Well, well, our very own bailout! Should we not be proud to have joined the Global Bailout Club? As we all know by now, 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). For some this may have come as a surprise – especially since the South African authorities have been at pains to assure us that the South African banking industry is 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. But the problem is not just African Bank – it is a much larger and wider contagion. The chart below 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 at 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 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 will be regretted down the road, as Credit Crisis Stage II starts to really bite. Expect a rocky road ahead for the next few months. For more info on the rand, go to www. ForexForecasts.co.za/go/ ZAROutlook CAPTION James Paynter is the head market analyst at Dynamic Outcomes
