No one is sure of the full fallout of the global banking crisis. One thing we do know is that over the next year it will have a knock-on effect locally and South Africans are sure to feel some pain.
Your bank deposit
Local banks have not been caught in the credit crisis. High interest rates and the National Credit Act tempered borrowing and although bad debts have increased, they remain off a low base. Banks are structurally sound, but remain vulnerable to a change in sentiment. If South Africans panic and withdraw their money, banks will feel the strain. But in the unlikely event of a classic ”run on the banks” the Reserve Bank would step in to protect the banking system. Money market funds offered by unit trust houses (as opposed to a money market investment with a bank) invest across a range of institutions, lowering risk through diversification. Select a fund that is not allowed offshore exposure — you want to stay as far away from foreign banks as possible.
Your debts
It is unclear when interest rates will ease. It depends on whether the Reserve Bank follows other central banks in cutting rates to stimulate the economy or focuses on inflation. This month the monetary policy committee meeting chose to hold rates steady as inflation remains a threat. The weaker rand (which has traded above R10 to the dollar), means South Africa faces imported inflation. The Reserve Bank will have to take into account slower global economic growth. If interest rates are too high, this will put added pressure on the economy. Analysts predict a cut in April 2009, but a weaker economy could see rates cut earlier.
Your job
Finance Minister Trevor Manuel has revised the growth forecasts to 3% next year compared with 5% last year. This means that South Africa is not facing a recession, but there are concerns that things could get a lot worse.
Goolam Ballim, economist for Standard Bank, says that trying to forecast growth is virtually impossible as the full impact of the financial crisis is yet to be felt. Globally many infrastructure projects will be put on hold and the demand for South African commodities such as platinum, copper and steel will fall. Locally we could see a reduction in infrastructure projects as costs increase and financing is put on hold. With global and local fixed investment likely to be lower than forecasted, Ballim says employment and income prospects will be insecure. A lot will depend on how quickly global stability is restored. Now is the time to cut back on spending and build up cash as a protection against job uncertainty. Check if any of your policies have any retrenchment cover built in. Some policies will cover your premiums if you are retrenched.
Your home
The global crisis aside, fundamentals for the local property market are improving. John Loos, property economist for FNB, believes the property market has hit bottom. That interest rates are not expected to increase again has reinvigorated the market. Confidence among estate agents surveyed for the FNB Residential Property Barometer has rallied as they expect improved activity levels for the fourth quarter of this year. But a substantial economic slowdown could derail this recovery. How much property prices recover will be determined by the extent of the global fallout. Banks will continue to tighten their lending practices as the risk moves from higher interest rates to job losses. If you are looking to sell, it may be some time before real activity returns, with properties taking about 20 weeks to sell.
Your pension
Since the start of 2008 the JSE All Share Index has declined by about 28%. Resource shares have been worst hit, with fears of a global recession seeing commodity prices plunge. But pension funds would not have had the same resource exposure as the All Share Index and the Financial and Industrial Index is perhaps a more meaningful figure. This index is down by about 22% since the start of the year. Although your pension value would have fallen over a one-year period, in the past five years it should have shown significant growth as the market is still up 120% from five years ago. It is important not to panic and stick to your long-term plan. Smoothed bonus funds should come into their own this year as they tend to reduce volatility. Old Mutual’s Smoothed Bonus Fund, for example, has not shown a negative return since Âinception in 1984.
Your investments
Valuations on the JSE are at levels last seen in 2002, before the start of the five-year bull run. Although markets are expected to remain volatile for some time, many investors are seeing this as an opportunity to enter the market. If you have discretionary investments, now would be the worst time to sell. But if you want to invest, do not get sucked in by short-term rallies. Investing over several months would be a prudent approach.