Is South Africa sheltered or delayed?

The South African Reserve Bank today lowered the REPO rate by a further 50 basis points, down to the level last seen in 2005 and the lowest the REPO and BA Rate have been in nearly 3 decades. Surveys leading up to the announcement and analysis of market interest rates suggests that the expectation was for rates to be held constant. Was this a purely populist decision, or does Tito Mboweni see more economic trouble ahead that other, more optimistic South Africans believe?

To date, the South African economy has been relatively less affected by the global financial crisis. Unemployment in Spain is up to 18% – within spitting distance of our own extravagant unemployment rates. Several large economies have been making eyes at 10% annual declines in GDP – often used as an informal definition of a depression (compared with a recession typically defined as two consecutive quarters of decline in real GDP). Property prices have been declining between 5% and 10% (depending on who you ask) and even after allowing for our higher inflation and thus greater real decreases, we compare very favourable to the drops of 20% to 50% in some parts of some countries.

Our stock market took some very sharp dives last year, but is hovering close to 11 month highs at the moment. It seems many are pricing in a return to normal earnings in 2010. At the same time, Germany announced  yesterday a 2nd quarter increase in GDP. Is the worst behind us? Have we been very sheltered so far?

I believe we have been more delayed than sheltered. Yes, exchange controls, the NCA and more conservative lending standards protected our banks  from the direct meltdown of sub-prime mortgages. 72 banks  have failed this year in the US (69 last time I blogged just a few days ago) while none of our banks have collapsed. However, there is plenty more bad news.

Our decline in GDP started  much later than other countries. Perhaps it was this that convinced Trevor Manuel to foolishly claim we would not fall into recession. (I’m not sure which is the worse truth, Mr Manuel was sufficiently obtuse to really not believe it would happen, or it was another pre-election promise that simply was never  going to be kept.) Germany may now be exiting their recession, but this is after a year of being in recession since the start of 2008. Manufacturing output is massively down, retail sales are massively down and liquidations are still climbing.

8 weeks ago my hairdresser was happy to announce they were still busy.  4 weeks ago and again this weekend she was complaining that they were very, very quiet. Lapse experience on individual life policies continues to deteriorate, and terminations of entire provident fund schemes (as a result of business closures) is charging full steam ahead, gathering momentum rather than slowing. Restaurants have closed and not reopened. These anecdotes tell of decrease disposable income, job losses, business closures and the beginnings of economic  hardship.

So was Mr Mboweni’s decision to cut rates a populist move? Perhaps. Certainly the 7% real wage increases offered to municipal workers have no merit except popularity amongst the recipients. But I feel that our economy will go through tougher times before better, and a little more stimulus isn’t the worst idea. National, provincial and city budgets are being strained  with large expenditures (now larger with the wage increases) and  sharply reduced revenue  collections. The City of Joburg has had to negotiate a higher debt level in their bond covenant since they are at 50%, 8% above the required 42%.

Now is not the time to crack the champagne and relax – the storm is continuing and our shelter may yet prove insufficient.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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