Don’t allow the current financial crisis to destroy your confidence. There are still quite a few positives. Chris Burgess’s recent leaders about the pessimistic nature of some articles in Farmer’s Weekly prompted me to look carefully at my own articles.
With all the gloom and doom around us, it’s very easy to sink into pessimism. One should rather count one’s blessings and change the current threats into opportunities.
Global financial crisis
There’s no doubt the world economy faces serious problems. The causes of the global financial crisis are well-known. US banks gave home loans to high-risk lenders with little or no capacity to repay them. However, as property prices boomed, banks could still recoup their original capital even if lenders defaulted. Banks realised they could use home loans to make a lot of money, and repacked them into instruments tradable between financial institutions.
But booms never continue indefinitely. When the property boom ended in a slump, the value of the securities held by banks decreased. Banks became suspicious about the value of the securitised loans shown as assets on the banks’ balance sheets. The banking system operates on trust based on confidence in each others’ asset structures. When they lost confidence, the US banking system froze. This also affected financial systems in other developed countries.
The South African situation
The good news is that we will be less affected by the crisis. Our financial system is not particularly heavily linked to the US system. The new Credit Act also helped limit credit uptake here.
Unfortunately, banks pushed credit, and especially short-term credit, in the months before the Act was promulgated. In South Africa, food and fuel prices, interest rates and administered prices increased sharply. This coincided with a sharp increase in consumer debt, from 63% of disposable income in 2005 to 76,7% by the second quarter of 2008. Higher debt and high interest rates increased the percentage of total income spent on debt repayment to an estimated 18%.
The new emerging middle class, known as the black diamonds, was largely responsible for the boom in retail sales since 2000. Unfortunately it was also heavily indebted with houses, cars, furniture and appliances all bought on credit in the last five years, and so the credit crunch hit it hard.
Other consumers were encouraged to use the increase in property values as basis for loans. In many cases home loans were used to consolidate short-term credit such as credit cards. Currently banks are repossessing thousands of cars per month, making bargains available for cash buyers.
Consumer spending will probably recover in 2009. Lower food and fuel prices will lower inflation. This has already encouraged the Reserve Bank to reduce interest rates and they may do so again, very possibly in February and April 2009.
The February budget will be the first full budget compiled by the Polokwane regime and with election day probably taking place in March 2009, we can expect a budget that will benefit the consumer. The good news is consumers can start spending again this year.
The Food and Agricultural Organization believes lower international food prices, the still-high input prices and limited credit availability may reduce agricultural production in 2009. This will be reflected again in higher producer prices. The same is true in South Africa and producer prices will increase again in time. In summary, there’s still some good news in the current situation. The recession will impact less on South Africa, consumers will start spending again and producer prices will reach a new equilibrium, below the 2007 peak but probably higher than 2004 to 2005 levels.
The important thing is not the nature of the current crisis, but the way farmers handle it. A positive attitude can help a lot.
Share prices on the JSE closely follow those on other stock exchanges. The All-Share Index fell from 32 000 in May 2008 to 18 000 in November 2008 – down 43%. This is bad news for investors. However, share prices will recover in time and those who can wait out the recovery period will benefit.
It’s also not true that the value of SA companies decreased by 43%. The factories, shops and mines are still running pretty much as before and are still declaring profits, although they no longer achieve the unsustainably high levels of profit growth as in the past. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy. |fw