South Africa’s coronavirus lockdown vs the 2008 financial crisis – the big differences

Financial stress testing indicates that the largest South African banks are expected to remain resilient through the current period affected by the Covid-19 outbreak – even under severe stress scenarios, says Corné Conradie, actuary and partner at PwC.

Conradie alongside Prof Conrad Beyers – Absa chair in Actuarial Science at the University of Pretoria – looked at South Africa’s largest full-service banks, including Absa, FirstRand, Standard Bank, Nedbank and Investec, as part of a financial stress test.

These banks account for 91% of all bank deposits and 94% of all loans granted by South African banks.

According to Conradie, the resilience of these banks is key to ensure the resilience of the South African banking system as a whole.

While it currently appears unrealistic to make reliable forecasts around the exact spread of the coronavirus based on biological and epidemiological models, Prof Beyers said it is possible to use financial modelling to form a view on the impact on the banking sector.

“It is clear that banks will experience significant strain, although the financial system appears to be stable for the foreseeable future”.

2008 vs 2020

Conradie noted that the current financial situation is often compared to previous stress events such as the 2008 global financial crisis. However, he noted that the two scenarios are different in various respects.

The 2008 crisis was concentrated in the financial sector and was characterised by high-interest rates and inflation with prime lending rates that peaked at 15.5% from June to November 2008 and inflation that peaked at 8.7% in May 2009.

“The South African equity market dropped by 34% between June and October 2008.  Over 2009, the South African economy shrunk by 1.5%,” he said.

By comparison, Conradie said that the Covid-19 financial stress is much more widespread with nearly all sectors experiencing strain.

Energy, construction, hospitality, transport and financial sectors are expected to be severely impacted, he said.

“The underlying macroeconomic conditions are also very different. The prime lending rate is very low – at a level last seen in 1973, and inflation is within the South African Reserve Bank target range.

“The equity market showed a similar drop of 33% between the end of December 2019 and 23 March 2020.

“The impact on GDP and subsequent job losses are, however, expected to far exceed the levels seen during the 2008 crisis. Initial estimates indicate a record GDP drop of more than 10% and a large increase in unemployment.”

Credit losses

PwC’s research shows that banks are expected to experience significant credit losses.

These losses will be driven by defaults on residential home loans, company loans and retail unsecured loans.

The likely causes of such losses is a loss of income of borrowers instead of affordability driven by increased prices and loan instalments.

Based on the nature of the stress, it is expected that unsecured loans will be the harder hit by the economic fallout of the Covid-19 pandemic.

Residential mortgages are expected to be affected less compared to the 2008 crisis, while companies may experience similar strain compared to the 2008 crisis.

It is expected that bank deposits will drop. Deposits by financial institutions are expected to be affected most, followed by public sector, company and retail deposits.

This would be driven by lower interest rates, lower economic growth, lower stock market returns and lower household disposable income.

Despite these stresses, banks are currently sufficiently capitalised to withstand the shocks.

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South Africa’s coronavirus lockdown vs the 2008 financial crisis – the big differences