Credit slides to lowest in 43 years
October 1, 2009
By Ethel Hazelhurst
Households and businesses remain reluctant, or unable, to borrow despite the 5 percentage point cut in interest rates since December last year - a sign that the economic recovery could be slow.
Data released yesterday by the Reserve Bank showed growth in credit to the private sector subsided to 2.34 percent year on year last month. The figure was the weakest since October 1966, said Ian Cruickshanks, the head of strategic research at Nedbank Capital.
If investments and "bills discounted" are excluded from the data, credit rose less than 1 percent - a more accurate reflection of activity over the past 12 months, since the excluded items relate to banking business.
Economists believe growth in total credit to the private sector could reach zero over the next two months. But the worst might be over. While the year-on-year figure shows the extent of the recession, quarterly data shows a slightly different picture.
In May, credit to the private sector was 0.98 percent lower than three months earlier, in June 1.07 percent lower and in July 1.10 percent. However, the trend reversed last month, which scraped in with a positive 0.11 percent.
The quarterly peak in growth was in September 2006 - 7.55 percent - three months after the Reserve Bank started to raise rates because inflation was moving towards the ceiling of its 3 percent to 6 percent target range. Increases in the central bank's official repo rate hiked benchmark prime and mortgage rates from 10.5 percent to 15.5 percent by June last year, putting great strain on household budgets. Since the start of the rate-cutting cycle in December benchmark rates have returned to their former levels but banks and borrowers remain cautious about giving and taking credit.
Instalment credit was flat in August year on year, while leasing finance fell nearly 22 percent. Nedbank said the two items combined fell 4.2 percent year on year - the fastest drop on record.
Growth in mortgage loans continued to fall - to 5.64 percent from 6.42 percent in July. This figure may improve as banks recently announced some relaxation of their strict credit policies.
The item "other loans and advances" was down more than 4 percent - a shrinking trend that started in May.
Standard Bank economist Shireen Darmalingam said, with interest rates at 27-year lows, "one would expect that consumers may be enticed to spend" but she pointed out that "depleted household wealth effects, with deflationary house price values" was holding them back.
This view is confirmed by Reserve Bank figures, which show household spending contracted for four consecutive quarters. But, despite low borrowing and spending, inflation remains above the target range - 6.4 percent in August. And Johan Rossouw, the group economist at the Vunani Group, warned of the danger of stagflation - high inflation and low growth.
The dismal figures did not mean a further rate cut could be expected, Darmalingam said. Though consumers and corporates were still struggling, the Reserve Bank had signalled that "time is needed for the impact of lower interest rates to become visible in the economy".
Investec group economist Annabel Bishop is more optimistic about a rate cut. She said a half percentage point cut could come "as early as this month".
She suggested that the low credit growth presented "a temporary opportunity for the central bank to build its foreign exchange reserves, with the benefit of weakening the rand somewhat". The bank has been reluctant to aggressively buy foreign currencies because its intervention would neutralise its relatively tight monetary stance.
Bishop said in the recessionary environment, "temporary stimulation to money supply and credit demand could prove beneficial". However, she expected inflation to return to the range towards the end of this year, while the Reserve Bank expected it in the second quarter of next year.
|
|
