Alarm raised over South Africa's disappointing GDP figures

[DJ...]

(Apologies in advance for the long post but if you don't quite understand the intricacies of how this all got started and why SA is somewhat more protected than other countries and you're interested in finding out, then give it a read. If it doesn't make sense then ask)

I disagree that NCA saved us because although dodgy lending practices were the root cause of the global financial issues, it was the pooled, secondary trading of these loan agreements as asset backed securities and the subsequent insurance on such deals that resulted in the crash that we're seeing - this market never was prevalent in SA at all. The banks could very easily cover their exposure to the actual defaulted loans as they had fixed asset collateral to back it up, however they most certainly couldn't cover their own subsequent exposure to the collapsing ABS market when the homeowners began defaulting and the cash flows on these deals dried up, therefore placing the ABS deal into default as well. Considering it is a derivative, there is no fixed asset collateral and therefore it just becomes a massive loss on the bank's, asset managers and other insurance company's books.

More than just that, the CDS market took a turn for the worst as well with such high counter party risk and insurers were therefore not able to pay out on the CDS deals they had insured, and the underwriters then took the hit as well as the banks. So basically the issue was the trading of derivatives, where a massive market is made for pooled credit, such as our credit cards (yes, they pool our credit cards and sell the mass risk off to investors whose cash flow is based on you and I paying off our credit cards) and home-loans - the banks sell the risk of you and I defaulting on our loans to investors. Where the issue really stems from is that the sub-prime home-owners were never in a position to afford their loan so they were destined to default. Again, this is not normally an issue, however we have the derivatives market trading this risk with no fixed asset backing, merely a cash flow and when this cash flow dries up, everything goes tits up.

The banks were exposed to the market, the investors were exposed and the insurers were exposed as well. It boils down to greed, because the banks sell the loan (money for them), then originate and sell an ABS deal to investors (more money and they sell the risk off), then the investors purchase insurance against the ABS deal defaulting (mostly sold by the banks in the form of a credit default swap so more money for them again), and the banks are facilitating each and every trade as well (more money for them). It's a lot more than just some dodgy lending practices. It is a case of a dodgy investment market called derivatives, where exposure and subsequent exposure insurance is not backed by an fixed asset at all - it is always bound to fail, it's only a matter of time. However the US banks were the kingpins of this market and were therefore exposed heavily. What makes it even worse (yes, it gets worse) is that many of these deals were leveraged which means they were financed through debt.

When they talk about SA banks being exposed to the sub-prime market, they are referring to SA banks investing in international asset backed securities, which is why it was mostly banks with an international focus such as Investec who were hit fairly hard when this began to take it's toll. The knock on affect was that the financial sector plummeted which hit hard on the equities market as well. This in turn left the commodities market (which SA mostly is) in turmoil as it relies on mostly foreign investment. Major foreign investors also pulled out completely from higher risk investments such as South Africa during this turmoil which just made matters worse for the likes of us.

In short, dodgy lending practices were but one spoke in the wheel of misfortune...

 

[DJ...]

How many consecutive quaters for it to be official?

Two consecutive quarters of reduced growth (oxymoron alert). Our GDP figures while atrocious, are not unexpected within the current economic climate.

What we should be doing is a little bit of good 'ol fashion T-Bone sales pitching. Travelling the world and selling SA as a lower-risk investment with great potential. 2010 is a major selling point for us, however this should have been done ages ago and with an election approaching there is no way any politician would be seen dead out of the country for an extended period...

 

[brixton tower]

(Apologies in advance for the long post but if you don't quite understand the intricacies of how this all got started and why SA is somewhat more protected than other countries and you're interested in finding out, then give it a read. If it doesn't make sense then ask)

I disagree that NCA saved us because although dodgy lending practices were the root cause of the global financial issues, it was the pooled, secondary trading of these loan agreements as asset backed securities and the subsequent insurance on such deals that resulted in the crash that we're seeing - this market never was prevalent in SA at all. The banks could very easily cover their exposure to the actual defaulted loans as they had fixed asset collateral to back it up, however they most certainly couldn't cover their own subsequent exposure to the collapsing ABS market when the homeowners began defaulting and the cash flows on these deals dried up, therefore placing the ABS deal into default as well. Considering it is a derivative, there is no fixed asset collateral and therefore it just becomes a massive loss on the bank's, asset managers and other insurance company's books.

