11 August 2011
A low lending rate and the Reserve Bank’s stockpiling of more than US$50-billion in foreign currency will help shield South Africa from some of the turmoil experienced by global markets following the US credit rating downgrade, says the Bank’s deputy chief economist.
However, the market turmoil of the past few days would impact “fairly heavily” on consumer and business confidence, Johan van den Heever told the National Assembly’s finance committee in Cape Town on Wednesday.
He was briefing the committee on the release of the Reserve Bank’s 2011 Annual Economic Report, which highlights South Africa’s poor export performance and slow recovery of lending by banks.
Not good news for investment
“It is quite clear that people will under the circumstances be more reluctant to enter into bold ventures, big capital expenditure, really heavily-geared undertakings, and so that it is not good news for short-term growth and longer-term investment,” Van den Heever said.
But he believed that despite this, South Africa would continue to grow – on the back of a consumer spending upswing combined with low interest rates, a strong financial system and relatively good fiscal conditions.
One positive to come out of the market chaos and resultant high level of uncertainty, he added, was an increase in the gold price, which would benefit the economy.
Bank lending still low
Turning to the Reserve Bank’s annual economic report, the Reserve Bank’s head of financial analysis and public finance, Vukani Mamba, said that despite South Africa’s interest rates being at their lowest in 30 years, lending by the country’s banks had not picked up substantially since the global financial crisis of 2008-09.
He said recovery of credit advances had been slower than that following South Africa’s previous recessions in 1974, 1982 and 1990.
The report revealed that advance of credit had, by February 2011, increased by just 5% from the level it stood at in May 2009, just months before the economy began recovering in September 2009.
Mamba attributed this to the poor recovery of the country’s productive sectors, the high number of job losses (reducing the number of those who qualified for credit) and high levels of indebtedness of consumers.
Banks had also incurred high impairment rates, which had seen them pulling back on lending.
The report said the level of impaired advances, which grew to 6.1% in December 2009, had levelled off last year and stood at 5.8% in April this year.
Despite this, South Africa’s percentage of non-performing loans remained “relatively high” when compared with other emerging-market countries.
At just under 6% in the fourth quarter of 2010, the level of non-performing loans was lower than Russia (at over 9%), but higher than Brazil and Chile (3%) and India (just below 3%).
However, Mamba believed the prudence of the country’s banks had been instrumental in protecting the economy, considering that the global financial crisis had been triggered by US banks lending to highly indebted individuals.
Poor export performance
Another area of concern highlighted by the Reserve Bank’s report is South Africa’s poor export performance.
Van den Heever pointed out that the country’s exports had not kept track with those of its fellow BRICS countries and advanced economies, which had rebounded at a far faster rate following the end of the recession.
He attributed the poor performance of exports to “quite a long list” of problems and not just to the strength of the rand.
These included infrastructure bottlenecks, lack of electricity capacity and the falling quality of some of the country’s minerals, including the grade of gold mined.
South Africa’s productivity was also a challenge, particularly when compared with a country like China, Van den Heever said.
Added to this, many of South Africa’s export destinations were in the developing world – Europe, Japan and the US – where the recession had cut the deepest.
He warned that if South Africa’s exports continued their lacklustre performance, the fiscus would be reduced.
However, he said South Africa had built up its foreign currency reserves from $8-billion in 2002 to about $50-billion currently, which would allow the country to pay for imports if it exports continued to underperform.