buy a stake in the bank. But, if it had gone pear-shaped, the impact on Absa’s day-to-day business would have been marginal. If Barclays had gone the way of Lehman Brothers it would have had to sell its stake in Absa, which would have put pressure on the Absa share price.
But Absa is a separate entity and Barclays’s curators would not have been able to touch the assets. The structure of the ownership is such that Barclays could inject money into Absa but could not take any money out. Absa Capital might have felt the impact because it uses the Barclays balance sheet to fund major cross-border transactions. The bottom line is that it would have hurt the share price, but Absa’s depositors are safe.