Ithala warns of impact of downgrades
Borrowing plans for capital expenditure will have to be looked at again Rand takes knock after US Fed’s interest hike
KWAZULU-NATAL’S development finance agency Ithala Development Finance Corporation has warned that it could be forced to review its lending criteria following the recent downgrades of the local banks by international rating agency Moody’s.
The lender said it expected the downgrades to result in increased costs particularly for facilities such as overdrafts.
Acting group chief executive Themba Mathe said borrowing plans for on-lending and capital expenditure projects would have to be looked aaat to accommodate the rising costs.
“The management of our facilities such as bank overdrafts and associated costs will be impacted,” Mathe said.
“As part of the institutions revision strategy it will have to reconsider how their clients are going to be affected and whether they will still to beable to repay their loans.”
Ithala concerns come in the wake of Moody’s cutting Standard Bank, Firstrand, Absa, Nedbank and Investec to near junk earlier this week.
The agency cited the weakening of the country’s institutional framework, reduced growth prospects, continued erosion of fiscal strength.
Mathe said Ithala however believed that it had a strategy to avert the effects of the downgrades. “We implemented our enterprise risk management strategy a couple of years ago and we are hoping that our risk mitigators will be adequate to minimise the impact of the downgrade at IDFC,” said Mathe.
Mathe said that Ithala was also considering reviewing general lending limits, sector limits and revise interest rates.
“In the short term, there are no direct implications for Ithala as the organisation currently does not raise funds through issuing bonds. However, any further weakening of the South African government’s credit profile could constrain its capacity to raise funding and extend financial support to direct foreign investors(dfi) which would hamper Ithala’s ability to optimally fulfil its developmental mandate,” said Mathe.
Ithala is in the process of being a fully fledged commercial bank.
According to Mathe the application is currently being assessed by the South African Reserve Bank (SARB) following which a decision will be made. “Meanwhile both strategically and operationally every effort is being made to meet the requirements of a full banking licence and to become a fully-fledged bank in keeping with Ithala SOC Limited’s mandate to serve the previously unbanked,” he said.
University of Kwazulunatal acting dean and head of accounting, economics and finance professor Mabutho Sibanda said the action to downgrade banks should not deter Ithala from pursuing its strategic objective of becoming a fully-fledged commercial bank. “The move is a strategic risk that the shareholder is willing to accept, it is a long term goal, and thus should not be adversely impacted by the current economic phase,” Sibanda said.
“The phase will come and pass and soon it will be business as usual in South Africa.”
Sibanda said the downgrades should not affect Ithala’s applications for commercial banking licences as applications were considered based on their merit and compliances to the minimum requirements. “Over the past ten years the penetration of financial services into the unbanked market has been tremendous. Ithala should just cement its relations with its existing clientele and then drive the penetration strategy as planned.”
He said the downgrades could provide Ithala with a unique opportunity to establish strong relationships with foreign banks. THE RAND and South Africa’s stock market largely shrugged off last week’s downgrading of the country’s domestic and foreign credit rating to one notch above “junk” by Moody’s but sharply retreated on the news that the US Fed has raised interest rates by 25 basis points.
The rand closed in on an 11-week high by Wednesday but retreated yesterday after the US Federal Reserve raised interest rates by 25bps from 1 percent to 1.25 percent in line with market expectations.
Policymakers kept forecasts for one more rate hike this year while increasing growth projections and lowering inflation expectations.
In addition, details on how the central bank will start reducing its $4.5 trillion portfolio were also provided.
Old Mutual chief economist Rian le Roux said the rand was unfazed by the weak economy and rating downgrades with the country’s current account and emerging market inflows still supportive of the local unit.
“Incoming data is shifting the interest rate debate, with some of the drivers behind a possible easier stance being the first quarter’s GDP slump and downside inflation surprises. The consensus is for a 25-basis point rate cut and we remain of the view that this is more likely to take place in September than July,” Le Roux said.
The rand gained more than 2 percent against the greenback since Moody’s ratings update last Friday, while it also made significant inroads against the pound which rattled in the aftermath of the surprising UK election result last week.
But it fell 1.5 percent on the Fed rates decision. The JSE followed suit with the all-share index and the top 40 index declining while gold stocks tanked more than 5 percent.
Annabel Bishop, chief economist at Investec, said the inflows into emerging markets had strengthened the rand, proving the current risk-on cycle to be an opportune time to receive downgrades from a yield and currency perspective.
“Credit rating downgrades in emerging markets) have previously been followed by some yield strength – in Brazil and Russia in 2015, and with Turkey also seeing some strength after its late 2016, and early 2017, downgrades, albeit interrupted by its political events,” Bishop said.
Moody’s said lower than expected growth would further delay the stabilisation of South Africa’s debt-to-gdp ratio. The agency said it now expected the debt burden to reach 55 percent of the GDP in 2018/19 financial year and to continue to rise gradually afterwards..
Yacoob Abba Omar, senior general manager of Strategy at Banking Association South Africa, said: “A common strategy to recover from the downgrade would be fiscal consolidation or austerity. In other words, less government spending. That’s a tough one for our government because many of its budget outlays are aligned to political priorities,” Omar said.
Raymond Parsons, a professor at North West University School of Business, said the continued negative outlook categorisation and Moody’s critical but balanced narrative means their decision should not be viewed as a reprieve, but rather as a warning for South Africa to get its house in order.
“A positive feature is that Moody’s decision… grants South Africa a breathing space and gives scope for remedial policies and actions.”