SA credit metrics key to grading

Reserve Bank Governor Lesetja Kganyago says South Africa has a robust monetary framework.

Johannesburg - South Africa should look at its credit metrics if the country wanted to avoid a potential downgrade to junk status, Reserve Bank governor Lesetja Kganyago said yesterday.

Speaking at the release of the first edition of the bank’s Financial Stability Review, Kganyago said by identifying weaknesses in credit metrics the country could keep a downgrade at bay.

Read: Junk status: Reserve Bank warns of risk

“A lot has been said about the potential downgrade of South Africa. How do we prevent the downgrade?” he said. “You do not prevent a downgrade by just talking to the rating agencies.”

Ratings agencies Standard & Poor’s (S&P) (now called S&P Global Ratings) and Fitch Ratings could downgrade South Africa to sub-investment grade next month.

The two agencies currently have the country one notch above the so-called junk status.

An S&P definition of junk status is that a sovereign faces “major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitments”.

Kganyago said South Africa had a robust monetary framework. “(The fiscal) framework is well-entrenched. Its credibility is well-entrenched.”

Raised concerns

In the review, the central bank said persistent weak economic fundamentals, a high current account deficit, the growing trend of the fiscal debt and other structural constraints in the South African economy had raised concerns with credit rating agencies about the outlook for South Africa, causing two of the agencies to change the outlook from stable to negative.

The impact for further ratings downgrade to non-investment grade on the South African economy and the financial system could lead to increased capital outflows, higher cost of and reduced access to funding, higher credit default swop spreads and lower business confidence and corporate profits, it said.

It said weak global and domestic growth prospects painted “a somewhat” bleak picture for local employment and high levels of unemployment could hamper the stability of the domestic financial system. Unemployment fell to 25.1 percent in the fourth quarter of 2015.

Emerging markets economist Peter Attard Montalto of Nomura said in a commentary yesterday that Nomura was more optimistic about South Africa’s economic growth.

“We forecast 0.9 percent (growth) for GDP (gross domestic product) for 2016 and 1.5 percent for 2017, although (we) have previously stressed the downside risks in both.

“We do not see a recession as (a likelihood). Consensus is around 0.6 percent to 0.7 percent for this year and 1.3 percent to 1.4 percent for next year,” Nomura said.

Meanwhile, South African banks were exposed directly and indirectly to the effects of the decline in commodity prices through their loan books and trading activities, the Reserve Bank said in its latest Financial Stability Review.

The central bank said this raised concerns about the banks’ performance in South Africa and on the African continent where economies depended on commodities and where South African banks had presence. “More idiosyncratic factors such as electricity supply interruptions and the effects of the prolonged and severe drought on the agricultural sector were also prevalent,” it said.

Consumers, on the other hand, battled a combination of low employment, sluggish disposable income and rising inflation. The Reserve Bank said cumulative increases of 200 basis points in the repo rate in the past two years required a renewed focus on the banking sector’s management of credit risk.

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