'SA well positioned in crisis'

Johannesburg - While South Africa is relatively well ositioned in the current credit crisis, a number of challenges remain as credit demand continues to fall sharply despite falling interest rates, said Ernst & Young on Monday in a report on the impact of the financial crisis.

"Interest rates are being cut across the globe to the lowest levels in decades, but the question is whether this is sufficient to get the banks to lend again," noted director of assurance at Ernst & Young, Emilio Pera.

He notes that all financial services segments have been impacted by the crisis, with banks having lower capital available to lend funds and insurers faced with negative investment yields.

Financial services analyst at Ernst & Young, Graham Thomson, said higher credit costs could become a serious concern if small and medium enterprises were excluded from the available funds.

The key concern among asset managers, meanwhile, is the profit squeeze caused by "static funds", accompanied by reduced performance fees.

The regulatory environment within organisations will change significantly in an attempt to prevent a re-occurrence of 2008's events.

"Risk management culture will have to be institutionalised/integrated into the normal business activities organisations," said Pera.

The researchers highlight that many executives interviewed in the Ernst & Young global study on the crisis were optimistic that the survivors of this "500-year flood" will emerge as much stronger global institutions, with managing liquidity the top lesson learnt.

Other threats

Added to this is the need to institutionalise an appropriate risk culture and "the imperative never again to let good times lead to complacency".

Notably, the research released on Monday shows that while banks in South Africa have a high-risk concern as far as the credit crunch goes in the banking realm, those risks become "critical" in the insurance and asset management spheres. Globally, all three place the credit crunch risk concern as "critical".

Regulation and compliance is only a moderate risk in SA as far as banking and asset management goes and medium risk for insurers, as things like the National Credit Act take root, but globally regulation and compliance is at "critical" in the banking industry.

However, analysts to the global survey did express concern about further threats that could worsen the recession, like political risks in emerging markets. SA's own election takes place on April 22.

"In this context, asset managers are worried about the impact of instability on emerging economies," said Pera.

Another concern raised by Pera and Thompson is contracting world growth causing SA's exports to "dry up", and thus the crisis having a bigger impact on the economy.

However, Pera notes that SA remains an attractive proposition among emerging economies when looking at risk premium ratings.

On a risk pendulum, SA financial services companies are seen as "stressed" rather than "distressed" like their global counterparts.

But Pera does note that there are "significant challenges" in a "tough environment".

- I-Net Bridge