Real Estate Investor Magazine South Africa October 2014 | Page 57

BY JAMES PAYNTER

FOREX

Bailouts, Bubbles

and Bankers
W

ell, well, our very own bailout! Should we
not be proud to have joined the global club?
African Bank was placed under
curatorship by the Reserve Bank last month, after
announcing a R6.4bn loss for the year and a R8.5bn
hole in its balance sheet – prompting its share price to
plummet 98% to a low of 31c, from around R40 just
two years ago.
Missed the warning signs?
For some this may have come as a surprise, especially
as the South African authorities have been at pains
to assure us that the South African banking industry
was well insulated, robust, highly regulated and well
capitalised. But the warning signs have been there for a
long time, if you looked for them.
Firstly, with regard to African Bank, this was a
business model that was doomed to failure, and was
reckless subprime lending at its worst: who in their
right mind would lend money to persons who couldn’t
afford to borrow, let alone repay the amounts back
plus exorbitant interest? And all unsecured! Is it any
wonder that R17bn of their R60bn loan book had
turned bad? And the depositors were equally reckless
in their lending and clearly governed by greed more
than common sense, chasing higher returns without
concern for the risk to their capital.
Contagion
But the problem is not just African Bank – it is a much
larger and wider contagion.
The above chart says it all – a massive increase in
domestic credit, which has mushroomed 10.8 times
since 1994, and now sits at R2.8 trillion! And as can be
seen, this has dramatically increased Household Debt
which, though slightly down from its 2007 peak, is still
sitting around 75% of Disposable Income – dangerous
and unsustainable levels. Default levels. All it needs is
a trigger, like an interest rate increase, or basic food
prices going up.
The fact is, we have the makings of our very own
credit crisis on our hands, and the cracks are starting
to show, not only with African Bank, but the Big Four
www.reimag.co.za

Rocky road for the Rand

as well, with a recent tally by Fin24 showing that SA
banks have written off or made provisions to write off
debt of more than R100bn over the last 12 months.
And then, to top it all, they have joined the Reserve
Bank in the bailout, pledging a further R10bn (of
depositors’ money) to prop up the ‘good bank’ part of
the African Bank toxic debt package. Why? To protect
depositors who were reckless and greedy in the first
place! We believe this will be a decision that they will
regret down the road, as Credit Crisis Stage II really
starts to bite.
Effect on the Rand
The effects are already being felt on the currency side,
with the Rand breaking out of its recent trading range
and weakening sharply against the Dollar. Expect a
rocky road ahead the next few months.

RESOURCES
Dynamic Outcomes
October 2014 SA Real Estate Investor

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