Labour unrest in the mining sector has hit where it hurts. So what does South Africa's first credit downgrade in nearly two decades mean?
Subdued economic growth, expected interest rate increases and concerns about banks retaining sufficient money to meet liquidity requirements has seen Moody’s retain its negative rating for South African banks.
The bank ratings, which have remained the same since 2012, are being affected by concerns about South Africa’s credit profile, as holdings in government securities and loans account for more than 150% of the banks’ core capital.
"Any deterioration in South Africa’s credit profile, as the government faces budgetary challenges and social tensions stemming from high inequality and unemployment, would exert downward pressure on the largest banks’ standalone profiles," Moody’s said.
This comes as Moody’s, together with rating agencies Fitch and Standard & Poor’s, this week indicated it they would leave its ratings unchanged on condition that the South African government kept its present policies on course.
Moody’s has a BAA1 rating for South Africa with a negative outlook, Standard & Poor’s has a BBB rating also with a negative outlook, while Fitch has a BBB rating with a stable outlook.
‘Ongoing robust growth’
Moody’s is upbeat, however, about sub-Saharan Africa, saying in a separate statement on Wednesday that it expects "ongoing robust growth", but warning of ongoing institutional constraints. The rating agency said it expected the banks to be negatively impacted by subdued economic growth for the next 12 to 18 months, weak prospects for private consumption and investment, as well as with protracted mining unrest that will undermine exports. All of which will "limit banks’ credit growth and new corporate business opportunities, pressuring banks’ asset quality".
Moody’s said it expects South Africa’s gross domestic product to grow by around 2.2% in 2014, and 2.7% in 2015, well below the pre-crisis 2004 to 2008 average of 4.9%.
It said it expected the non-performing loan’s in the system to increase, ranging between 4% to 4.2% in 2014/15, up from 3.7% last year. This is the result of challenging operating conditions and strains in the unsecured lending market, as well as a recent interest rate hike.
Prospects of further hikes have also influenced its decision.
Concern about the banks’ ability to meet the liquidity levels required under Basel III was also raised because of their dependence on local wholesale institutional deposits.
But Moody’s said it believes that the banks would continue to build up their core liquidity, which would ease some of these risks in the future. It also believes that the banks will be able to absorb expected increases in loan losses.
On sub-Saharan Africa, Moody’s in a report entitled "Sovereign Outlook: Sub-Saharan Africa" said it expected minimal ratings movement in the near term because of persistent structural credit challenges that would offset favourable growth prospects. It said global conditions were also serving to dampen growth prospects.
South Africa and Ghana (B1 rating) were given negative ratings because of the risk to its credit quality, Moody’s said.