Down­grades will dampen the South African econ­omy

The Star Early Edition - - BUSINESS REPORT - Roy Cokayne

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.

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