A turn for the worse?


South Africa has done a great job of avoiding the credit and liquidity problems that have blighted global markets over the past eight months. This has been possible due to a number of reasons - the relatively vanilla character of the local market for securitised assets, the restrictive mandates of most local investors and, as some financiers are brave enough to admit, exchange controls.

But while the local market has not been roiled in quite the same way as Europe and the US, it has no doubt been affected by global events. And the most obvious impact the turmoil has had on South Africa is to be found in securitisation.

As we detail in pages 4-7, the offshore placement of domestic issues was keenly eyed by all bank originators as a crucial route to market growth by early 2007. By July, European market ructions meant it was promptly cut off. Increased spreads, postponed deals - and even the pulling of at least one planned transaction - ensued. For bank originators, local investors' capacity constraints have now retaken their place as a chief concern.

In addressing this, though, it seems some of the country's securitisation houses are putting their biggest difficulty to work in their favour. Recognising investors are overweight on assets such as residential mortgage-backed securities and auto-loan asset-backed securities (ABSs), some are now looking to bring a greater variety of debt structures to the local market. In particular, further deals backed by commercial mortgages are thought likely, as well as other more refined structures, such as collateralised loan obligations.

Such development will no doubt put the market in good stead for the future. But investors will also do well to scrutinise any new structures as closely as possible. Above-target inflation is keeping South Africa's central bankers awake at night, leading them to embark on a 200 basis-point hike in the repo rate from June to December 2007.

As a result, some reckless lending - as targeted by the National Credit Act last June - might be coming back to haunt the country's banks. The domestic consumer credit cycle is thought by many to be turning. Bad credit card debts are apparently showing on bank balance sheets, while Moody's Investors Service reports an uptick in delinquencies among some auto-loan ABS transactions. Could South Africa be heading for a credit crisis of its own?

Mark Pengelly, Risk, South Africa.

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