Bank warns of tougher times ahead
Sovereign credit ratings under pressure
SA was at high risk of further credit rating downgrades which would affect the stability of the domestic economy, the Reserve Bank warned on Tuesday.
Despite credit-ratings downgrades from S&P Global and Fitch, foreign investors were still buying domestic bonds. But further downgrades on the local currency rating could trigger a mass exodus of these investors and cause the rand to plummet, said the Bank.
According to the first edition of the Bank’s Financial Stability Review published on Tuesday, a deteriorating economic outlook and greater political risk have placed SA’s sovereign credit ratings for foreign and local currency under pressure.
In April, S&P Global Ratings cut South African foreign debt to subinvestment grade, while Fitch downgraded both the foreign and local currency debt to “junk” status. Moody’s has put SA on a 90-day review for a downgrade.
Reserve Bank governor Lesetja Kganyago said that with Moody’s placing SA on watch for a credit downgrade “Once again Team SA will be at work to see if we can [avoid] another credit-ratings downgrade. 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.”
The Bank said: “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.”
Foreign investors accounted for R 23.2bn of bonds in March and R 8.9bn in April so far, but further downgrades and exclusion from other key global indices had raised concern about SA’s financial stability and the effect on foreign investment.
The Bank’s macroprudential economist, Greg Farrell, said that while SA’s banks had been able to withstand a downgrade after a stress test in 2016, there was concern around SA’s inclusion in key global indices.
While markets and the rand had remained relatively stable, there were still risks to the domestic financial system in the next 12 months, which included further credit-rating downgrades, headwinds for banks, policy uncertainty in the US and financial system vulnerabilities in Europe.
“The likelihood of further credit rating downgrades is high and the impact is high,” he said.
The outlook is based on weak growth, political developments and fiscal sustainability including contingent liabilities.
In November 2016, the Bank revised its outlook on a downgrade to medium from a medium-to-high outlook and indicated that a downgrade to subinvestment grade did not pose a short- to medium-term risk of SA being removed from any of the global indices.
Before the downgrades, SA was included in various global bond indices such as the Citibank World Government Bond index, JP Morgan Bond indices and the Barclays Global Aggregate index.
JP Morgan said on April 7 that SA would no longer be included in its investment-grade emerging market bond indices. SA was excluded from the indices on April 28 and will be excluded from three other JP Morgan indices from May 31.
R 23.2bn the amount invested by foreigners in local bonds in March
R 8.9bn the amount invested in April