What Effect Will Crisis Have on SA?

An article published by The Times discusses Nedbank chief economist, Dr Dennis Dykes’ view that the current crisis in the US could potentially impact South Africa far less than many other countries around the world.

Dykes argues that countries with extremely high household debt to income ratios, such as the UK and Australia (both currently at 160%) are at a much higher risk than South Africa (at 76%).

“Banks in these countries are reluctant and unable to grant more credit to consumers, which will affect all aspects of these economies, particularly property prices,” according to Dykes. He goes on to say that the current weakness in South African property prices is more likely cyclical than structural.

“In other words, the global crisis is not really the cause of the slowdown in our property market. Higher interest rates, coupled with huge gains in house prices over the last few years, were already having a cooling effect on our property market,” Dykes explains.

He adds that, “There is also a good possibility that interest rates in South Africa will decrease over the next few months, as global and local inflation slows. This will bring confidence back into the local housing market. However, a strong recovery is unlikely in the short term”.

Another factor is that none of the big South African banks have been directly exposed to the subprime market in the US. “Although there could be some counter-party losses resulting from bank failures elsewhere, it is likely that the direct impact will be very minimal,” Dykes notes.

He also says that the consolidation that occurred in the South African banking industry a few years ago left those remaining in the game very strong financially. While it has not been expressly stated by the government, Dykes concludes that it would no doubt back up the banking system should this ever be required.

The information in this article is courtesy of I-Net Bridge (“Crisis shouldn’t hit SA houses: Dykes”, The Times, 8 October 2008).

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