The cracks in SA’s miracle

2014-12-14 19:00

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Household debt in South Africa is now equal to 75% of disposable income, according to a 2013 report by US investment bank Goldman Sachs.

Twenty years ago, the figure was 57%. Goldman Sachs believes the rise is due to the growth of the unsecured loans market, which had expanded by more than 300% since 2007; yet it said these high-risk loans – often small amounts lent over short periods of time at high interest rates – were only 11% of all loans in South Africa, and the country’s banks were safe from systemic risk.

On August 10, African Bank Investments Limited (Abil), South Africa’s fifth-largest bank and leading unsecured loans specialist, had to be placed under supervision by the Reserve Bank.

Abil’s difficulties revealed the cracks in South Africa’s economic miracle, which has succumbed to its own version of the US subprime lending crisis.

Idriss Linge of the African economic and financial information agency Ecofin said: “Until then, many people had managed to pay back what they had borrowed, and [lending] was highly profitable. But lending to people who have problems repaying their loans is not a viable business model.”

In the 2000s, a generation of borrowers emerged, aspiring to the modest prosperity promised by Africa’s leading economic power. The new black middle class appetite for consumption – household appliances, travel, private schools – began to exceed its average monthly income. Shopping centres were packed. More than 500?000 new cars were sold every year.

To fuel this spending, South Africans turned to banks and microlenders who offered unsecured loans, but the mortgage and home loans market was already running out of steam.

Tami Somoku, an executive director of Abil, summed up the situation in February 2013: “We know as a fact that [consumers] are not interested in consumer education?...?They want a loan and they want it as quickly as possible.”

In 2005, the government passed a law capping interest rates, but this less regulated sector frequently ignores the legislation.

Nearly 30?000 unregistered microlenders charging monthly interest rates of around 100% sprang up in working class areas. Not satisfied with lending to 250?000 civil servants recruited since 2007, or to middle class managerial workers, they encouraged poor labourers who previously had no access to credit to consume more.

President Jacob Zuma’s tolerance of these tactics was not unconnected to his electoral concerns at a time when he was under attack from within his own party over his opaque and demagogic methods. Microloans made it possible to sustain a rate of economic growth that the new black middle class was no longer able to support.

Foreign operators joined in. The British online microlender Wonga established a subsidiary in South Africa offering “fast little loans” over a maximum of 50 days. The capital investment sector bought South African shares. In five years, $20?billion (R230 billion) went into South Africa’s unsecured loans bubble.

The financial services providers lent tiny amounts that made a huge profit for their shareholders, and in 2012 they accounted for 20% of the total value of all shares on the JSE.

In December 2013, Goldman Sachs participated in “one of the largest African cross-border equity capital market transactions [that] year”. It raised $525?million for Abil, which triggered a new capitalisation led by the International Finance Corporation, part of the World Bank group.

Since 2008, the JSE has become a speculative playground for Western investment funds. They target the financial sector, which contributes 25% of South Africa’s gross domestic product. Inflation of 6.6%, with a sharp rise in the cost of housing (5.8% in a year), food (8.8%), electricity (which has doubled in four years) and public transport (8.6%), has strained budgets.

More than 4.7?million people are unemployed – 25.6% of the working population. At the end of 2013, 9?million of the 21?million people with a loan contract were three months or more in arrears on repayments, and a third of the 3.2?million loans issued by Abil were in default.

The unsecured loans market is a time bomb, but nobody has tried to disarm it. According to Adenaan Hardien, chief economist at Cadiz Asset Management, the collapse of Abil could drive millions to leave the credit system.

Abil’s shareholders will lose an average of 10% on their initial investment. But what will be the consequences of the economic downgrading of the “born-free” generations, who will have seen only the downside of democracy? Given the growing inequality and a stormy debate on the establishment of a minimum wage, everyone senses an impending crisis. – Le Monde diplomatique.

Distributed by Agence Global

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