Too Much Lent Too Cheaply

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By Staff Reporter

WINDHOEK

Old Mutual Africa Managing Director, Johannes !Gawaxab, this week said that the recent sell-off in financial markets was part of the normalization of credit spreads around the world.

Markets across the world, including Namibia, were hit hard as evidenced in negative returns of 6.29% and 4.45% by the NSX Overall Index and the JSE All Share Index respectively for the period July 1 to August 10, 2007.

“Too much money was lent too cheaply and too easily to many people who could not afford it,” he said in a press statement.

“The spreads – difference in returns offered between lower quality debt and high-grade investment instruments such as the US bonds – became too thin, resulting in a credit crunch which forced central banks around the world to inject more than $320-billion to shore up confidence in the financial system,” he added.

The losses also affect the value of pension funds and unit trusts of many Namibians.

According to !Gawaxab, the sell-off was primarily spurred by the collapse of the housing market in the United States of Amer-ica where many retail investors had to buy houses at a time when interest rates were low and house prices appreciating.

“When interest rates started rising and house prices dropping, low-income house-owners started defaulting on generous loans they had received.

“A credit crunch was inevitable as investors baled out, and this led to a sudden loss of confidence in the banking system,” he said.

Central Banks in the US, Canada, Europe, Australia and Japan injected billions (liquidity) to reassure investors.

He said to calm the jittery markets and to ensure a smooth functioning of financial markets – central banks in the US, Canada, Europe, Australia and Japan had to lend money to commercial banks at a cheap rate to meet their obligations.

!Gawaxab warns that the crisis is not over yet and that investors should anticipate short-term headwinds and market volatility.

“We are not out of the woods yet.

“The Bank of Namibia is expected to hike the repo rate this week.

“The cost of borrowing is expected to increase from 14.25% to 14.75% due to inflationary pressures caused by the effects of the US sub-prime mortgage market, the oil and food prices, as well as credit exuberance.”

For every N$100 000 a one-percent increase in short-term rates means a 6% increase in one’s instalment.

He advised those planning to retire over the next few months and need to preserve their capital or need to lock-in their pension, to consider pulling out of the market and explore other initiatives.

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