What the Reserve Bank thinks about SA junk status chances
The Reserve Bank warns that South Africa faces a medium to high probability of a downgrade to non-investment status.
The group’s sentiments, contained in a Financial Stability Review published on Tuesday, has seen the rand track back towards R15.00 against the dollar. In morning trade on Tuesday, the local unit weakened 1.44% to R14.84 against the dollar.
Reuters pointed to subdued risk appetite amid concern by investors about weak global growth, while the central bank warned that that any ratings downgrade could lead to increased capital outflows.
“Locally the rand once again failed to consolidate the gains of the previous sessions. Technically, this does not bode well for the local unit, as well as the continued concerns regarding a local downgrade,” Nedbank Capital analysts Mohammed Nalla and Reezwana Sumad said in a note.
Standard & Poor’s and Fitch rate South Africa a notch above sub-investment grade, while Moody’s has it two notches above junk.
Bloomberg noted that South Africa risks losing its investment-grade status with S&P Global Ratings due to review its BBB- assessment, which is one level above junk, in June.
Moody’s Investors Service put its assessment, which is one step higher, on review for a downgrade in March.
“You don’t prevent a downgrade just by talking to ratings agencies,” Governor Lesetja Kganyago said after the release of the report. “A downgrade is prevented by improving your credit metrics,” he told Bloomberg.
According to the report, the impact of a further ratings downgrade on the South African economy and financial system could manifest in the form of:
- Capital outflows;
- Potential spillovers to rand-denominated South African government debt;
- Higher cost of, and reduced access to, funding;
- Reduced credit to the private sector;
- Increasing CDS spreads;
- Receding business confidence;
- Falling corporate profits;
- High and rising household debt levels and financing costs thereof; and
- Elevated credit risk of financial and non-financial sectors.
The Reserve Bank said that despite elevated levels of volatility in global financial markets and spillovers into domestic markets, “the South African financial system continues to efficiently facilitate financial intermediation and mitigate negative spillovers and disruptions”.
“Overall, despite some serious headwinds, the financial system is assessed as remaining robust, characterised by well-capitalised, liquid and profitable financial institutions,” it said.
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