Could South Africa have saved the world?
Over the last two decades the developed world, led by the US, has been on a credit binge of significant proportions. By mid 2007 consumers in the US, Europe, the UK and many other aspirant developing nations had feasted on easy credit to the point where debt, expressed as a percentage of annual disposable income, was well over 100% and rising. Financial institutions fell over themselves to feed this demand, recklessly ignoring the capacity or even the ability of consumers to meet the corresponding obligations. The smart institutions made sure that as many of these potentially doubtful debts were repackaged and sold on in the investment markets. Investors, attracted by the high yields, failed to perform the necessary due diligence to understand the risk involved. More often than not these assets ended up in the hands of the same greedy consumers who were over extended and living beyond their means.
“The last two years of this cycle of greed has seen the collapse of stalwarts long considered resilient and unbreakable. The world’s financial system came within a whisker of total collapse, only saved by the intervention of governments who have pumped billions of Dollars into the system to avert what would have been an implosion that would have led to a depression of 1930’s proportions”, says Menzi Nkosi CEO of Trilinear Investment Managers.
The consumer, caught in the middle of this whirlpool, had lost out across the board the Assets bought with borrowed funds have fallen in value, he has nothing left to show for the excess and his pension fund value has reverted to 2002 levels despite his ongoing monthly contributions and, if he is lucky, he still has a job with a company that has just reduced salaries by only 10% across the board. The only line on his balance sheet that hasn’t reduced in value is the capital due on his loans.
“And soon, his government, to refinance its own balance sheet strained by the costs of intervening, will come with the news that his social benefits will reduce or his taxes will increase or, as is most likely, both will happen together”, continues Nkosi
If the world had been watching and had noticed the introduction of the National Credit Act (NCA) in South Africa in July 2007, they may have realised what an important piece of the puzzle this legislation was as a possible solution to the crisis.
“The NCA, along with exchange controls and the relatively effective financial legislation relating to, and the supervision of, the financial system, was a recipe that, if adopted in other countries, could have reduced the probability of a collapse such as the world has recently had”, says Nkosi
When the NCA was introduced there was an outcry about excess meddling in the free markets and the excess costs that financial institutions would need to bear to ensure compliance. It was predicted that this would push up the cost of banking to the very market that they were trying to ensure had access to banking. It’s not a simple exercise, but a review of the results of South African banks would suggest that the impact of the cost of introducing the NCA was negligible and far less than the consequences could have been. The extent of bad debts written off may very well have exploded if lending in South Africa had been allowed to grow to the extent that it has elsewhere.
It is interesting to note which financial institutions in SA have been the worst hit by the global financial crises it is those that were the most aggressive in offshore markets with Old Mutual, Investec and Firstrand being examples among the majors. The million dollar question is: Had there been no exchange controls, or unrestricted capital flows allowed, what carnage would have hit South Africa? Pre 1994 South Africa had draconian exchange controls that totally restricted fund flows for investment purposes and trade flows were also strictly controlled. Post 1994 the restrictions on capital movements have been substantially reduced. The system is one that manages flows through the financial system with an objective of monitoring the legality of these flows and matching this information to statistics to ensure that tax liabilities are accurately recognised. Additionally, the practicalities of exchange controls assist the authorities in managing the economy and stabilising the financial environment, a condition that has assisted in the regular improvements in South Africa’s credit rating. This will ultimately positively impact on the cost of borrowing and the ability of South Africa to be globally competitive.
“The NCA may have been motivated by the government’s need to protect the emerging consumer in South Africa who historically did not have access to credit or the educational background to manage it. The reality is that even sophisticated consumers from the developed world could not exercise the financial discipline required to protect their own interests in the face of the temptations offered by financial institutions”, concludes Nkosi
Unfortunately, the South African economy is very open and reliant on exports of manufactured goods and commodities to generate economic growth, employment and foreign exchange. The significant destruction of the US and the developed world consumer has had a significant impact on SA, an impact that would have been substantially worse had the SA consumer been allowed to borrow without constraint. This, along with wise companies such as Trilinear investment Managers advising clients of what to do with their money and when, clearly indicates that South Africa’s innovative new legislation may very well have saved the rest of the world from the strife that they are faced with now. The obvious question then is; would the rest of the world’s economies been saved had they implemented legislation to regulate lending many years ago?
