Ratings agency Moody’s has published two reports assessing the state of South Africa’s banks and non-financial companies, and their risk profiles in a constrained economic environment.
For South African non-financial companies, the group found that they have adequate liquidity levels and will continue to have support from the country’s deep pool of domestic investors.
South Africa’s banking system, meanwhile, remains stable, with the banks set to have sound finances over the next 12 to 18 months despite the sluggish economy, Moody’s said.
“Our assessment that South African companies have adequate liquidity is supported by an evenly spread debt maturity profile, somewhat prudent financial policies that include the use of committed undrawn credit facilities and a track record of good access to capital,” said Lahlou Meksaoui, an AVP-analyst in Moody’s Corporate Finance Group, who co-authored the report.
Moody’s key measurement of sufficient liquidity is for companies to have enough available liquidity resources to meet pending debt maturities and other cash requirements over a 12-month period without access to new funding.
The cash flows of the real estate investment trusts (REITs) that Moody’s rates are under pressure because of weak local property market fundamentals, illustrated by declining renewal rates on new leases.
This is partly offset by reduced spending on investments and acquisitions, asset disposals, and steady dividends from international operations.
Mining companies have accessed diversified sources of capital to fund capital spending, the group said, but those with weaker balance sheets are more exposed to refinancing risk.
Regarding the country’s banks, Moody’s said that profitability will stay firm despite slow business growth.
“Net interest income, banks’ main revenue source, will come under pressure because of lower loan growth, but we expect digital investment costs to reduce over the next 12 months,” said Akin Majekodunmi, VP-senior credit officer at Moody’s.
Problematic loans are set to rise marginally but remain below 4%. Capital will be stable and stay comfortably above regulatory minima over the next 12 months.
Funding and liquidity conditions will also be resilient, and Moody’s expects institutional deposits, an important source of funding for South African banks, to remain stable.
“Still, the sluggish economy will be a constraint. Moody’s forecasts real GDP growth of just 0.7% in 2019 rising to 1.5% in 2020, which will dampen banks’ growth prospects.
“The South African economy continues to be held back by low business confidence, policy uncertainty and stagnant income per capita. Accordingly, Moody’s expects loan growth to fall to 6% over the next 12 months, from 8% in 2018,” it said.