RIDDLE OF THE CREDIT RATINGS
Downgrades will dampen the South African economy
THE CREDIT rating downgrades of South Africa’s five largest South African banks is expected to lead to a tighter and more expensive credit market, resulting in less consumption and fixed investment expenditure and a dampening in economic growth and employment prospects.
The housing and new vehicle markets are likely to take further knocks from the tighter and more expensive credit market.
Cas Coovadia, the managing director of the Banking Association of South Africa, said last week that the downgrades would lower South Africa’s creditworthiness and make financing harder and more expensive to source, with knock-on effects for all South Africans, especially the poor.
Azar Jammine, the chief economist at Econometrix, said the increased cost of bank funding would be passed on to consumers and businesses in the form of higher interest rates and also result in increased difficulty in getting credit from banks or at higher interest rates. Jammine said most of the damage caused by the downgrades was to business confidence and the continued willingness of banks to lend as before.
“The downgrading of the banks will make it more difficult for banks to support fixed investment,” he said.
Jammine added that the April credit growth figures showed declines across all forms of loans, but what was not clear was whether that was because of increased caution on behalf of borrowers or lenders tightening their lending conditions. National Treasury said last week that some business stakeholders were complaining about tightness in the credit market.
It said it would engage the finance sector and the Reserve Bank for a better understanding of possible interventions.
‘In some cases, pricing may be adjusted for higher funding costs, but not in others.’
“This is critical for supporting business investment and general credit to households,” it said.
Mike Schussler, the chief economist at economists.co.za, said banks would take on less risk because of the downgrades and become “very stingy” in approving loans, resulting in fewer cars and houses being sold, and limiting increases on credit cards and being more careful in granting micro loans.
Kamilla Kaplan, an economist at Investec, said consumers who wanted to take on more debt would not be able to do so easily. Kaplan said household consumption rates, which accounted for 60 percent of gross domestic product, were expected to remain weak.
“We’ve seen this in credit data released by the Reserve Bank, where real credit extension to households is negative and in nominal terms very low. Basically we will not get a credit fuelled expenditure boom any time soon,” she said.
Arno Daehnke, the chief financial officer of Standard Bank, said the downgrade by Moody’s was not unexpected and, due to the new Moody’s rating remaining above sub-investment grade level, has had minimal impact on domestic currency and interest rate markets.
Daehnke said the pricing of the vast majority of lending products were not limited by regulatory caps, but rather by market dynamics and the additional cost of funding flowing from ratings downgrades would therefore either be absorbed by the bank or passed on to customers.
“In some cases, pricing may be adjusted for higher funding costs, but not in others,” he said.
An Absa spokesperson said the downgrade had so far had a negligible effect on Absa’s overall cost of wholesale funding.
The spokesperson said pricing on existing loans to customers would be honoured in line with the contractual terms and the bank would have to absorb any material increases in costs.