More than just that, the CDS market took a turn for the worst as well with such high counter party risk and insurers were therefore not able to pay out on the CDS deals they had insured, and the underwriters then took the hit as well as the banks. So basically the issue was the trading of derivatives, where a massive market is made for pooled credit, such as our credit cards (yes, they pool our credit cards and sell the mass risk off to investors whose cash flow is based on you and I paying off our credit cards) and home-loans - the banks sell the risk of you and I defaulting on our loans to investors. Where the issue really stems from is that the sub-prime home-owners were never in a position to afford their loan so they were destined to default. Again, this is not normally an issue, however we have the derivatives market trading this risk with no fixed asset backing, merely a cash flow and when this cash flow dries up, everything goes tits up.

The banks were exposed to the market, the investors were exposed and the insurers were exposed as well. It boils down to greed, because the banks sell the loan (money for them), then originate and sell an ABS deal to investors (more money and they sell the risk off), then the investors purchase insurance against the ABS deal defaulting (mostly sold by the banks in the form of a credit default swap so more money for them again), and the banks are facilitating each and every trade as well (more money for them). It's a lot more than just some dodgy lending practices. It is a case of a dodgy investment market called derivatives, where exposure and subsequent exposure insurance is not backed by an fixed asset at all - it is always bound to fail, it's only a matter of time. However the US banks were the kingpins of this market and were therefore exposed heavily. What makes it even worse (yes, it gets worse) is that many of these deals were leveraged which means they were financed through debt.

When they talk about SA banks being exposed to the sub-prime market, they are referring to SA banks investing in international asset backed securities, which is why it was mostly banks with an international focus such as Investec who were hit fairly hard when this began to take it's toll. The knock on affect was that the financial sector plummeted which hit hard on the equities market as well. This in turn left the commodities market (which SA mostly is) in turmoil as it relies on mostly foreign investment. Major foreign investors also pulled out completely from higher risk investments such as South Africa during this turmoil which just made matters worse for the likes of us.

In short, dodgy lending practices were but one spoke in the wheel of misfortune...

Good post.

 

[killadoob]

Personally i believe why south africa is being affected is because of all this recession hype, everyone is running around worried which is affecting us more than the actual problem.

 

[PeterCH]

Not really quite the same thing. We ARE insulated from the root causes of the global financial crisis - in that our banks are not involved in dodgy, underhanded, lending practices. That much is true. (And let it be said that our banks would happily *have* been involved, had the NCA not been passed....)

We are not however immune from the secondary affects of the collapse - which is the slowdown and collapse of the economies in the West.

SA banks were not lending money to poor blacks (mostly) hence we were insulated. As for international lending I'm not sure our banks could afford that too much, our banks are small compared to international banks (ABSA was assimilated by Barclays for example).

We're also largely a raw product exporter, SA does very little processing, as the cost of labour in SA is high, productivity low, socialist practices of the ANC, poorly educated blue collar workers, political and economic unstability (given Africa's and our neighbours' track records) etc, there are just so many more productive places to invest in - Eastern Europe and Asia - SA can never compete with those places. Also SA government does not do enough, not as much as foreign governments which give real tax breaks to investors and have no stupid BEE/AA rules either. Socialist politics as in SA is out over there.

As demand for raw minerals drops because people are not buying processed product and hence not making it and global lay-offs continue, plus as Americans buy more American goods which is inevitable given Democrats in power, SA's raw goods will be more difficult to sell. The recession has hardly started and we're going to be hit pretty hard. Our banks may be healthy but our internal market is too small and won't sustain us foreign capital inflows
dwindle.

 

[I am Penguin]

SA banks were not lending money to poor blacks (mostly) hence we were insulated. As for international lending I'm not sure our banks could afford that too much, our banks are small compared to international banks (ABSA was assimilated by Barclays for example).

We're also largely a raw product exporter, SA does very little processing, as the cost of labour in SA is high, productivity low, socialist practices of the ANC, poorly educated blue collar workers, political and economic unstability (given Africa's and our neighbours' track records) etc, there are just so many more productive places to invest in - Eastern Europe and Asia - SA can never compete with those places. Also SA government does not do enough, not as much as foreign governments which give real tax breaks to investors and have no stupid BEE/AA rules either. Socialist politics as in SA is out over there.

As demand for raw minerals drops because people are not buying processed product and hence not making it and global lay-offs continue, plus as Americans buy more American goods which is inevitable given Democrats in power, SA's raw goods will be more difficult to sell. The recession has hardly started and we're going to be hit pretty hard. Our banks may be healthy but our internal market is too small and won't sustain us foreign capital inflows
dwindle.

Well said! I agree.
There was talks long ago of rather processing locally and create jobs? It never really materialised must be labour cost and fear of union interference?