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Good fiscal policies fares South Africa well in 2009 credit ratings

12 March 2009 Coface

South Africa’s country credit rating has remained unchanged despite 22 countries’ being downgraded.  

Coface, the international credit insurer, has downgraded the credit rating of some of the world’s major economies including Germany, Australia, New Zealand, Spain, Greece, Taiwan, Hong Kong, China, Russia, Chile, Mexico and the UAE. 

Coface says the re-rating of China and Russia represent for the first time the downgrading of two of the largest emerging countries. 

Coface retained South Africa on an A3 negative watch.  This is seen as a positive indication that South Africa has not being as badly affected by the credit crisis as most other major economies around the world.

At the time of the economic boom, South Africa’s fiscal policy seemed to many businesses to be archaic and harmful in building a globally competitive economy. 
The Bank Act of 1990 Chapter VI Prudential Requirements 72 stipulated the minimum liquid assets that banks should hold. This prevented South African banks from investing more than 20% of their liquid assets in any one venture.

Exchange control regulations prevented companies working in South Africa from removing more than 75% of their capital assets or earnings from South Africa.

The launch of the National Credit Act (NCA) in mid 2007 at the time seemed over cautious and very limiting to many credit providers and businesses looking for loans to fuel economic growth.

South African’s can however be grateful for the more cautious approach taken in our monetary policy.  It is this policy that has for the most part protected South Africa from the worst of the global financial crisis. 

The spread of investments that banks were forced to make has resulted in the protection of local banks’ investments.  Overseas, companies that had too much leverage and where their asset’s where complicated to value, had to prioritise foreign senior lenders first, over shareholders.  Glaring examples which have rocked the financial world are Lehman Brothers, Freddie Mac and Fannie Mae.

Exchange control regulations in SA prevented companies from becoming too heavily involved in foreign markets. When the US and European markets plummeted, the South African exposure in those markets was limited.

In addition, the introduction of the National Credit Act legislated that local banks and credit providers take a more prudent approach to lending than their overseas counterparts.

In most cases banks and credit providers would not have lent monies in excess of the “true” current equity values, and the liquidity of the debtor.
 
South Africa has undoubtedly been affected by the global financial crisis and will continue to follow the global downturn trend.  It is however unlikely that the effect of the global financial crisis will be as drastic as it has been in Europe and the US. One of the contributing factors behind this is the prudent fiscal policies in place.

By Julie Solipa, financial director, Coface South Africa

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