/ 5 July 2013

Drop in lending is likely to rebound on the economy

Drop In Lending Is Likely To Rebound On The Economy

The rate of new credit granted to customers slowed over the past quarter — most notably in unsecured lending, where the levels of growth remain worryingly high — and there is concern it will translate into poor economic growth.

The National Credit Regulator recently announced that the statistics for the quarter ended March 2013 showed a decrease of almost 15% in new credit granted to consumers.

The total value of new credit granted decreased by R18-billion to R102-billion, from R120-billion, for the quarter ended December 2012. The regulator said all credit types experienced a quarter-on-quarter decline in rand value terms and in the number of accounts, but it was unsecured credit that experienced the largest quarter-on-quarter decline — of 22.29% or R6.48-billion.

The South African Reserve Bank has long claimed that it is not concerned about the levels of unsecured lending, although in November last year it reportedly met and warned national lenders about the rate of growth in the sector.

The Reserve Bank's latest quarterly bulletin showed a slowdown in the growth of unsecured lending and last month the registrar of banks, René van Wyk, speaking at the treasurer's conference, said he was "comforted" by the lower growth rates.

But the slowed credit growth will translate into poor economic growth, as more than a third of total consumption growth over the two years can be attributed to the rise of unsecured credit, according to Peter Attard Montalto, an analyst at multinational financial services group Nomura.

Good news
The seemingly good news about the credit slowdown has also coincided with bad news about the economy, with gross domestic product (GDP) growth slowing to 0.9% in the first quarter of 2013 — notably lower than the 2.1% growth reported in the final quarter of 2012 and meaning a year-on-year increase of just 1.9%.

It was described as a "downside shock" by Montalto in a Nomura report. And better days are not in sight either.

"We don't see any above-potential growth GDP prints on a yearly basis in our forecast horizon. The last time this occurred was in 2007 when growth was 5.6% — the difference there versus long-run potential growth of 3.7% was due to credit expansion — that is, soft overheating in the economy," the report said.

"We are increasingly coming to think of potential growth in South Africa at 3.7% as more of a speed limit on the economy rather than a cycle-average, long-run growth rate. Herein lies the problem for South Africa.

"Where is the driver of growth going to come from to boost the economy over its potential growth rate? Credit is a possibility under a political push, though we think this is unlikely with the South African Reserve Bank on the watch; external is unlikely; sustainable growth of aggregate disposable income looks difficult to achieve without fundamental policy change."

Montalto said that, in terms of explicit policy, neither the government nor the Reserve Bank was doing anything really meaningful to slow unsecured credit, but rather "growth is naturally slowing as the particular target income deciles of the market are becoming saturated, combined with some risk aversion based on the regulation outlook as opposed to the regulation itself, and also goings-on at African Bank Investments".

"Not there" yet
If anything, he said, the risk was that the government would try to provide a further boost over time — and in particular with elections next year — to step up credit and so also growth.

"We are not there at all at the moment, but the politics will become interesting as growth and consumption slow further and we approach the election," Montalto said.

Given the role credit expansion had played, "we are still very bearish on GDP and retail sales for this year even, given a slightly more benign global outlook at the moment, on the United States front at least, and why we think the hurdle to rate hikes is very high for this year".

The question whether slower growth in credit extension is a good or a bad thing was a "tough one" to answer, said Ngoako Mabeba, the acting statistics manager at the National Credit Regulator. "Particularly unsecured credit — you can't describe it as a bad product if it is used for constructive purposes."

Mabeba said credit providers had definitely tightened lending criteria because of a lower risk appetite given an increase in impaired records and nonperforming loans, but said it boiled down to "seasonality, changing economic conditions and a slowdown in the number of applications".

Mabeba said that, although one would expect credit extension to slow down in December, it had actually spiked the way it traditionally does and it slumped back down after January.

So, if looking at the December figures only, credit extension actually grew year on year from R107-billion in 2011 to R120-billion in 2012.