South Africa’s central bank is concerned about further downgrades to local currency debt and the impact on the stability of the domestic financial system its first semi-annual financial stability review published on Tuesday.
The publication aims to identify and analyse potential risks to financial system stability, and communicate such assessments in order to stimulate debate on pertinent issues.
“The possibility of further downgrades to South Africa’s local currency rating and South Africa consequently being excluded from the remaining bond indices is disconcerting given the country’s dependency on portfolio inflows to finance its current account deficit, among other things,” said the report.
“In essence, should further downgrades be effected on South Africa’s local currency debt, this could have a significant impact on the country’s cost of funding and investment flows into the country. Market volatility could increase as a result, with sharp losses likely to be recorded in the currency, bond and equity markets, thereby negatively affecting the stability of the domestic financial system.”
On 3 April 2017, Standard & Poor’s (S&P) downgraded South Africa’s long-term foreign currency rating by 1 notch to BB+ with a negative outlook, pushing the country’s credit rating to sub-investment grade for the first time since the early 2000s.
S&P also lowered the country’s local currency rating by 1 notch to BBB- (also with a negative outlook), which is 1 notch above sub-investment grade.
Rating agency Fitch followed suit by downgrading the country’s foreign and local currency ratings to subinvestment grade (BB+), but with a stable outlook.
Fitch is the first rating agency to lower South Africa’s local currency rating to sub-investment grade.
Both rating agencies cited heightened political tensions and increased policy uncertainty as the main reasons for the downgrade (following the Cabinet reshuffle by the President on 31 March 2017).
You can read the full report here.